[Congressional Record Volume 142, Number 117 (Friday, August 2, 1996)]
[Senate]
[Pages S9620-S9621]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         ADDITIONAL STATEMENTS

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            LEGISLATION TO AMEND THE COMMODITY EXCHANGE ACT

 Mr. LUGAR. Mr. President, today Senator Leahy and I announced 
that we will propose legislation to amend the Commodity Exchange Act, 
which establishes the ground rules for commodity futures trading in the 
United States. Our decision to proceed with legislation follows a 
public hearing on June 5 and extensive discussions with industry and 
federal regulators.
  I commend Senator Leahy for his bipartisan cooperation in this as in 
so many other matters. In order that our colleagues and the general 
public may understand the legislation we plan to introduce, I ask that 
a statement issued earlier today by the two of us be printed in the 
Record. I further ask that a letter signed by the two of us and 
addressed to Acting CFTC Commissioner Tull also be printed in the 
Record.
  The material follows:

 Reforming and Updating the Commodity Exchange Act: Outline of Planned 
                              Legislation

       The Commodity Exchange Act has benefited the American 
     economy. It has helped encourage a dynamic, world-class 
     futures trading industry that allows farmers, ranchers and 
     other business operators to manage risk, provides investment 
     opportunities and offers protection to consumers of its 
     services. From time to time, Congress has re-examined the Act 
     to bring it up to date with changing markets. Such an update 
     is now opportune.
       On June 5, the Committee on Agriculture, Nutrition, and 
     Forestry heard testimony on the need to update the Commodity 
     Exchange Act. Since then, committee staff have consulted 
     extensively with federal agencies and private industry, 
     seeking to explore the implications of legislative proposals 
     by various groups.
       As a result of this thorough process, we have decided to 
     introduce legislation to amend the Commodity Exchange Act. 
     Because it is late in the legislative session, it is unlikely 
     the bill we introduce will become law this year. We intend it 
     to spark discussion, with the aim of completing work on 
     revisions to the Act in 1997.
       In considering possible legislation, we have been ably 
     advised by CFTC staff. While the CFTC is unconvinced that new 
     legislation is needed, commission officials have cooperated 
     with our staff whenever they have been asked. We want to 
     thank them publicly for this assistance.
       In addition, commission staff have been receptive to 
     addressing some issues through administrative action. 
     Although some reforms we propose are beyond the scope of the 
     commission's current statutory authorities, others could be 
     resolved without legislation. We encourage the CFTC to work 
     toward this end.
       There is a public interest in a strong, competitive U.S. 
     futures industry because of its critical role in price 
     discovery and business risk management. This public interest 
     implies, and requires, a degree of regulation. In recent 
     years, U.S. futures exchanges have also faced increasing 
     competition from foreign exchanges and from over-the-counter 
     derivative products.
       U.S. exchanges face some regulatory costs that are not 
     borne by their competitors. The Act, and the Commodity 
     Futures Trading Commission's actions to implement its 
     requirements, must strike an appropriate balance between 
     prudent regulation and the need for a cost-competitive 
     industry.
       We will introduce legislation in September. The reason for 
     delaying introduction is a provision of the Act called the 
     ``Treasury amendment.'' The amendment excludes certain 
     transactions from the CFTC's jurisdiction and has been the 
     subject of varying interpretations since it was first 
     enacted. Many firms and associations have requested that 
     Congress clarify the Treasury amendment, and we agree that 
     clarification is in order.
       The CFTC and the Treasury Department have been working to 
     arrive at a common interpretation of the Treasury amendment. 
     We believe it is wise to give them, and other relevant 
     agencies, a chance to complete these discussions before 
     making a legislative proposal. Therefore, we are writing to 
     Secretary Rubin and Acting Chairman Tull to encourage their 
     agencies to complete their discussions and advise us of their 
     progress. If these conclusions suggest a need to modify the 
     Treasury amendment, we will strongly consider incorporating 
     those modifications into the bill we introduce.
       In order for our colleagues to have an opportunity to 
     examine the legislation before this session of Congress ends, 
     we will need to introduce the bill in the first week Congress 
     returns from the August recess, that is the week ending 
     September 6. Therefore, we would like to receive the 
     Administration's counsel before the Labor Day holiday.
       It is premature to propose a specific change to the 
     Treasury amendment. However, we can say that we do not intend 
     for the CFTC to become involved in markets where it does not 
     now have any significant role. An example is the ``when-
     issued'' market in Treasury securities.
       We invite public comment during August on the legislative 
     proposals we will outline in this statement. The bill we 
     introduce in September will be a discussion document. It 
     might subsequently be scaled back, but it also might be 
     expanded to make additional changes to the Act. It will be 
     neither an opening gambit nor a least common denominator. It 
     will represent our best judgment of how the Act should 
     prudently be changed, but our minds remain open to other 
     approaches.
       The committee's work on the Commodity Exchange Act has been 
     bipartisan and collegial. Like the 1996 farm bill, the 
     landmark food safety legislation now on the President's desk, 
     and other important laws originated by the committee, this 
     legislative effort is one on which we will work together.
       A summary of planned legislative provisions follows.

