What were the consequences of the CFMA?

By Felix Salmon
September 25, 2009
Commodity Futures Modernization Act in 2000.

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Newsweek.com is doing a big month-long series on the end of the decade, and, inevitably, it’s going to feature lots of listicles. One of them is a list of the top ten “history altering decisions” — seemingly-small moves that had massive consequences. Each one is going to be written up, and Newsweek has asked me for a very short essay (just 200 words or so) on the consequences of Bill Clinton signing the Commodity Futures Modernization Act in 2000.

Top of mind at Newsweek are the Enron collapse and the unregulated rise of the CDS market — can those fairly be ascribed to the CFMA? Are there any other key consequences of the CFMA’s passage which I should include? Newsweek has given me full freedom to crowdsource this, so if you ever thought you might have a CFMA blog entry in you somewhere, now’s the time to write the thing, or just leave a comment here. Thanks!


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The CFMA constituted in part an experiment that didn’t work. It removed an informal prohibition that had existed in the US on the listing of single-stock futures (SSF). There were some enthusiasts of this aspect of the bill (I was one of them) who thought that SSFs would be eagerly embraced by a waiting public and fill a vital gap in the marketplace.

It didn’t happen. The SSF is the great “dog who didn’t bark” of the turn of the century.

If you are doing a story on the end of the decade, shouldn’t you wait until the end of the decade to do it. That would be 12/31/2010.

CFMA (following Glass-Steagall repeal) confirmed that Wall Street and ISDA could control law and regulation to a degree never before imagined, dictating laws to order. CFMA’s passage meant that Wall Street no longer had to fear Washington, just write what it wanted and buy it off. Phil Gramm (whose wife Wendy was chairman of the CFTC) is the poster boy for the decade of crony capitalism that followed.

Posted by London Banker | Report as abusive

Superintendent Eric Dinallo of the New York State Insurance Department did a good job explaining the learned lessons of history that were undone by the CFMA. (available at http://www.ins.state.ny.us/speeches/pdf/ sp0811201.pdf)


“Bucket shops” arose in the late nineteenth century. Customers “bought” securities or commodities on these unauthorized exchanges, but in reality the bucket shop was simply booking the customer’s order without executing on an exchange. In fact, they were simply throwing the trade ticket in the bucket, which is where the name comes from, and tearing it up when an opposite trade came in. The bucket shop would agree to take the other side of the customer’s “bet” on the performance of the security or commodity. Bucket shops sometimes survived for a time by balancing their books, but were wiped out by extreme bull or bear markets. When their books failed, the bucketeers simply closed up shop and left town, leaving the “investors” holding worthless tickets.

The Bank Panic of 1907 is famous for J.P. Morgan, the leading banker of the time, calling all the other bankers to a meeting and keeping them there until they agreed to form a consortium of bankers to create an emergency backstop for the banking system. At the time there was no Federal Reserve. But a more lasting result was passage of New York’s anti-bucket shop law in 1909. The law, General Business Law Section 351, made it a felony to operate or be connected with a bucket shop or “fake exchange.” Because of the specificity and severity of the much-anticipated legislation virtually all bucket shops shut down before the law came into effect, and little enforcement was necessary. Other states passed similar laws.


Fast forward to the present. Section 408(c) of the CFMA, codified as 7 USC 27f(c), provided:

Sections 27 to 27f of this title shall supersede and preempt the application of any State or local law that prohibits or regulates gaming or the operation of bucket shops (other than antifraud provisions of general applicability) in the case of
(1) a hybrid instrument that is predominantly a banking product; or
(2) a covered swap agreement.

Note the reference to gaming laws. It doesn’t get any clearer than that. Congress legalized gambling by large financial institutions.

[I wrote a short paper on the CFMA and its application to the CDS market in relation to the financial crisis. Feel free to contact me by email.]

Posted by Mark | Report as abusive

Up until the CFMA was passed, it was illegal for traders to trade single stock futures even though they were being traded in other parts of the world. The amount of leverage made available came with a corresponding risk. Therein lie the problem. The debt to equity ratio became inbalanced and the slippery slope was made even more dangerous. No one seems to hang this on Clinton’s neck. He’s such a nice guy.

Posted by Unemployed | Report as abusive

Second the comments above by London Banker.


the fate of Brooksley Born, who questioned this legislation, sent a very clear message to regulatory officials that there was little political will to regulate anything much at all any more.

So here we are…

Posted by Richard Smith | Report as abusive

Just list Brooksley Born’s concerns and her fate at the hands of the sponsors and supporters of the act and you’re pretty much done.

Then go on and add a bit on the exemptions granted to GS, CITI et al that allowed them to trade commodities, as they were ‘immaterial’ at the time. They’re not so immmaterial now (Phibro) and without the exemptions CITI wouldn’t be able to fund its core banking functions without this huge profit center.

Plus the act was clearly a ringing bell that regulator capture was the law of the land.

Posted by michaelc | Report as abusive

Barry Ritholtz dedicates a lot of time to the CFMA in his book Bailout Nation. Just contact him and I’m sure he’ll provide all you’d ever need to write the 200 word piece. In my opinion it’s a pretty important and damning piece of legislation.

Posted by Todd | Report as abusive

CFMA enabled Enron. It enabled Enron’s highly leveraged, risky derivatives trading. That trading was funded by short term borrowing and Enron was undone by a good old cash crisis when credit lines were withdrawn by banks overnight. When, much too late, the SEC paid attention, it focused mostly on Fastow’s off-balance sheet fraud and other accounting chicanery. Andy’s antics and AA’s coverup were clearly illegal and to an agency needing to wield a hammer, they were suitable nails. So we ended up with SOX but nobody focused on the
some of the most important lessons of Enron’s downfall. No attention to risky derivatives, no attention to liquidity risk arising from short term funding, no attention to leverage. Indeed, in 2004, the SEC agreed to let the I-banks expand their leverage, a decision high on the list of contributors to the debacle. Enron was a harbinger of the fall of Bear, Lehman, Merrill and others but attention wasn’t paid.

Another key decision that led to the mess was FASB’s 2003 decision, under intense pressure from banks, to exempt QSPEs used for securitization from consolidation.

Other factors were important but not so easy to tie to a particular act or time. At what point do you say the Fed should have realized the money supply needed tightening? How to categorize the many sins of omission such as the Fed’s failure to deal with poor underwriting
standards or the NY Insurance Commissioner’s failure (and inability?) to deal with AIG’s FP division. Where to start on the failings of the NSROs?

Posted by Linda | Report as abusive