The Commodity Futures Modernization Act resolved a dispute between the SEC and CFTC over the definition of commodities. It allowed for the trading of individual stock futures, which had characteristics of both commodities and stocks, and were popular in European markets. The OneChicago Exchange is now the primary market for these products in the US.
The Commodity Futures Modernization Act was passed by Congress and signed into law by President Bill Clinton in December 2000. It was an attempt to resolve a dispute between the Securities Exchange Commission (SEC) and the Futures Trading Commission Commodity Trading (CFTC) that emerged in the early 1980s. At the time, Congress had enacted legislation to expand the scope of what was defined as a commodity. This resulted in some overlap between the regulatory scope of the SEC and the CFTC.
Originally, commodities were typically agricultural products and raw materials. Things like pork bellies, corn, wheat, and oil are common products. Markets for these products were developed, standard contracts were developed, and then bought and sold.
For example, at the Chicago Board of Trade, in May 2006 it is possible to purchase a contract for 5,000 bushels of wheat for delivery in December 2006. There are two types of buyers in this market: the end user, such as a flour mill, and the investor. The end user is in this market as they know they will need 5,000 bushels of wheat in December. The investor is in this market with the expectation of making a profit. The investor expects to buy wheat now for a certain amount per bushel and sell it for a larger amount in December.
There are also basically two types of sellers: the farmer or commodity producer and the investor. The investor in the buying example will eventually be a seller, since they have no use for 5,000 bushels of wheat. Even if the price in December is less than what the investor paid for it to purchase, the investor will sell the product in December.
Farmers are free to sell whenever they want. They generally sell after the harvest to know the amount they have on hand, but they can also sell before the harvest to pay for the materials needed for their harvest. However, if they sell more than they grow, they will have to become buyers when the contract should make up the short deficit.
Investors liked this process so much that someone decided to start treating stocks like commodities. For example, someone began selling a contract in June 2005 to deliver 100 shares of General Electric (GE) in December 2006. This type of financial instrument is called a single stock futures contract. It is this type of contract that resulted in the Commodity Futures Modernization Act being drafted and passed.
Everything in public markets tends to be quickly regulated by some governing body. An individual stock futures contract had characteristics of both a commodity, which is governed by the CFTC, and a stock, which is governed by the SEC. Both agencies wanted jurisdiction over transactions in this type of financial instrument. They could not reach an agreement in the 1980s, and the result was that this type of financial instrument was prohibited. Because there was demand for this instrument, and this type of instrument was being sold in the European markets, Congress wrestled with the Commodity Futures Modernization Act. The purpose of the law was to settle the dispute between the two governing bodies, since they could not come to an agreement on their own.
In 2000, Congress passed the Commodity Futures Modernization Act, and individual stock futures could soon be sold again in the US markets. However, many of the issues remained unresolved, and trading in the product at the retail level was prohibited until August 2003. The Act did not specify which exchange would be allowed to trade this instrument, and initially, many of the exchanges were set to offer a market for this product. Today, however, individual stock futures are traded primarily on the OneChicago Exchange, a joint venture between the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, and the Chicago Board of Trade.
Individual stock futures have been popular in the European markets and now, thanks to the Commodity Futures Modernization Act, they are slowly catching on in the US. You can learn more about individual stock futures and trading individual stocks. this instrument by visiting the OneChicago Exchange.
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