Under the old CEA's regulatory scheme, all regulated futures were traded on "contract markets" by registered futures commission merchants and brokers. All exchanges had to satisfy certain statutory requirements intended to prevent fraud and manipulation before they could be designated "contract markets." Once the CEA made the designation, the contract markets regulated themselves. The CEA intervened only if the exchanges failed to enforce their own rules, and then the principal sanction it had was to suspend or revoke the "contract market" designation. Since the CEA was reluctant to take such a drastic step, it followed a passive regulatory policy.The CFTC Act gives the Commission the ability to take an active role in preserving the integrity of futures trading by extending its authority to cover what is traded, who may trade, where trading may occur, and the rules under which it may be conducted. The Commission is empowered to compile information concerning futures trading in order to identify and discourage market abuses and to encourage investor activity. In marked contrast to the CEA, the Commission has broad enforcement power to seek injunctive relief in court, to take action in emergency circumstances to restore orderly trading, and to impose increased penalties to punish violations.
Redefining "commodity": Under the 1936 Act the regulator of futures contracts was kept on a very tight leash, because back then, "commodity" was defined as cotton, rice, millfeeds, butter, eggs, Irish potatoes, wheat, corn, oats, barley, rye, and flaxseed. Subsequently, in 1940, Congress changed the meaning of the word "commodity" to include vegetable oils, cottonseed meal, cottonseed, peanuts, and soybean meal on the list. And then in 1955, Congress added onions to the list.
But under the 1974 Act, the word "commodity" referred to any and all commodities, with very limited statutory carve-outs, in order to afford the CFTC a great deal of discretion.
The meaning of the word "commodity" was changed again in late 2000, under the Commodity Futures Modernization Act of 2000, aka the Enron Loophole, which, among other things, exempted energy and metals commodities and "electronic exchanges" from regulatory oversight. The meaning of "commodity" was subsequently changed with Dodd-Frank, which rescinded much of the Enron Loophole.
This is but one illustration of the crackpot notion that you can pluck one fragment of legislative history, to exclusion of everything else, to divine the meaning of a statute.
Redefining "Necessary": Legislation enacted after the 1936 Act also changed the meaning of "necessary," as in, "as the Commission finds are necessary-- Wilkins rejects this notion. Again, he argues that the context an d meanings of the words have not changed since an "Explanation of the Bill" was drafted in 1935.
The 1974 Act altered the meaning of what was "necessary" because of the CFTC's new regulatory mandate, and because it specifically gave the CFTC the authority to define "bona fide hedge exemptions," which were long or short positions on the exchanges, but, because those positions were offset by other positions taken in the ordinary course of business--say, American Airlines hedging its physical position in jet fuel--they were not subject to position limits.
The meaning of "necessary" has also been altered dramatically by other legislation enacted subsequent to 1936. In order to establish that any position is "necessary," the CFTC must first complete a cost-benefit analysis. More specifically:
The costs and benefits of the proposed Commission action shall be evaluated in light of -(A) considerations of protection of market participants and the public;
(B) considerations of the efficiency, competitiveness, and financial integrity of futures markets;
(C) considerations of price discovery;
(D) considerations of sound risk management practices; and
(E) other public interest considerations.
In addition, Dodd-Frank modified the meaning to "necessary" by imposing additional requirements:
- to ensure sufficient market liquidity for bona fide hedgers; and- to ensure that the price discovery function of the underlying market is not disrupted.
Though the CFTC considered all these issues when establishing position limits, Wilkins, like the GOP Commissioners, cherry-picks from the record to suggest that the opposite is true. He quotes from Commissioner Sommers, who claimed that, in her view, the Commission had, "created a very complicated regulation that has the potential to irreparably harm these vital markets." Wilkins quotes from Commissioner Dunn, who claimed that, "position limits may harm the very markets we're intending to protect."
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