The Commodity Exchange Act – Knowing the Gist

The Commodity Exchange Act is a United States congressional act ratified in 1936. Its basic function is to regulate futures trading of agricultural products in an organized and standardized method. Futures trading is a trading option wherein the underlying assets or commodities, its delivery, the mode of delivery, and other specifics relative to the ordered goods or services are clearly stipulated in a futures contract. Futures trading is doing commerce by ordering today for a commodity that will be delivered at an agreed price in the future.

Where It All Began: A History

The Commodity Exchange Act of 1936 is an offshoot of the Grain Futures Act of 1922. This act was made by the U.S. government in cognizance of the need to come up with an organized way of doing futures trading. The Commodity Exchange Act gave way to the U.S. Congress’ establishment of Commodity Exchange Commission, which delegated the duties of regulating the trade futures to the Secretary of Agriculture. The putting up of a commission paved the way to the establishment of Commodity Exchange Administration to enact the regulatory obligations.

Over time, some significant amendments and revisions were made to further substantiate the law. In 1974, the regulatory authority was transferred to Commodity Futures Trading Commission. When the efforts to regulate futures started in 1920s, the only commodity being regulated were agricultural products, but eventually, other commodities started to be subjected to regulation such as livestock, energy commodities, bonds and securities. and foreign currencies. What started as a simple futures regulatory act gave way to the creation of more specified and effective laws. The creation of Commodity Futures Trading Commission in 1974 resulted to the establishment of the National Futures Association of 1982.

What Objectives and Functions Does It Serve

The Commodity Exchange Act of 1936 includes the following functions and main objectives:

It prohibits the manipulation of prices of the commodities subjected in the futures contract.
It provides that regulated commodities subjected to futures trading should only be traded on licensed contract market, thus protecting both the buyer and seller against illegal traders and fraudulent dealers.
Brokerage firms handling clients were required to register at the U.S. federal government. This way, the buyers and sellers are ensured that they are dealing with legal brokers and agencies.
The Commodity Exchange Authority is an independent body under the Department of Agriculture; therefore, its independence eradicates any government official’s ulterior interest to control or influence levels of margin in the futures trading industry.
The act also provides the government the authority to control the size of speculative positions by individual traders.

The Commodity Exchange Act also intends to prevent commodity options trading to regulated and standardized commodities since such instruments can be highly speculative.