 | This article possibly contains original research. (May 2013) |
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| Acronyms (colloquial) | CFMA |
|---|---|
| Effective | December 21, 2000 |
| Legislative history | |
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The Commodity Futures Modernization Act of 2000 (CFMA) is United States federal legislation that ensured financial products known as over-the-counter (OTC) derivatives remained unregulated. It was signed into law on December 21, 2000 by President Bill Clinton. It clarified the law so most OTC derivative transactions between "sophisticated parties" would not be regulated as "futures" under the Commodity Exchange Act of 1936 (CEA) or as "securities" under the federal securities laws. Instead, the major dealers of those products (banks and securities firms) would continue to have their dealings in OTC derivatives supervised by their federal regulators under general "safety and soundness" standards. The Commodity Futures Trading Commission's (CFTC) desire to have "functional regulation" of the market was also rejected. Instead, the CFTC would continue to do "entity-based supervision of OTC derivatives dealers".[1] The CFMA's treatment of OTC derivatives such as credit default swaps has become controversial, as those derivatives played a major role in the financial crisis of 2008 and the subsequent 2008–2012 global recession.[2][3]
- ^ Greenspan Testimony to Senate Agriculture Committee in note 18 below. PWG Report defined in note 11 below at 16. Opening statement of Congressman Leach at House Banking Committee June 17, 1998, Hearing referenced in note 20 below at 2. In her March 21, 1999, speech to the Futures Industry Association CFTC Chairwoman Brooksley Born made the distinction between "entity-based supervision", which she viewed as inadequate (because it did not "provide oversight of the market generally") and incomplete (because it only covered the major dealers), with "functional market oversight" by the CFTC, which she viewed as necessary to "provide oversight of the market generally." For a 1999 defense of entity level regulation see Willa E. Gipson, "Are Swap Agreements Securities or Futures?: The Inadequacies of Applying the Traditional Regulatory Approach to OTC Derivatives Transactions", 24 Journal of Corporation Law 379 (Winter 1999) at 416 ("Regulatory issues concerning the swap market can best be addressed by focusing regulation on the market participants rather than by classifying the swap agreements as securities or futures for purposes of regulation.") In a 2009 television interview, former CFTC Chairwoman Brooksley Born gave a less complete description of the regulatory effects of the CFMA in not mentioning the "entity-based supervision" that existed before and continued after the CFMA. "FRONTLINE: the warning: video timeline - PBS". pbs.org. Retrieved 2009-11-16.
[the act] "took away all jurisdiction of over the counter derivatives from the CFTC. It also took away any potential jurisdiction, ah, on the part of the SEC, and in fact, forbid state regulators from interfering with the over the counter derivatives markets. In other words, it exempted it from all government oversight, all oversight on behalf of the public interest" – PBS interview with Brooksley Born
- ^ Alan S. Blinder, Alan Blinder: Five Years Later, Financial Lessons Not Learned, The Wall Street Journal, September 10, 2013 (Blinder summarizing causes of the "Great Recession": "Disgracefully bad mortgages created a problem. But wild and woolly customized derivatives—totally unregulated due to the odious Commodity Futures Modernization Act of 2000—blew the problem up into a catastrophe. Derivatives based on mortgages were a principal source of the reckless leverage that backfired so badly during the crisis, imposing huge losses on investors and many financial firms.")
- ^ "2000 Commodities Act Paved Way For Problems". NPR. 2009-03-20. Retrieved 2020-02-15.