Commodity Bill Finalized

December 18, 2000

Congress Friday finalized the commodity futures bill designed to modernize the existing regulatory framework for exchange-traded and over-the-counter derivatives, and allow exchange-traded single stock futures. Supporters of change say the economic potential of the derivatives and futures markets is hampered by a regulatory structure that has not kept pace with the rapid changes in world markets.

The House and Senate consensus legislation removes outdated prohibitions against single stock futures, streamlines the regulation of U.S. futures exchanges, and limits the jurisdiction of the Commodity Futures Trading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. The bill closely follows recent rules adopted by the CFTC that would move that agency's focus from detailed, prescriptive rules to core principles that futures exchanges would be expected to implement.

The measure also adds guidelines for the Securities and Exchange Commission'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 entered into by a bank before Dec. 5, 2000, and was not prohibited by the CEA or regulated by the Commodity Futures Trading Commission (CFTC) before Dec. 5.

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 Federal Reserve may ask that the action 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."

"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."