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 solve a dispute between the Securities Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) that arose in the early 1980s. At that 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 commodities. Markets developed for these products, and standard contracts were developed, and then bought and sold.
For instance, on the Chicago Board of Trade, it is possible in May 2006 to purchase a contract for 5,000 bushels of wheat for delivery in December of 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 that 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 hopes to purchase wheat now for a certain amount per bushel and sell it for an increased amount in December.
There are also basically two types of sellers: the farmer, or commodities producer, and the investor. The investor in the purchasing 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 upon purchase, the investor will sell the commodity in December.
Farmers are free to sell when they want. They usually sell after the harvest so they know the amount they have in hand, but they may also sell before their harvest to pay for the materials required for their crop. However, if they sell more than they grow, they will need to become buyers when the contract is due to make up for the short fall.
Investors liked this process so much that someone decided to start treating stocks as if they were commodities. For instance, someone started selling in June 2005 a contract to deliver 100 shares of General Electric (GE) stock 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 the public markets tends quickly to become regulated by some governing body. A single stock futures contract had features 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 of this type of financial instrument. They could not come to an agreement in the 1980s, and the result was that this type of financial instrument was banned. Since there was demand for this instrument, and this sort of instrument was being sold on European markets, Congress stepped into the dispute with the Commodity Futures Modernization Act. The purpose of the Act was to resolve the dispute between the two governing bodies since they could not come to an agreement on their own.
In the year 2000, Congress passed the Commodity Futures Modernization Act, and single stock futures could soon be sold again in US markets. However, many of the issues were left unresolved, and trading the product at a retail level was prohibited until August of 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, single stock futures are primarily traded on the OneChicago Exchange, a joint venture between the Chicago Board of Options Exchange, the Chicago Mercantile Exchange and the Chicago Board of Trade.
Single stock futures have been popular on European markets and are now, thanks to the Commodity Futures Modernization Act, slowly catching on in the US. You can find out more about single stock futures and trade in this instrument by visiting the OneChicago Exchange.
