What were the goals and functions of the Commodity Exchange Act of 1936, and how did its enactment affect the economy?

Expert Answers
Karyth Cara eNotes educator| Certified Educator

Goals, Functions and Affects of the Commodity Exchange Act of 1936

Goals: Regulation of commodity markets to stop manipulation of commodity prices and to "stop commodity options trading on regulated commodities" listed in the Commodity Exchange Act (Markham, "Commodity Exchange Act (1936)").

Functions: (the kind of action or activity proper to the Act and proper to attaining the goals of the Act). Regulate commodities trading through licensed contract markets; register futures commission merchants to prohibit fraudulently handled customer orders; to be "administered by a Commodity Exchange Commission composed of the attorney general and the secretaries of agriculture and commerce" (Markham); regulatory responsibilities handled by the Department of Agriculture and delegated to its the Grain Futures Administration; not entitled to regulate level of margins in futures; entitled to "limit the size of speculative positions by individual traders or those acting in concert with each other" in response to market price manipulations of large individual or syndicate group investors driving commodity prices down (Markham); register commodities to stop options and futures trading.

Affects: Generally ineffective in reaching its goals because some commodities were not listed in the Commodity Exchange Act of 1936, so options (long and short selling) and futures (speculations on future prices resulting in price manipulations) were still carried out on those unlisted commodities. Flawed because the process of amending the listed commodities was slow and ineffective. The ineffectiveness of the Act led to the collapse of the commodities markets in the 1970s to the detriment of unsophisticated commodities traders who were speculating in the futures exchanges. In response Congress enacted the Commodity Futures Trading Commission Act, an act that created the establishment of the Commodity Futures Trading Commission (CFTC), an independent federal commission that acts like the similarly independent federal Securities and Exchange Commission (SEC) that regulates the securities exchanges.

Commodity Futures Trading Commission of the Commodity Futures Trading Commission Act

The outdated Commodity Exchange Commission (CEC), which was the regulatory arm of the ineffective Commodity Exchange Act of 1936, was subsumed under the new Commodity Futures Trading Commission (CFTC)--though the Act of 1936 stayed in effect,--while the CFTC was given new regulatory powers. One of these powers was to fine violators of the Commodity Exchange Act of 1936 or of Commodity Futures Trading Commission rules with civil penalties of up to $100,000 for each violation. In an effort to curtail fraudulent handling of customer transactions, new classes of registrants were added to the requirement for registration of futures commission merchants. These new classes of registrants included commodity trading advisers and commodity pool operators: pools are groups of customers who trade collectively in commodity futures (similar in principle to mutual funds for collective group securities trades).

Despite the efforts of the CFTC to regulate the commodities markets, fraudulent sales of commodities options again surfaced compromising unsophisticated traders. In response the CFTC suspended commodities trading until commodities exchanges could be regulated for options trading. Financial innovations in the securities exchanges, which began to allow SEC regulated futures trading on financial instruments, resulted in a clash over jurisdiction between the SEC and the CFTC, which had up until then had sole jurisdiction over futures trading, and futures trading up until then had been solely in commodities, not in securities instruments. Examples of futures instruments that began trading on SEC regulated securities exchanges are stock index futures and futures on fixed income instruments like government securities (e.g., short-term T-bills).  

The CFTC and the SEC reached a compromise agreement on their regulatory jurisdiction conflict, which was enacted into law but which did not solve enough of the problems relating to futures or relating to jurisdiction. The stock market crash of 1987 was blamed on the "destabilizing effects of futures trading on stock indexes," according to the SEC (Markham). Then the development of over-the-counter futures derivatives instruments led to renewed conflict over SEC and CFTC jurisdiction boundaries. Instruments like "swaps" led to disagreement over how such over-the-counter derivatives should be regulated. The institutional losses due to trades in over-the-counter derivatives in the early 1990s intensified the CFTC-SEC disagreement and resulted in a long-term debate over jurisdiction and regulation. The CFTC eventually decided that, except for individual retail customers (as opposed to institutional investors, e.g., pension fund and mutual fund managers), deregulation of commodities as a whole would lead to the best resolution on regulating (or not regulating) futures trading and futures derivatives. The resultant Commodity Futures Modernization Act of 2000 enacted the resolution into law.

This act amended the Commodity Exchange Act [1936] to free institutional traders from regulatory restrictions in their derivative transactions, provided that their counter party was also an institution. (Markham)

Criticism of the Commodity Futures Modernization Act (2000) escalated after the collapse of the Enron Corporation in 2001. Enron had used provisions of the Modernization Act to "escape regulation of its broad-based commodity trading activities" (Markham).

Source: Jerry W. Markham. "Commodity Exchange Act (1936)." Major Acts of Congress. Ed. Brian K. Landsberg. Vol. 1. Gale Cengage, 2004

kipling2448 eNotes educator| Certified Educator

Since the middle of the 19th Century, the federal government has sought legislative mechanisms for regulating the trade in goods like grain, eggs, produce, cotton, and other agricultural items that are perpetually in high demand.  Simultaneously, traders have sought to establish stable organizational mechanisms through which to conduct the actual trade in these commodities.  Over time, the definition of “commodity” was expanded to include natural resources beyond agricultural goods, particularly metals needed for construction and manufacturing.  Exchanges sprang up in New York and around the Midwest, in effect, in the agricultural regions of the U.S., specific to certain commodities like eggs, butter, cheese and cotton.  These efforts at regulating and standardizing the trade in commodities would continue on to the present, with oil and natural gas eventually being incorporated into the regulatory regimes.  Many of these early efforts at establishing regulatory structures were found to be unconstitutional by the U. S. Supreme Court, sometimes because the legislation originated in the Senate in contravention of the U.S. Constitution’s stipulation that tax and spending bills originate in the House of Representatives, and sometimes because the legislation in question represented an abuse of the governments’ authority to impose taxes. 

This trend continued until the 1922 passage of the Grain Futures Act, which established the Grain Futures Administration to oversee trade in grains, which, in turn, begat the Grain Futures Commission to carry out the day-to-day responsibilities of regulating the industry, including the imposition of public disclosure reporting requirements, always an onerous burden from the perspective of business.  The next major step in the regulation of commodities was the Commodity Exchange Act of June 1936, which replaced the Grain Futures Act and greatly expanded the number and types of goods characterized as commodities for the purpose of government oversight.  The Commodity Exchange Act represented the most comprehensive effort at regulating the trade in agricultural goods and natural resources that the country had yet witnessed.  To this day, the Act remains the foundation of all statutory regimes intended to govern the trade in such goods.  As with any such legislation passed during a long-ago era under very unique circumstances – the country was still suffering from the effects of the Great Depression and government intervention in the marketplace was attaining new heights – the Commodities Exchange Act has been amended numerous times over the succeeding years, often to address newly emergent concerns about speculation regarding commodities like soybean.  Today, speculation in oil futures, which directly impact every citizen in the country, has led to increased focus on the role speculators play in setting the price of goods – prices that reflect such financial maneuvering rather than the simple law of supply and demand.  The Commodity Exchange Act, as with its financial regulatory counterpart, the Securities and Exchange Commission, remains in a perpetual state of war with the industries it is tasked with overseeing.