[Congressional Record Volume 142, Number 127 (Monday, September 16, 1996)]
[Senate]
[Pages S10604-S10608]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LUGAR (for himself and Mr. Leahy):
  S. 2077. A bill to amend the Commodity Exchange Act to improve the 
act, and for other purposes; to the Committee on Agriculture, 
Nutrition, and Forestry.


             The Commodity Exchange Act Amendments of 1996

 Mr. LUGAR. Mr. President, today Senator Leahy and I are 
introducing legislation to amend the Commodity Exchange Act. This bill 
follows several months of hearings and informal consultations with 
industry, academics and regulators. The legislation streamlines U.S. 
futures trading law, conforming it to changing competitive realities.
  In many ways, regulation has benefited the U.S. futures industry. 
Prudent regulation enhances customer protection, prevents and punishes 
fraud and other abuses, and makes futures markets better able to 
provide risk management, price discovery and investment opportunity.
  Regulation, however, also has its costs. U.S. futures markets face 
competition that is, in some cases, less regulated or differently 
regulated. In the years ahead, our challenge is to balance the need for 
adequate regulation with the need to offer cost-competitive products.
  This bill tries to strike such a balance. It requires the Commodity 
Futures Trading Commission to consider the costs for industry of the 
regulations it imposes. The bill streamlines the process of introducing 
new futures contracts, reducing the time that is required to begin 
trading these new products. It makes similar reforms to the process by 
which exchanges' rules are reviewed by the CFTC.
  Where additional authority for the CFTC is needed, the bill provides 
it. The CFTC will have the authority to require delivery points for 
overseas futures markets to provide information that is also regularly 
demanded of American market participants. This is eminently reasonable, 
and may assist the CFTC and other regulators in the future if 
situations similar to the current copper market scandal recur.
  The bill will also provide greater legal certainty for swaps, over-
the-counter products that are of increasing importance to many 
businesses. It is important that these contracts' enforceability be 
made more certain, so that legal risk does not compound the other risks 
inherent in any financial transaction.
  The bill contains a number of other provisions. I have provided a 
descriptive summary which may be helpful to our colleagues. Mr. 
President, I ask unanimous consent that this document and the text of 
the introduced bill be printed in the Record.
  It is late in the session, and I do not expect the Commodity Exchange 
Act Amendments of 1996 to become law this year. Senator Leahy and I 
wanted to introduce it to spur discussion and debate, so that early in 
the next Congress we can again introduce the bill, with any refinements 
that may be developed in the interim. We both intend that the bill will 
be a major focus of attention for the Committee on Agriculture, 
Nutrition, and Forestry next year.
  As usual, I am indebted to Senator Leahy for his bipartisan 
cooperation in this as in so many other endeavors. I am honored that he 
is an original co-sponsor of the bill.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2077

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Commodity Exchange 
     Amendments Act of 1996''.

     SEC. 2. HEDGING.

       The fourth sentence of section 3 of the Commodity Exchange 
     Act (7 U.S.C. 5) is amended by striking ``through 
     fluctuations in price''.

     SEC. 3. DELIVERY POINTS FOR FOREIGN FUTURES CONTRACTS.

       Section 4(b) of the Commodity Exchange Act (7 U.S.C. 6(b)) 
     is amended--
       (1) in the third sentence--
       (A) by striking ``(1)'' and ``(2)'' and inserting ``(A)'' 
     and ``(B)'', respectively; and
       (B) by striking ``No rule'' and inserting ``Except as 
     provided in paragraph (2), no rule'';
       (2) by inserting ``(1)'' after ``(b)''; and
       (3) by adding at the end the following:
       ``(2)(A) The Commission shall consult with a foreign 
     government, foreign futures authority, or department, agency, 
     governmental body, or regulatory organization empowered by a 
     foreign government to regulate a board of trade, exchange, or 
     market located outside the United States, or a territory or 
     possession of the United States, that has 1 or more 
     established delivery points in the United States, or a 
     territory or possession of the United States, for a contract 
     of sale of a commodity for future delivery that is made or 
     will be made on or subject to the rules of the board of 
     trade, exchange, or market.
       ``(B) In the consultations, the Commission shall endeavor 
     to secure adequate assurances, through memoranda of 
     understanding or any other means the Commission considers 
     appropriate, that the presence of the delivery points will 
     not create the potential for manipulation of the price, or 
     any other disruption in trading, of a contract of sale of a 
     commodity for future delivery traded on or subject to the 
     rules of a contract market, or a commodity, in interstate 
     commerce.
       ``(C) Any warehouse or other facility housing an 
     established delivery point in the United States, or a 
     territory or possession of the United States, described in 
     subparagraph (A) shall--
       ``(i) keep books, records, and other information specified 
     by the Commission pertaining to all transactions and 
     positions in all contracts made or carried on the foreign 
     board of trade, exchange, or market in such form and manner 
     and for such period as may be required by the Commission;
       ``(ii) file such reports regarding the transactions and 
     positions with the Commission as the Commission may specify; 
     and
       ``(iii) keep the books and records open to inspection by a 
     representative of the Commission or the United States 
     Department of Justice.''.

