WASHINGTON -- The Commodity Futures Trading Commission's much-touted new framework for regulating futures markets has been rendered largely moot by Congress' passage of sweeping new legislation that accomplishes essentially the same thing.
As a result, the CFTC announced Dec. 21 that it was withdrawing most of the new framework it had spent months putting together and gathering support for.
Which is not to say CFTC officials were disappointed Congress managed to pass the Commodities Futures Modernization Act of 2000 before adjourning for the year. The law, which will allow institutional investors to trade complex derivatives with very little oversight was attached to a year-end spending bill President Clinton signed Dec. 21.
The new legislation, like the CFTC framework, adopts a tiered approach to regulating traditional futures exchanges, eases derivatives trading regulations for most institutional investors, makes privately negotiated derivatives transactions exempt from government oversight and makes legal the practice of trading futures on individual stocks, something that has been banned for 18 years.
Self-policing
Perhaps the most significant change is the way in which the CFTC will oversee futures exchanges. Institutional investors trading more complex products essentially will police themselves. Less sophisticated investors will be subject to varying degrees of regulation based on their experience and what products they are trading.
The legislation also specifically addresses over-the-counter derivatives like swaps, which generally are negotiated directly between banks or other large investors. This gives them more legal certainty, said CFTC Chairman William J. Rainer; such deals generally had been exempt from commission oversight.
The legislation also allows for exchange trading of single-stock futures. Although experts disagree as to how popular such instruments will be among institutional investors, making them legal opens a new avenue for investors and helps U.S. futures exchanges stay competitive with European exchanges such as the London International Financial Futures and Options Exchange, which plans to start trading futures based on individual U.S. equities at the end of January.
The law also re-authorizes the CFTC for five more years and grants the commission oversight of retail foreign exchange trading.
Slow pace
CFTC officials worked for nearly a year to get the legislation passed. Its complexity led to disagreements among House and Senate members, and at times over the past three months, it didn't look as if the House and Senate would be able to reconcile their two versions of the law before Congress adjourned. In a Nov. 8 speech at the Futures Industry Association's Futures and Options Expo, Mr. Rainer expressed some frustration at the slow pace.
"I had hoped for legislation, or to have voted on and passed the proposed (framework), or to at least know who the president is," Mr. Rainer said. "We have no legislation, no rules pending the legislation and no president."
Rather than waiting for Congress to act, the CFTC went ahead in November and approved its own regulatory framework. The goal was to replace regulation of exchanges and clearing houses with "core principals" tailored to meet the differing needs of various investors, and Mr. Rainer said that while this was an "important step" in revamping the commission's approach to regulation, it did not lessen the need for legislation.
On Dec. 21, Mr. Rainer announced he would step down as CFTC chairman, after having been nominated by President Clinton in June 1999 and confirmed by the Senate in August 1999 to a five-year term. It's up to President-elect George W. Bush to nominate the next chairman.
