Clinton Signs Commodity Futures Modernization Act, Cementing Derivatives Deregulation

President Bill Clinton signed the Commodity Futures Modernization Act (CFMA) into law on his last day before Christmas recess, completing the deregulation of the derivatives market that Brooksley Born had warned against two years earlier. The legislation, inserted into a 10,000-page authorization bill by Senator Phil Gramm, removed regulatory oversight of over-the-counter derivatives, including credit default swaps, and prohibited states from regulating derivatives.

Treasury Secretary Lawrence Summers had lobbied extensively for the legislation, providing testimony that derivatives should remain largely unregulated. The Clinton Administration’s letter supporting the act was used by Phil Gramm to help sell the legislation. The CFMA represented the final victory of Wall Street’s deregulatory agenda, removing the last major regulatory barrier to the free use of derivatives and setting the stage for the explosive growth of the shadow banking system that would collapse in 2008.

Later analyses by institutions like Brookings and academic scholars would highlight the act’s critical role in creating systemic financial vulnerability, demonstrating how complex financial deregulation can have profound long-term consequences. Academic research from Cornell Law School specifically argued that the credit crisis was a direct result of the CFMA’s removal of long-standing legal constraints on speculative derivatives trading.