     SEC. 4. EXEMPTION AUTHORITY AND SWAP EXEMPTION.

       (a) In General.--Section 4(c) of the Commodity Exchange Act 
     (7 U.S.C. 6(c)) is amended by adding at the end the 
     following:
       ``(6)(A) An agreement, contract, or transaction (or class 
     thereof) that is otherwise subject to this Act shall be 
     exempt from all

[[Page S10605]]

     provisions of this Act and any person or class of persons 
     offering, entering into, rendering advice, or rendering other 
     services with respect to the agreement, contract, or 
     transaction (or class thereof) shall be exempt for the 
     activity from all provisions of this Act (except in each case 
     the provisions of sections 2(a)(1)(B), 4b, and 4o, any 
     antifraud provision adopted by the Commission pursuant to 
     section 4c(b), and the provisions of section 6(c) and 9(a)(2) 
     to the extent the provisions prohibit manipulation of the 
     market price of any commodity in interstate commerce or for 
     future delivery on or subject to the rules of any contract 
     market): Provided, That prior to, on, or after the date of 
     enactment of this paragraph, the agreement, contract, or 
     transaction (or class thereof) satisfies the eligibility 
     conditions for an exemption under the regulations of the 
     Commission published in the Federal Register on January 22, 
     1993, and codified in sections 35.1(b)(2) and 35.2 of part 35 
     of title 17, Code of Federal Regulations.
       ``(B) This paragraph shall not restrict the authority of 
     the Commission to grant exemptions under this subsection that 
     are in addition to or independent of the exemption provided 
     in this paragraph. No such exemption shall be applied in a 
     manner that restricts an exemption provided under this 
     paragraph.
       ``(7)(A) The Commission may exempt an agreement, contract, 
     or transaction (or class thereof) under this subsection to 
     the extent that the agreement, contract, or transaction (or 
     class thereof) may be subject to this Act.
       ``(B) An exemption under this subsection shall not create a 
     presumption that the exempted agreement, contract, or 
     transaction (or class thereof) is subject to this Act.''.
       (b) Review.--Not later than 1 year after the date of 
     enactment of this Act, the Commodity Futures Trading 
     Commission shall complete a reconsideration of the 
     regulations contained in part 36 of title 17, Code of Federal 
     Regulations, with the goal of establishing exemptive 
     provisions that are consistent with subsection (c).
       (c) Sense of Congress.--It is the sense of Congress that--
       (1) the exemption provided under section 4(c) of the 
     Commodity Exchange Act (7 U.S.C. 6(c)), and codified in part 
     36 of title 17, Code of Federal Regulations, does not yet 
     sufficiently promote fair competition by affording exchange-
     traded instruments fair and even-handed treatment with 
     similar products traded over-the-counter among institutions 
     and professionals; and
       (2) the Commodity Futures Trading Commission should provide 
     for such fair competition by granting instruments traded on 
     or subject to the facilities of exchanges, exemptive 
     flexibility that is equitable in comparison to the exemptive 
     flexibility the Commission has granted to over-the-counter 
     transactions, while ensuring the protection of market 
     participants and financial and market integrity.
       (d) Report.--On completion of the review required by 
     subsection (b), the Commodity Futures Trading Commission 
     shall report on the results of the review to the Committee on 
     Agriculture of the House of Representatives and the Committee 
     on Agriculture, Nutrition, and Forestry of the Senate.

     SEC. 5. CONTRACT DESIGNATION.

       (a) In General.--Section 5 of the Commodity Exchange Act (7 
     U.S.C. 7) is amended--
       (1) by striking the matter preceding paragraph (1) and 
     inserting the following:

     ``SEC. 5. DESIGNATION OF A BOARD OF TRADE AS A CONTRACT 
                   MARKET.