[[Page S9621]]

       Considerations required in regulatory actions.--For each 
     significant regulation it imposes (not including enforcement, 
     emergency and similar actions), the CFTC will be directed to 
     take into account both the anticipated costs and the 
     anticipated benefits of the action it contemplates, and to 
     explain publicly its evaluation of the various costs and 
     benefits. In weighing costs and benefits, CFTC will consider 
     whether the proposed action, taken as a whole, will promote 
     customer protection, market integrity and efficiency, fair 
     competition and sound risk management. The provision will 
     apply to actions commenced after the date of enactment, 
     and will require an evaluation, not a cost-benefit 
     analysis in the strict, quantitative sense.
       Audit trail.--The bill will clarify the intent of Congress 
     that the audit trail statute does not mandate the development 
     or adoption of any particular technology, but establishes a 
     performance standard. This clarification will be consistent 
     with 1995 Senate testimony by then-Chairman Mary Schapiro.
       Contract designation.--The legislation will end the 
     requirement that proposed futures contracts be pre-approved 
     by the CFTC before trading can commence. Instead, the bill 
     will provide that exchanges must submit information about 
     contracts they intend to trade to the CFTC, which will have a 
     reasonable but limited period to examine the proposed 
     contract terms. The CFTC will analyze the information with a 
     presumption in favor of allowing the contract to trade. 
     However, within the examination period, the CFTC may require 
     additional information, or delay the start of trading for a 
     limited time, if it finds reason to believe the contract is 
     susceptible to manipulation, violates the Act or is contrary 
     to the public interest. Ultimately, the CFTC would have the 
     ability to prevent a contract from trading, but only after 
     instituting proceedings to disallow the exchange from 
     commencing trading. Comments are invited on the appropriate 
     length for the periods specified above.
  Similar procedures would apply to other proposed exchange rules. 
Committee report language will direct the CFTC to report, on an ongoing 
basis, its evaluation of how well exchange governing bodies meet the 
statutory requirement for meaningful representation of a diversity of 
interests.
       Disciplinary actions and penalties.--The bill will state 
     the sense of Congress that, in deploying enforcement 
     resources, the CFTC should avoid unnecessary duplication of 
     effort in areas where self-regulatory organizations also have 
     enforcement duties, while ensuring a CFTC presence and role 
     sufficient to safeguard market integrity and customer 
     interests. The CFTC will be directed to report to Congress on 
     its enforcement program. The report is to include an analysis 
     of the CFTC's performance in preventing, deterring and 
     disciplining violations of the CEA that involve fraud against 
     individual investors through ``bucket shops'' and similar 
     abuses. The report will be due a year after enactment, and 
     may follow one or more commission round tables on the 
     subject.
       Exemptive authority.--The bill will direct the CFTC to re-
     evaluate its Part 36 Rules (which allow exchanges to set up 
     less-regulated professionals-only markets in certain limited 
     circumstances) in light of the need to provide equitable 
     competitive conditions among various participants in 
     derivative product markets. Any revisions to the rules would 
     remain within the CFTC's discretion. The bill will also state 
     the sense of Congress that any revisions should ensure the 
     financial integrity of markets and customer protection. The 
     CFTC will be encouraged to convene a round table meeting or 
     meetings to receive public input on possible improvements in 
     Part 36 Rules.
       Swaps exemption.--The statute will be amended to enhance 
     the legal certainty of contracts involving swaps and similar 
     products. Products meeting the requirements of the CFTC's 
     1993 swaps exemption will be exempt from the Act's provisions 
     to the same extent as at present. The provision will not 
     diminish the CFTC's authority to grant additional 
     exemptions. In addition, the bill will end the current 
     prohibition on granting an exemption from CEA regulation 
     to any transactions subject to the Shad-Johnson accord 
     (which establishes CFTC and SEC jurisdiction on such 
     products as stock index futures). Instead, the bill will 
     allow the CFTC to exempt such products, but only with the 
     concurrence of the Securities and Exchange Commission. 
