Commodities and Futures Guide.com

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Our team has come up with an article about the modernization act which was passed to resolve a dispute concerning jurisdiction over securities-based derivatives and also focusses on the major areas like individual securities, future contracts etc.

The Commodities and Futures Modernization Act of 2000 was passed on December 21^st 2000 in order to effectively repeal the Shad-Johnson Jurisdictional Accord. In order to fully understand the meaning and underlying reasons for the Commodities and Futures Modernization Act of 200, one must understand what exactly the Shad-Johnson Jurisdictional Accord was.

The Shad-Johnson Jurisdictional accord, which was passed in 1982, was an agreement reached between the Chairmen of SEC and CFTC in 1981 to resolve a dispute concerning jurisdiction over securities-based derivatives. Under the accord, CFTC retained exclusive jurisdiction over all futures contracts, including futures on securities-based indexes and options on futures and physical commodities. Futures and options on futures on securities indexes were allowed only for contracts settled in cash, not readily susceptible to manipulation, and derived from a substantial segment of a publicly traded group or index of equity or debt securities, called broad-based indexes.

The major area of focus of the accord was that futures contracts on individual securities, other than exempted securities (such as U.S. Treasuries), were prohibited by the accord. The CFTC chairman who negotiated the accord stated at the CFTC reauthorization roundtable that the accord was intended to ban certain stock-based futures until issues of concern to SEC could be addressed. According to the legislative history, the SEC was concerned that the regulatory scheme governing futures trading did not mirror securities regulation in important areas such as insider trading prohibitions, customer protections, floor trading rules, and margin requirements.

The Commodity Futures Modernization Act was passed to “settle” the dispute of which body would have jurisdiction, CFTC or SEC, over an instrument that had features of a stock and of a commodity (i.e. a future on an individual security).

The Commodity Futures Modernization Act of 2000 had a companion bill which was labeled as the “Enron loophole”, because it exempts most over-the-counter energy trades and trading on electronic energy commodity markets. The “loophole” was drafted by lobbyists for Enron who were working with senators. Therefore, this act first gained attention as it was partially blamed for the fall of Enron.

What this Act really did was open the door to unregulated trading of credit default swaps which, in-part, led to the failure of Lehman brothers, the massive loans to American International Group (AIG), and the current economic crisis.

On June 22, 2008, the Senate proposed the repeal of the “Enron loophole” as a means to curb speculation on skyrocketing oil prices.