       ``(a) In General.--The Commission shall designate a board 
     of trade as a contract market if the board of trade complies 
     with and carries out the following conditions and 
     requirements:'';
       (2) by striking paragraph (7);
       (3) by redesignating paragraph (8) as paragraph (7); and
       (4) by adding at the end the following:
       ``(b) Existing and Future Designations.--
       ``(1) In general.--If a board of trade is designated as a 
     contract market by the Commission under subsection (a) and 
     section 6, the board of trade shall retain the designation 
     for all existing or future contracts, unless the Commission 
     suspends or revokes the designation or the board of trade 
     relinquishes the designation.
       ``(2) Existing designations.--A board of trade that has 
     been designated as a contract market as of the date of 
     enactment of this subsection shall retain the designation 
     unless the Commission finds that a violation of this Act or a 
     rule, regulation, or order of the Commission by the contract 
     market justifies suspension or revocation of the designation 
     under section 6(b), or the board of trade relinquishes the 
     designation.
       ``(c) New Contract Submissions.--Except as provided in 
     subsection (e), a board of trade that has been designated as 
     a contract market under subsection (a) shall submit to the 
     Commission all rules that establish the terms and conditions 
     of a new contract of sale in accordance with subsection (d) 
     (referred to in this section as a `new contract'), other than 
     a rule relating to the setting of levels of margin and other 
     rules that the Commission may specify by regulation.
       ``(d) Procedures for New Contracts.--
       ``(1) Required submission to commission.--Except as 
     provided in subsection (e), a contract market shall submit 
     new contracts to the Commission in accordance with subsection 
     (c).
       ``(2) Effectiveness of new contracts.--A contract market 
     may make effective a new contract and may implement trading 
     in the new contract--
       ``(A) not earlier than 10 business days after the receipt 
     of the new contract by the Commission; or
       ``(B) earlier if authorized by the Commission by rule, 
     regulation, order, or written notice.
       ``(3) Notice to contract market.--The new contract shall 
     become effective and may be traded on the contract market, 
     unless, within the 10-business-day period beginning on the 
     date of the receipt of the new contract by the Commission, 
     the Commission notifies the contract market in writing--
       ``(A) of the determination of the Commission that the 
     proposed new contract appears to--
       ``(i) violate a specific provision of this Act (including 
     paragraphs (1) through (7) of section 5(a)) or a rule, 
     regulation, or order of the Commission; or
       ``(ii) be contrary to the public interest; and
       ``(B) that the Commission intends to review the new 
     contract.
       ``(4) Notice in the federal register.--Notwithstanding the 
     determination of the Commission to review a new contract 
     under paragraph (3) and except as provided in subsection (e), 
     the contract market may make the new contract effective, and 
     may implement trading in the new contract, on a date that is 
     not earlier than 15 business days after the determination of 
     the Commission to review the new contract unless within the 
     period of 15 business days the Commission institutes 
     proceedings to disapprove the new contract by providing 
     notice in the Federal Register of the information required 
     under paragraph (5)(A).
       ``(5) Disapproval proceedings.--
       ``(A) Notice of proposed violations.--If the Commission 
     institutes proceedings to determine whether to disapprove a 
     new contract under this subsection, the Commission shall 
     provide the contract market with written notice, including an 
     explanation and analysis of the substantive basis for the 
     proposed grounds for disapproval, of what the Commission has 
     reason to believe are the grounds for disapproval, including, 
     as applicable--
       ``(i) the 1 or more specific provisions of this Act or a 
     rule, regulation, or order of the Commission that the 
     Commission has reason to believe the new contract violates 
     or, if the new contract became effective, would violate; or
       ``(ii) the 1 or more specific public interests to which the 
     Commission has reason to believe the new contract is 
     contrary, or if the new contract became effective would be 
     contrary.
       ``(B) Disapproval proceedings and determination.--
       ``(i) Opportunity to participate; hearing.--Before deciding 
     to disapprove a new contract, the Commission shall give 
     interested persons (including the board of trade) an 
     opportunity to participate in the disapproval proceedings 
     through the submission of written data, views, or arguments 
     following appropriate notice and an opportunity for a hearing 
     on the record before the Commission.
       ``(ii) Determination of disapproval.--At the conclusion of 
     the disapproval proceeding, the Commission shall determine 
     whether to disapprove the new contract.
       ``(iii) Grounds for disapproval.--The Commission shall 
     disapprove the new contract if the Commission determines that 
     the new contract--

       ``(I) violates this Act or a rule, regulation, or order of 
     the Commission; or
       ``(II) is contrary to public interest.

       ``(iv) Specifications for disapproval.--Each disapproval 
     determination shall specify, as applicable--

       ``(I) the 1 or more specific provisions of this Act or a 
     rule, regulation, or order of the Commission, that the 
     Commission determines the new contract violates or, if the 
     new contract became effective, would violate; or
       ``(II) the 1 or more specific public interests to which the 
     Commission determines the new contract is contrary, or if the 
     new contract became effective would be contrary.

       ``(C) Failure to timely complete disapproval 
     determination.--If the Commission does not conclude a 
     disapproval proceeding as provided in subparagraph (B) for a 
     new contract by the date that is 120 calendar days after the 
     Commission institutes the proceeding, the new contract may be 
     made effective, and trading in the new contract may be 
     implemented, by the contract market until such time as the 
     Commission disapproves the new contract in accordance with 
     this paragraph.
       ``(D) Appeals.--A board of trade that has been subject to 
     disapproval of a new contract by the Commission under this 
     subsection shall have the right to an appeal of the 
     disapproval to the court of appeals as provided in section 
     6(b).
       ``(6) Contract market deemed designated.--A board of trade 
     shall be deemed to be designated a contract market for a new 
     contract of sale for future delivery when the new contract 
     becomes effective and trading in the new contract begins.
       ``(e) Required Interagency Review.--Notwithstanding 
     subsection (d), no board of trade may make effective a new 
     contract (or option on the contract) that is subject to the 
     requirements and procedures of clauses (ii) through (v) of 
     paragraph (1)(B), and paragraph (8)(B)(ii), of section 2(a) 
     until the requirements and procedures are satisfied and 
     carried out.''.