     Comments are invited on additional or alternative means of 
     enhancing the legal certainty of contracts while assuring 
     market integrity.
       Definition of a hedge.--The statute will be amended to 
     clarify that a hedge may be established to reduce risks other 
     than price risks. The bill will make clear that the change 
     does not affect the ability of exchanges and the CFTC to 
     establish speculative limits, require reporting of large 
     trader positions and otherwise discharge their 
     responsibilities.
       Delivery by Federally licensed warehouses.--The bill will 
     repeal an outdated provision that allows any federally 
     licensed warehouse to deliver grain against a futures 
     contract, even if it is not a designated delivery point. The 
     current statute could allow market manipulation in some 
     circumstances.
       Delivery points for foreign futures contracts.--The CFTC 
     will be directed to commence negotiations with appropriate 
     foreign agencies which regulate exchanges that have 
     established delivery points in the U.S., with the goal of 
     securing adequate assurance (through improvements in the 
     foreign regulatory scheme or other means) that the presence 
     of U.S. delivery points for foreign exchange contracts does 
     not create the potential for market manipulation or other 
     disruptions of U.S. markets. The CFTC will also be granted 
     additional powers, if necessary, to obtain needed information 
     on such delivery points. Comments are invited on the 
     appropriate scope of additional authorities, if any, required 
     by the CFTC to ensure that U.S. markets are not subject to 
     manipulation.
       Delegation of authority.--The bill will state the sense of 
     Congress that the CFTC should review its authorities with a 
     view to delegating additional duties to the National Futures 
     Association or other self-regulatory bodies, requiring a 
     report one year after enactment on the results of the review. 
     Report language will state that among the duties the CFTC may 
     consider delegating are the review of disclosure documents 
     and reparations procedures. The statute will further state 
     the sense of Congress that in making any additional 
     delegations, the CFTC should establish a procedure of spot 
     checks, random audits or other means of ensuring adequate 
     performance, and may also make the delegation on a pilot 
     basis.
       Treasury amendment.--The bill's provisions to modify the 
     Treasury amendment (an exemption from CEA regulation for the 
     interbank currency markets and some other markets) will be 
     drafted following review of suggestions received by the 
     Administration.
       Technical changes.--The bill may also include technical 
     changes to the Act such as those suggested by the National 
     Futures Association in its June 5 testimony.
         U.S. Senate, Committee on Agriculture, Nutrition, and 
           Forestry,
                                   Washington, DC, August 1, 1996.
     Hon. John Tull,
     Acting Chairman, Commodity Futures Trading Commission, 
         Washington, DC.
       Dear Mr. Chairman: We were heartened to learn that the 
     Commodity Futures Trading Commission and the Treasury 
     Department have been discussing the so-called ``Treasury 
     amendment'' to the Commodity Exchange Act, with a view toward 
     arriving at a common interpretation of the provision. At a 
     hearing our committee held June 5, the Treasury amendment was 
     cited by several witnesses as a provision of the Act that 
     needed review and clarification.
       We intend to introduce legislation that will make a number 
     of changes to the Act, and believe it is appropriate to 
     address the Treasury amendment in that bill. It would be 
     highly desirable to have the benefit of the Treasury and the 
     CFTC's joint advice in this regard.
       In order for our colleagues to have adequate opportunity to 
     review the bill this fall, we intend to introduce it in the 
     first week Congress returns from its August recess, that is 
     the week ending September 6, 1996. We would appreciate 
     hearing from relevant federal agencies their views on the 
     Treasury amendment before the Labor Day holiday, if possible. 
     However, we are confident you share our strong hope that 
     agencies will resolve any differences by that time and arrive 
     at a common understanding, so that the statute's provisions 
     and scope can be made clear.
       Thank you for your assistance in this matter. A similar 
     letter has been sent to Secretary Rubin.
           Sincerely yours,
     Patrick J. Leahy,
       Ranking Democratic Member.
     Richard G. Lugar,
       Chairman.

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