Commodity Futures Modernization Act - Explained
What is the Commodity Futures Modernization Act?
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Table of ContentsWhat is the Commodity Futures Modernization Act?What does the the Commodity Futures Modernization Act (CFMA) Do?Academic Research on the Commodity Futures Modernization Act
What is the Commodity Futures Modernization Act?
CFMA is a law in the US that was enacted in 2000 and deregulated under the derivatives of the OTC (over-the-counter). The law enables the "sophisticated parties to enter into trade contracts without inspection as stated by the Commodities Exchange Act of 1936. Rather the business activities under these contracts must adhere to the general guidelines and rules of soundness and safety.
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What does the the Commodity Futures Modernization Act (CFMA) Do?
The CFMA law by the US government in 2000 and mandates the management of the Commodity Futures Trading Commission to regulate the US commodity market for five years. The main benefit and this act aim to subsidize the trading stock features. The law focuses on the future individual share in the stock market. When it was enacted in 2000, the law provides CFMA provides that foreign exchange dealers have to acquire registration certificate from CFTC, and later become a member of Futures Commission Merchant (FCM) forex dealer. The (CFMA) signed by US President Bill Clinton during its enaction created ways for manipulation of the financial instruments that altered the commodity prices in 2003. The Modernization Act signed into law by President Bill Clinton aimed at solving Security Exchange Commission dispute with Commodities Future Trading Commission that emerged in the early 1980s. Similarly, there was the enactment of legislation that expanded the scope for the definition of commodity. There was overlap in the SEC and CFTC's regulatory scope. Commodities were initially agricultural products and raw materials. There was the development of both market and standard contracts for these commodities and purchases and sales then followed. For example, there is the possibility of purchasing a contract for 5000 bushels for wheat in May to be supplied in December the same year. Two types of buyer exist in this market, the end user like flour mill and the investors. The end user in this market is aware of their 5000 bushels of wheat need in December. The investor in this market is aiming at making profits by buying the bushels in earlier at a lower price and selling them late at an increased price. Similarly, to the buyers, there are two sellers; the farmer or commodity producer and the investor. In this case, the investor is the seller as they do not want to use 5000 bushels of wheat. The seller will sell the commodity in December regardless of the price as at then. Farmers are at their discretion of selling at any time they want. Their sales proceed the harvests making them aware of the amount they have. Also, they can sell before harvest to allow them to pay for materials needed for their crop. When the farmers sell more than what is produced, there will be a necessity of them buying to cover for the difference. There is a lot of preference for this contract by the investors to the extent of one treating stock as commodities. For example, in single stock futures stock, one selling 100 shares in 2005 that was to be delivered in Dec.2006. The contract type leads to the Modernization Act implementation. There is the steadfast tread of regulations of everything in the public markets. Single stock future contacts have both commodity and stock features. As a commodity, it is regulated by CFTC while as a product it is regulated by the SEC. As a result of lack of agreements between the two agencies that wanted the authority of over these contacts, the financial instruments were banned. Due to the demand of the banned financial contract, while it was traded in Europe, the Congress came I with the Commodity future Modernization Act which was purposed to solving the dispute between the two bodies because they were unable to have their agreement. Congress passed commodity Future Modernization Act in 2000, and single stock futures resumed in US markets even though many issues remain unresolved and banning of product retail until 2003. The Act failed in the specification of exchange that was permitted to deal with the security despite many exchanges that were legalized to provide the stock. Currently, single stock futures are mainly traded in One Chicago exchange, a joint venture between the Chicago Board of Options Exchange and the Chicago Board of Trade. Single stock futures have been prevalent in European markets and currently gaining momentum in the US as a result of the Commodity Futures Modernization Act. For more about single stock futures and its trade one needs to visit OneChicago Exchange.