What were the goals and functions of the Commodity Exchange Act of 1936, and how did its enactment affect the economy?
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The outdated Commodity Exchange Commission (CEC), which was the regulatory arm of the ineffective Commodity Exchange Act of 1936, was subsumed under the new Commodity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...
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