[[Page S10606]]

       (b) Conforming Amendment.--The first sentence of section 
     6(a) of the Commodity Exchange Act (7 U.S.C. 8(a)) is amended 
     by striking ``Any board of trade desiring'' and inserting ``A 
     board of trade that has not obtained any designation as a 
     contract market for a contract of sale for a commodity under 
     section 5 that desires''.

     SEC. 6. DELIVERY BY FEDERALLY LICENSED WAREHOUSES.

       Section 5a(a) of the Commodity Exchange Act (7 U.S.C. 
     7a(a)) is amended by striking paragraph (7) and inserting the 
     following:
       ``(7) Repealed;''.

     SEC. 7. SUBMISSION OF RULES TO COMMISSION.

       Section 5a(a) of the Commodity Exchange Act (7 U.S.C. 
     7a(a)(12)) is amended by striking paragraph (12) and 
     inserting the following:
       ``(12)(A)(i) except as otherwise provided in this 
     paragraph, submit to the Commission all bylaws, rules, 
     regulations, and resolutions (collectively referred to in 
     this subparagraph as `rules') made or issued by the contract 
     market, or by the governing board or committee of the 
     contract market (except those relating to the setting of 
     levels of margin, those submitted pursuant to section 5 or 
     6(a), and those the Commission may specify by regulation) and 
     may make a rule effective not earlier than 10 business days 
     after the receipt of the submission by the Commission or 
     earlier, if approved by the Commission by rule, regulation, 
     order, or written notice, unless, within the 10-business-day 
     period, the Commission notifies the contract market in 
     writing of its determination to review such rules for 
     disapproval and of the specific sections of this Act or the 
     regulations of the Commission that the Commission determines 
     the rule would violate. The determination to review such 
     rules for disapproval shall not be delegable to any employee 
     of the Commission. Not later than 45 calendar days before 
     disapproving a rule of major economic significance (as 
     determined by the Commission), the Commission shall publish a 
     notice of the rule in the Federal Register. The Commission 
     shall give interested persons an opportunity to participate 
     in the disapproval process through the submission of written 
     data, views, or arguments. The determination by the 
     Commission whether a rule is of major economic significance 
     shall be final and not subject to judicial review. The 
     Commission shall disapprove, after appropriate notice and 
     opportunity for hearing (including an opportunity for the 
     contract market to have a hearing on the record before the 
     Commission), a rule only if the Commission determines the 
     rule at any time to be in violation of this Act or a 
     regulation of the Commission. If the Commission institutes 
     proceedings to determine whether a rule should be disapproved 
     pursuant to this paragraph, the Commission shall provide the 
     contract market with written notice of the proposed grounds 
     for disapproval, including the specific sections of this Act 
     or the regulations of the Commission that would be violated. 
     At the conclusion of the proceedings, the Commission shall 
     determine whether to disapprove the rule. Any disapproval 
     shall specify the sections of this Act or the regulations of 
     the Commission that the Commission determines the rule has 
     violated or, if effective, would violate. If the Commission 
     does not institute disapproval proceedings with respect to a 
     rule within 45 calendar days after receipt of the rule by the 
     Commission, or if the Commission does not conclude a 
     disapproval proceeding with respect to a rule within 120 
     calendar days after receipt of the rule by the Commission, 
     the rule may be made effective by the contract market until 
     such time as the Commission disapproves the rule in 
     accordance with this paragraph.
       ``(B)(i) The Commission shall issue regulations to specify 
     the terms and conditions under which, in an emergency as 
     defined by the Commission, a contract market may, by a \2/3\-
     vote of the governing board of the contract market, make a 
     rule (referred to in this subparagraph as an `emergency 
     rule') immediately effective without compliance with the 10-
     day notice requirement under subparagraph (A), if the 
     contract market makes every effort practicable to notify the 
     Commission of the emergency rule, and provide a complete 
     explanation of the emergency involved, prior to making the 
     emergency rule effective.
       ``(ii) If the contract market does not provide the 
     Commission with the requisite notification and explanation 
     before making the emergency rule effective, the contract 
     market shall provide the Commission with the notification and 
     explanation at the earliest practicable date.
       ``(iii) The Commission may delegate the power to receive 
     the notification and explanation to such individuals as the 
     Commission determines necessary and appropriate.
       ``(iv) Not later than 10 days after the receipt from a 
     contract market of notification of such an emergency rule and 
     an explanation of the emergency involved, or as soon as 
     practicable, the Commission shall determine whether to 
     suspend the effect of the rule pending review by the 
     Commission under the procedures of subparagraph (A).
       ``(v)(I) The Commission shall submit a report on the 
     determination of the Commission on the emergency rule under 
     clause (iv), and the basis for the determination, to the 
     affected contract market, the Committee on Agriculture of the 
     House of Representatives, and the Committee on Agriculture, 
     Nutrition, and Forestry of the Senate.
       ``(II) If the report is submitted more than 10 days after 
     the Commission's receipt of notification of the emergency 
     rule from a contract market, the report shall explain why 
     submission within the 10-day period was not practicable.
       ``(III) A determination by the Commission to suspend the 
     effect of a rule under this subparagraph shall be subject to 
     judicial review on the same basis as an emergency 
     determination under section 8a(9).
       ``(IV) Nothing in this paragraph limits the authority of 
     the Commission under section 8a(9);''.

