The Commodity Futures Modernization Act of 2000 or CFMA (H.R. 5660 and S.3283) is United States federal legislation which repealed the Shad-Johnson jurisdictional accord, which had banned single-stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts. This act was incorporated by reference into H.R. 4577, an omnibus spending bill. It was passed by the 106th United States Congress and signed by President Bill Clinton on December 21, 2000; the legislation thus became law as a part of H.R. 4577 - Public Law 106–554, §1(a)(5).

The act has been cited as a public-policy decision significantly contributing to Enron's bankruptcy in 2001 and the much broader liquidity crisis of September 2008 that led to the bankruptcy filing of Lehman Brothers and emergency Federal Reserve Bank loans to American International Group and to the creation of the U.S. Emergency Economic Stabilization fund.

Legislative history

The "Commodity Futures Modernization Act of 2000" [H.R. 5660 was introduced in the House on Dec. 14, 2000 by Rep. Thomas W. Ewing (R-IL) and cosponsored by Rep. Thomas J. Bliley, Jr. (R-VA) Rep. Larry Combest (R-TX) Rep. John J. LaFalce (D-NY) Rep. Jim Leach (R-IA) and never debated in the House.

The companion bill (S.3283) was introduced in the Senate on Dec. 15th, 2000 (The last day before Christmas holiday) by Sen. Richard Lugar (R-IN) and cosponsored by Sen. Peter Fitzgerald (R-IL) Sen. Phil Gramm (R-TX) Sen. Chuck Hagel (R-NE) Sen. Thomas Harkin (D-IA) Sen. Tim Johnson (D-SD) and never debated in the Senate.

The "Enron loophole"

The Commodity Futures Modernization Act of 2000 has received criticism for the so-called "Enron loophole," 7 U.S.C. §2(h)(3) and (g), which exempts most over-the-counter energy trades and trading on electronic energy commodity markets. The "loophole" was drafted by lobbyists for Enron working with senator Phil Gramm seeking a deregulated atmosphere for their new experiment, "Enron On-line.

Several Democratic legislators introduced legislation to close the loophole from 2000-2006 but were unsuccessful.

In September 2007, Senator Carl Levin (D-MI) introduced Senate Bill S.2058 specifically to close the "Enron Loophole" This bill was later attached to H.R. 6124, the Food, Conservation, and Energy Act of 2008, aka "The 2008 Farm Bill". President Bush vetoed the bill, but was overridden by both the House and Senate, and on June 18th, 2008 the bill was enacted into law.. One specific reason behind its introduction was to address the record high oil prices of the 2000s energy crisis. Since it was enacted, average gas prices of regular unleaded gasoline in the U.S. have dropped $0.357, from their record high of $4.114 on July 17, 2008 to an average of $3.757 as of September 21, 2008. Though the drop in price can not be specifically linked to the legislation, mainly due to the volatility of crude oil prices.

The prohibition on single-stock futures and narrow-based indices that had been in effect until the passage of this act was known as the Shad-Johnson Accord because it was first announced in 1982, as part of a jurisdictional pact between John S.R. Shad, then chairman of the U.S. Securities and Exchange Commission and Phil Johnson, then chairman of the Commodity Futures Trading Commission.

The act specifically banned regulation of credit default swaps. These unregulated instruments, insurance policies against default on risky investments like mortgage backed securities, necessitated the government bailout of insurer A.I.G.

H.R. 4577

H.R. 4577 was an appropriations/budget bill encompassing the funding for the Departments of Labor, Health and Human Services, and Education for fiscal year 2001 which had already begun in September 2000. This budget bill included:

1. H.R. 5656 - Labor HHS Education Appropriations;
2. H.R. 5657 - Legislative Branch Appropriations;
3. H.R. 5658 - Treasury Appropriations;
4. H.R. 5666 - Miscellaneous Appropriations - except section 123 relating to the enactment of H.R. 4904;
5. H.R. 5660 - Commodity Futures Modernization;
6. H.R. 5661 - Medicare, Medicaid and SCHIP Benefits Improvement and Protection;
7. H.R. 5662 - Community Renewal Tax Relief and Medical Savings Accounts;
8. H.R. 5663 - New Markets Venture Capital Program; and
9. H.R. 5667 - Small Business Reauthorization..

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