Commodity Futures Modernization Act of 2000 - Introduction

Introduction

Before and after the CFMA, federal banking regulators imposed capital and other requirements on banks that entered into OTC derivatives. The United States Securities and Exchange Commission (SEC) and CFTC had limited “risk assessment” authority over OTC derivatives dealers affiliated with securities or commodities brokers and also jointly administered a voluntary program under which the largest securities and commodities firms reported additional information about derivative activities, management controls, risk and capital management, and counterparty exposure policies that were similar to, but more limited than, the requirements for banks. Banks and securities firms were the dominant dealers in the market, with commercial bank dealers holding by far the largest share. To the extent insurance company affiliates acted as dealers of OTC derivatives rather than as counterparties to transactions with banks or security firm affiliates, they had no such federal “safety and soundness” regulation of those activities and typically conducted the activities through London-based affiliates.

The CFMA continued an existing 1992 preemption of state laws that prevented any such law from treating eligible OTC derivatives transactions as gambling or otherwise illegal. It also extended that preemption to security-based derivatives that had previously been excluded from the CEA and its preemption of state law.

The CFMA, as enacted by President Clinton, went beyond the recommendations of a Presidential Working Group on Financial Markets (PWG) Report titled “Over-the Counter Derivatives and the Commodity Exchange Act.” (the “PWG Report ”).

President's Working Group on Financial Markets, November 1999:

• Lawrence Summers, Treasury
• Alan Greenspan, Fed
• Arthur Levitt, SEC
• William J Rainer, CFTC

Although hailed by the PWG on the day of congressional passage as “important legislation” to allow “the United States to maintain its competitive position in the over-the-counter derivative markets”, by 2001 the collapse of Enron brought public attention to the CFMA’s treatment of energy derivatives in the “Enron Loophole.” Following the Federal Reserve’s emergency loans to “rescue” American International Group (AIG) in September, 2008, the CFMA has received even more widespread criticism for its treatment of credit default swaps and other OTC derivatives.

In 2008 the “Close the Enron Loophole Act” was enacted into law to regulate more extensively “energy trading facilities.” On August 11, 2009, the Treasury Department sent Congress draft legislation to implement its proposal to amend the CFMA and other laws to provide “comprehensive regulation of all over-the counter derivatives.” This proposal was revised in the House and, in that revised form, passed by the House on December 11, 2009, as part of H.R. 4173 (Wall Street Reform and Consumer Protection Act of 2009). Separate, but similar, proposed legislation was introduced in the Senate and still awaiting Senate action at the time of the House action.