     SEC. 8. AUDIT TRAIL.

       Section 5a(b) of the Commodity Exchange Act (7 U.S.C. 
     7a(b)) is amended--
       (1) in paragraph (3), by inserting ``selected by the 
     contract market'' after ``means'' each place it appears; and
       (2) by adding at the end the following:
       ``(7) The requirements of this subsection establish 
     performance standards and do not mandate the use of a 
     specific technology to satisfy the requirements.''.

     SEC. 9. MISCELLANEOUS TECHNICAL AMENDMENTS.

       Section 8a of the Commodity Exchange Act (7 U.S.C. 12a) is 
     amended--
       (1) in paragraph (2)--
       (A) in subparagraph (B), by inserting ``this paragraph or'' 
     after ``the provisions of''; and
       (B) in subparagraph (D), by inserting ``pleaded guilty to 
     or'' after ``such person has''; and
       (2) in paragraph (3)(H), by striking ``or has been 
     convicted in a State court,'' and inserting ``or has pleaded 
     guilty to, or has been convicted, in a State court,''.

     SEC. 10. CONSIDERATION OF EFFICIENCY, COMPETITION, RISK 
                   MANAGEMENT, AND ANTITRUST LAWS.

       Section 15 of the Commodity Exchange Act (7 U.S.C. 19) is 
     amended--
       (1) by striking ``Sec. 15. The Commission'' and inserting 
     the following:
       ``Sec. 15. (a)(1) Prior to adopting a rule or regulation 
     authorized by this Act or adopting an order (except as 
     provided in subsection (b)), the Commission shall consider 
     the costs and benefits of the action of the Commission.
       ``(2) The costs and benefits of the proposed Commission 
     action shall be evaluated in light of considerations of 
     protection of market participants, the efficiency, 
     competitiveness, and financial integrity of futures markets, 
     price discovery, sound risk management practices, and other 
     appropriate factors, as determined by the Commission.
       ``(b) Subsection (a) shall not apply to the following 
     actions of the Commission:
       ``(1) An order that initiates, is part of, or is the result 
     of an adjudicatory or investigative process of the 
     Commission.
       ``(2) An emergency action.
       ``(3) A finding of fact regarding compliance with a 
     requirement of the Commission.
       ``(c) The Commission''; and
       (2) by striking ``requiring or approving'' and inserting 
     ``requiring, reviewing, or disapproving''.

     SEC. 11. DISCIPLINARY AND ENFORCEMENT ACTIVITIES.

       (a) In General.--It is the sense of Congress that the 
     Commodity Futures Trading Commission should--
       (1) to the extent practicable, avoid unnecessary 
     duplication of effort in pursuing disciplinary and 
     enforcement actions if adequate self-regulatory actions have 
     been taken by contract markets and registered futures 
     associations; and
       (2) retain an oversight and disciplinary role over the 
     self-regulatory activities by contract markets and registered 
     futures associations in a manner that is sufficient to 
     safeguard financial and market integrity and the public 
     interest.
       (b) Report.--Not later than 1 year after the date of 
     enactment of this Act, the Commission shall submit a report 
     to the Committee on Agriculture of the House of 
     Representatives and the Committee on Agriculture, Nutrition, 
     and Forestry of the Senate that evaluates the effectiveness 
     of the enforcement activities of the Commission, including an 
     evaluation of the experience of the Commission in preventing, 
     deterring, and disciplining violations of the Commodity 
     Exchange Act (7 U.S.C. 1 et seq.) and Commission regulations 
     involving fraud against the public through the bucketing of 
     orders and similar abuses.

     SEC. 12. DELEGATION OF FUNCTIONS BY THE COMMISSION.

