What is the Commodity Futures Modernization Act (CFMA)?

Published by Thomas Herold in Economics, Laws & Regulations, Trading

'Commodity Futures Modernization Act (CFMA)' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

In the year 2000, the U.S. Government passed the Commodity Futures Modernization Act. The act did several things. First it reaffirmed the regulatory authority of the Commodity Futures Trading Commission over all American futures markets. This authority became extended for a period of five years with this act.

A second and more significant result of the act came about as the government allowed Single Stock Futures to be traded for the first time in the United States. Other countries already allowed their investors to trade these particular types of futures when Congress passed this act. In America up to this point where the CFMA passed, it was illegal for investors to participate. Yet investors were eager to gain the leverage that these futures delivered.

Single Stock Futures are popular precisely because they do allow significant exposure to equity markets. A single stock future is a special kind of futures contract. The instrument allows a buyer to trade a certain number of shares in a single company at a price that they agree on now for a particular date in the future. The price is known as the strike price or futures price. The future date that the two parties set is the delivery date.

Buyers of these contracts are long the future in the stock. Sellers of the contract are short the stock in question. The buyer makes money if the price of the underlying stock increases, while the seller makes money if the value of the underlying stock declines. There is no cost to open the contract besides commissions and fees.

Single Stock Futures trade typically in contracts of 100 shares. Buying the contract does not cause any dividend or voting rights to transfer from the seller to the buyer. Futures trade using margin and provide tremendous leverage. There are no short selling rules applied to them as there are to stocks themselves.

Other countries adopted the Single Stock Futures trading ahead of the United States. The American market was not allowed to trade them before the passage of the Commodity Futures Modernization Act of 2000. This was because there was conflict between the two regulatory agencies the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission. The two could not work out which agency would regulate these new Single Stock Futures products and trading.

When the government passed the CFMA of 2000 into law, they agreed to a compromise. Both of these agencies decided to share the jurisdiction under a plan that allowed the Single Stock Futures to finally start trading on November 8 of 2002. This allowed the United States based traders to catch up with other countries who were already trading these instruments.

The Commodity Futures Modernization Act brought the United States into a global market of the Single Stock Futures that included Great Britain, Spain, South Africa, India, and other countries. The South African market has traditionally been the largest of the single stock futures marketplaces. Their average numbers of contracts amount to 700,000 each day.

Though the CFMA allowed single stock futures to be traded, this did not establish a marketplace for them on which they could be traded in the U.S. Two different companies began trading them initially. One of these closed. The remaining company trading these types of futures in the U.S. is now known as the One Chicago. This is a joint venture of the main Chicago commodities and futures exchanges the Chicago Mercantile Exchange, the Chicago Board Options Exchange, and the Chicago Board of Trade.

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The term 'Commodity Futures Modernization Act (CFMA)' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.