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1 1 (June 9, 2008)

handle is hein.crs/crsaitg0001 and id is 1 raw text is: Order Code RS22028 Updated June 9, 2008 CFTC Reauthorization Mark Jickling Specialist in Financial Economics Government and Finance Division Summary Authorization for the Commodity Futures Trading Commission (CFTC), a sunset agency established in 1974, expired on September 30, 2005. In the past, Congress has used the reauthorization process to consider amendments to the Commodity Exchange Act (CEA), which provides the basis for federal regulation of commodity futures trading. The last reauthorization resulted in the enactment of the Commodity Futures Modernization Act of 2000 (CFMA), the most significant amendments to the CEA since the CFTC was created in 1974. Both chambers considered reauthorization bills in the 109'h Congress, but none was enacted. In the 1 10th Congress, CFTC reauthorization provisions were added to the Farm Bill (H.R. 2419) and enacted over the President's veto on May 22, 2008, as P.L. 110- 234. This report provides brief summaries of the issues addressed in that law, including (1) regulation of energy derivatives markets, where some blame excessive price volatility on a lack of effective regulation, (2) the legality of futures-like contracts based on foreign currency prices offered to retail investors, and (3) the market in security futures, or futures contracts based on single stocks, which were authorized by the CFMA, but trade in much lower volumes than their proponents expected. This report will be updated as developments warrant. Futures contracts - like other financial derivatives such as options or swaps - gain or lose value as the price of some underlying commodity rises or falls. They allow traders to invest in corn, gold, or T-bills without actually owning the underlying commodities themselves. Futures can be used to avoid, or hedge, price risk. That is, farmers, utilities, airlines, banks, and many other businesses can use derivatives to protect themselves against unfavorable changes in commodity prices, interest rates, or other variables. Most futures trading, however, is done by speculators who profit if their forecasts of price trends are correct. (The futures exchanges are associations of professional speculators.) There are two benefits to speculation: liquidity and price discovery. Speculators provide liquidity because they are willing to assume the risks that hedgers wish to avoid. Speculation provides an efficient price discovery mechanism because futures prices adjust immediately to new information and serve as the basis for many physical (or spot market) transactions in energy, agricultural, and other markets.