Congress Concludes Commodity Futures Modernization Act
House-Senate committee leaders craft consensus measure
Washington, D.C. -- After four years of examination and legislative preparation, Congress moved Friday to finalize “The Commodity Futures Modernization Act of 2000” (H.R. 5660) with votes in the House and Senate that will modernize the existing regulatory framework for exchange-traded and over-the-counter derivatives, and to allow exchange-traded single stock futures. Although unseen and unfamiliar to most Americans, the economic potential of swaps and derivatives in the commodities and futures markets is hampered by a regulatory structure that has not kept pace with the rapid changes in world markets.
The measure also adds guidelines for the SEC's role in regulating equity based swaps in order to prevent fraud and manipulation. In providing legal certainty for bank products, identified banking products are excluded from the Commodity Exchange Act (CEA) if the product was commonly offered, sold, or enter into by a bank before December 5, 2000 and was not prohibited by the CEA or regulated by the Commodity Futures Trading Commission (CFTC) before December 5, 2000. Hybrid instruments that are predominantly banking products are not subject to CFTC jurisdiction. If the CFTC believes that a hybrid instrument is not predominantly a banking product, it must: 1) consult with and seek the concurrence of the Federal Reserve Board, 2) if no agreement is reached and the CFTC makes any ruling or determination, the FED may ask for the action to be reviewed by the U.S. Court of Appeals for the District of Columbia Circuit. Covered Swaps are excluded from the CEA
"These legislative reforms are aimed at reducing systemic risk and removing barriers to financial innovation that are threatening America's global competitive position in financial markets," said House Agriculture Committee Chairman Larry Combest (R-TX). "The Commodity Exchange Act had lumbered along with a regulatory framework created in the days of ticker tape while today's world markets flash by at bits and bytes. Tom Ewing's dedication as chairman of the Risk Management Subcommittee has ultimately charted a course for our nation's financial markets in the new world of 21st Century global commerce."
"This agreement is an important step for the American futures industry," said Agriculture Risk Management Subcommittee Chairman Thomas Ewing (R-IL). "The hard work and cooperation of the industry, the administration, and congressional leaders has produced an agreement that will ensure America will remain the leader in the world's financial community."
The House and Senate consensus legislation removes outdated prohibitions against single stock futures, streamlines the regulation of U.S. futures exchanges, and limits the jurisdiction of the Commodity Futures Trading Commission. By eliminating the sources of legal uncertainty that impede innovation in product development and the use of electronic trading and clearing facilities, the legislation addresses the systemic risks of a papered-over system.
The foundation of the bill came about October 19 from the near-unanimous House passage (377 to 4) of the Commodity Futures Modernization Act of 2000, constructed by the House Agriculture, Banking, and Commerce Committees. Strong support comes from the U.S. Treasury Department, Federal Reserve Board, Securities and Exchange Commission, and Commodity Futures Trading Commission under the auspices of the President's Working Group.
The size of these worldwide markets is now estimated at 90 trillion dollars in economic exposure - impacting every business and every individual in America. Derivatives - including futures, swaps and other over-the-counter instruments - enable cities to save money and keep taxes lower by reducing the cost of their public debt. Derivatives enable agricultural producers and consumers to hedge the risks associated with variable crop yields and extreme weather, reducing food costs. U.S. exports generally are strengthened when exporters use these instruments to hedge foreign currency risks.