       (a) In General.--It is the sense of Congress that the 
     Commodity Futures Trading Commission should--
       (1) review its rules and regulations that delegate any of 
     its duties or authorities under the Commodity Exchange Act (7 
     U.S.C. 1 et seq.) to contract markets or registered futures 
     associations;
       (2) consistent with the public interest and law, determine 
     which additional functions, if any, performed by the 
     Commission should be delegated to contract markets or 
     registered futures associations; and
       (3) establish procedures (such as spot checks, random 
     audits, reporting requirements, pilot projects, or other 
     means) to ensure adequate performance of the additional 
     functions that are delegated to contract markets or 
     registered futures associations.
       (b) Report.--Not later than 1 year after the date of 
     enactment of this Act, the Commission shall report the 
     results of its review and actions under subsection (a) to the 
     Committee on Agriculture of the House of Representatives and 
     the Committee on Agriculture, Nutrition, and Forestry of the 
     Senate.
                                                                    ____


[[Page S10607]]

  


 Summary and Discussion--The Commodity Exchange Act Amendments of 1996

       Section 1. Short title.
       The bill is entitled ``The Commodity Exchange Act 
     Amendments of 1996.''
       Section 2. Hedging.
       The CEA does not directly define the term ``hedging.'' In 
     Section 3 of the CEA, which contains various legislative 
     findings that justify regulation of futures markets, the 
     statute speaks of business operators ``hedging themselves 
     against possible loss through fluctuations in price.'' 
     Questions have been raised whether hedging can occur against 
     risks other than price risks--for instance, in new futures 
     contracts that are based on yields of specified crops in 
     particular states. The bill deletes the phrase ``through 
     fluctuations in price.'' It makes clear that risks to be 
     hedged may be risks other than those directly resulting from 
     price changes. This change will not affect the authority to 
     establish speculative limits, require reporting of large 
     trader positions and otherwise ensure market integrity.
       Section 3. Delivery Points for Foreign Futures Contracts.
       In recent years, some overseas futures exchanges have 
     established delivery points in the U.S. The implications of 
     making and taking delivery of a physical commodity that is 
     priced on a foreign exchange may differ, depending on the 
     comparability of price discovery on that exchange and on U.S. 
     exchanges, as well as other factors. Serious questions have 
     been raised, as the current scandal in the copper markets has 
     unfolded, about what role, if any, delivery points for 
     foreign futures contracts may have played in that affair. 
     These questions are not yet answered. However, the 
     legislation makes changes that will be appropriate regardless 
     of the outcome of specific investigations.
       The bill directs the CFTC to consult with overseas 
     regulators and other appropriate parties in countries where 
     futures exchanges have established U.S. delivery points. The 
     aim of the consultations will be to secure adequate 
     assurances against any adverse effect on U.S. markets because 
     of these delivery points. Such assurances could take the form 
     of changes to regulations or trading rules in the overseas 
     market.
       The bill also gives the CFTC authority to obtain 
     information from warehouses that are delivery points for 
     foreign exchanges. This information would be similar to that 
     which the CFTC may already require of persons making trades 
     on overseas futures markets, and will assist the CFTC in 
     ensuring market integrity, preventing abuses and otherwise 
     discharging its responsibilities.
       Section 4. Exemption Authority and Swap Exemption.
       The Act gives the CFTC authority to exempt transactions 
     from its regulatory requirements, either completely or on 
     stated terms. In 1993, the CFTC used this authority to exempt 
     swap agreements from most, but not all, portions of the Act. 
     This exemption generally seems to have worked well, 
     facilitating a climate in which swaps, which offer numerous 
     benefits to their users if properly and prudently employed, 
     could trade with secure legal status. (It was the lack of 
     such legal certainty which, in part, prompted Congress to 
     enact the exemptive authority.)
       The bill will provide additional legal certainty for swaps 
     transactions in two ways. First, the bill codifies the 
     present exemption from regulation for transactions that meet 
     its requirements, either now or in future. For these 
     qualifying instruments, a statutory change would be required 
     in order for the exemption to become more restrictive than it 
     now is. The codification does not affect the CFTC's power to 
     grant additional exemptions that would be less restrictive 
     than the current exemption. Nor does it limit the CFTC's 
     ability to enforce anti-manipulation or anti-fraud provisions 
     of the CEA as they may apply to these transactions or as the 
     present exemptions may be conditioned on compliance with 
     their provisions.
       Second, the bill codifies two important elements of the 
     present swaps exemptive authority, again to enhance legal 
     certainty. The legislation clarifies that the CFTC may issue 
     an exemption that is applicable to the extent the exempted 
     transaction may have been subject to the Act--i.e., without 
     requiring a prior decision on whether the transaction 
     actually was, in fact, subject to the Act. Relatedly, the 
     legislation states that the mere fact that a transaction was 
     exempted from the Act does not, in itself, create a 
     presumption that the transaction was one that would have 
     fallen under the Act's regulatory requirements had it not 
     been exempted. Both these clarifications are consistent with 
     present regulations for exemptions.
       This section of the bill also directs the CFTC to review 
     rules that permit futures exchanges, under narrowly defined 
     conditions, to operate less-regulated markets that are 
     restricted to professional and institutional participants. 
     These so-called ``Part 36'' rules have not, so far, resulted 
     in the active operation of such markets. The issue is an 
     especially important one because of the competitive 
     challenges futures exchanges face, both from overseas markets 
     and from over-the-counter products in the U.S. The 
     legislation does not contemplate greater regulation of the 
     latter markets, and indeed strives to achieve greater legal 
     certainty for O-T-C products. But it does express the view of 
     Congress that futures exchanges need to be able to compete in 
     today's financial marketplace, in a way that reduces 
     regulatory costs of doing business while assuring customer 
     protection. To this end, the CFTC is directed to re-examine 
     the Part 36 rules and report, within a year, to Congress on 
     what if any changes may be appropriate. This broad mandate, 
     as opposed to requirements for specific changes in the 
     current regulations, reflects a view that the CFTC should be 
     better able than Congress to assess necessary reforms. The 
     report will afford an opportunity for Congress to judge the 
     adequacy of any changes, and to contemplate any additional 
     statutory changes that may be required.
       Section 5. Contract Designation.
       The Act now requires futures exchanges to be ``designated'' 
     as a ``contract market'' for each futures contract they 
     trade. This process has been streamlined by the CFTC in 
     recent years, but the statute continues to reflect a rather 
     elaborate process in which, in many ways, the burden of proof 
     is placed on exchanges to demonstrate why they should be able 
     to offer new products for trading. Even for a regulated 
     financial sector like the futures industry, this implicit 
     presumption against new product development is out of date. 
     The bill streamlines the process of introducing new futures 
     contracts, both by compressing the time available for agency 
     review and by creating a presumption that products developed 
     by exchanges should be permitted to trade unless the CFTC 
     finds compellingly why they should not. The legislation 
     treats new contract applications as rules, albeit under 
     somewhat different procedures from other exchange rules. 
     Under the new procedure, an exchange submits a new contract 
     to the CFTC. The new contract may trade after 10 business 
     days, unless the CFTC states an intention to review it for 
     possible disapproval. After a further 15 business days, the 
     new contract can be traded unless the CFTC institutes 
     proceedings to disapprove it. These proceedings are to be 
     completed within 120 days; if not, the new contract can trade 
     until and unless it is finally disapproved. In contrast to 
     the present burden on an exchange to show that a contract is 
     in ``the public interest,'' the CFTC could only disapprove a 
     contract by showing that it was ``contrary to the public 
     interest'' (or by showing that it violated law or 
     regulations). The philosophy is a fairly simple one: Subject 
     to prudent regulatory limits, private futures exchanges can 
     more appropriately and efficiently decide which new products 
     are ripe for trading than can the government. The exchanges 
     may sometimes err in these judgments, but that is the way 
     markets work.
       Section 6. Delivery by Federally Licensed Warehouses.
       An obscure provision of the Act now allows any federally 
     licensed grain warehouse to make delivery against a futures 
     contract, on giving reasonable notice. Though seldom used, 
     this provision appears to conflict with the ability of 
     exchanges to establish their own trading procedures, 
     including delivery points. In an extremely tight market, the 
     current provision could in some circumstances facilitate 
     market manipulation. The bill repeals this provision.
       Section 7. Submission of Rules to Commission.
       The bill revises current requirements for submitting 
     exchange rules to the CFTC. These rules affect the everyday 
     procedures for doing business on the exchange, as well as the 
     ground rules for trading. They run the gamut from major to 
     minor. As with the procedures for approving new contracts, 
     the legislation compresses the time available for federal 
     review and generally streamlines procedures. Rules are to be 
     submitted to the CFTC and can become effective in 10 business 
     days unless the CFTC notifies the exchange that it will 
     review them for possible disapproval. If the CFTC does not 
     institute disapproval proceedings within 45 days of receiving 
     the proposed rule, or conclude its proceedings within 120 
     days, the rule can become effective until and unless 
     disapproved.
       The authors of the bill intend that its legislative history 
     will also discuss the implementation of statutory 
     requirements for the composition of exchange boards of 
     directors. The CFTC will be directed to report, on an ongoing 
     basis, its evaluation of how fully these requirements are 
     being met. The report language will provide further 
     clarification of Congressional intent with regard to the 
     qualification of individuals to satisfy particular 
     requirements for board representation.
       Section 8. Audit Trail.
       Futures exchanges are subject to audit trail requirements 
     that are intended to ensure market integrity, and to deter 
     and detect abuse. The bill clarifies these requirements in 
     one respect. It states--consistent with testimony by the CFTC 
     before Congress in 1995--that the audit trail requirements 
     establish a performance standard, not a mandate for any 
     particular technological means of achieving the standard. In 
     further support of this clarification, the bill speaks of the 
     ``means selected by the contract market'' for meeting audit 
     trail standards. The authors of the bill intend that its 
     legislative history will also note further CFTC testimony 
     that, in assessing the ``practicability'' of various 
     components of the audit trail standards, the cost to 
     exchanges of meeting the standards is one factor to be taken 
     into account.
       Section 9. Miscellaneous Technical Amendments.
       The bill makes several technical changes to correct 
     omissions in the current statute.
       Section 10. Consideration of Efficiency, Competition, Risk 
     Management, and Antitrust Laws.
       The bill requires the CFTC, in issuing rules, regulations 
     or some types of orders, to

[[Page S10608]]

     take into account the costs and benefits of the action it 
     contemplates. The requirement is not for a quantitative cost-
     benefit analysis, but a mandate to consider both costs and 
     benefits, as well as other enumerated factors. The authors of 
     the bill believe that in establishing its policies and giving 
     direction to market participants, the CFTC should weigh how 
     its actions may effect the participants' costs of doing 
     business, as well as what benefits may accrue from the 
     action.
       Some activities of the CFTC, of course, do not call for 
     this kind of approach, and indeed applying a cost-benefit 
     requirement to them would be inappropriate. Thus, the bill 
     exempts the CFTC's adjudicatory and investigative processes, 
     emergency actions and certain findings of fact that are 
     objective, quantitative or otherwise unsuitable for a cost-
     benefit approach. The bill's eventual legislative history 
     will further discuss Congressional intent in enacting this 
     requirement.
       Section 11. Disciplinary and enforcement activities.
       Enforcement is a priority for the CFTC. Like other 
     financial regulators, the CFTC is assisted in its enforcement 
     activities by the complementary rules, surveillance and 
     disciplinary actions of self-regulatory organizations (SROs). 
     These include both the futures exchanges themselves and the 
     National Futures Association. The bill provides guidance to 
     the CFTC on the deployment of enforcement resources, and 
     requires a report in 1 year on the overall enforcement 
     program. The legislation expresses the sense of Congress that 
     the CFTC should avoid unnecessary duplication of effort 
     where SROs have taken adequate action to deter abuse and 
     ensure customer protection. It further states that the 
     CFTC's oversight and disciplinary role should be 
     sufficient to safeguard market integrity and protect 
     public confidence in markets.
       Section 12. Delegation of functions by the Commission.
       The CFTC, under current law, has delegated some limited 
     duties to the National Futures Association. Today's austere 
     budget climate makes it prudent for the commission to assess 
     whether other functions could appropriately be delegated. The 
     bill calls on the CFTC to determine which, if any, additional 
     functions should be delegated to SROs, suggesting the use of 
     procedures like spot checks and random audits to ensure that 
     any delegated functions are adequately performed, and 
     requires a report in one year with the results of the review. 
     The authors intend that the bill's legislative history will 
     cite several current CFTC activities that could be considered 
     for delegation.
                                                                    ____


        Outline of the Commodity Exchange Act Amendments of 1996

       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 announced on 
     August 2, 1996, our intention to introduce legislation to 
     amend the Commodity Exchange Act. Today we are introducing 
     that legislation. Because it is late in the legislative 
     session, we do not intend that the bill become law this year. 
     We intend it to spark discussion, so that the Congress can 
     make comprehensive revisions to the Act in 1997.
       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.
       In our August 2 statement, we noted the importance of a 
     provision of the Act called the ``Treasury amendment.'' This 
     amendment excludes interbank foreign exchange transactions 
     and some other enumerated transactions from the CFTC's 
     jurisdiction. It has been the subject of much more frequent 
     litigation than other sections of the Act. It was written, in 
     some haste, in 1974 at a time when many financial markets and 
     instruments were different or less fully developed than 
     today. The case for Congress to revisit, reassess and clarify 
     the Treasury amendment is compelling.
       We asked the CFTC and the Treasury Department to conclude 
     discussions which they had begun some months before, and 
     report their progress around Labor Day. Unfortunately, these 
     discussions have so far produced some points of agreement but 
     no overall consensus among the two agencies or among the 
     other members of the President's working group on financial 
     markets.
       We are disappointed that an agreement on the Treasury 
     amendment has not yet been forged. The issues raised by the 
     amendment seem to us substantial but not insurmountable. In 
     fairness to the Administration, there is not yet a consensus 
     in the private sector either about the appropriate scope of 
     the amendment's exclusions from the Act.
       With some reluctance, we have been persuaded to defer 
     addressing the Treasury amendment in this bill. The 
     Administration asserts that given furhter time, it will be 
     able to reach internal agreement. We are today informing the 
     Administration that, in our view, an agreement by the end of 
     this year is necessary so that the issue can be presented to 
     our colleagues at the beginning of the 105th Congress. If the 
     Administration is not able to present its ideas by the end of 
     1996, we will reluctantly conclude that no consensus in the 
     executive branch is likely, and not await further agency 
     deliberations.
       Deferring a provision of the Treasury amendment does not 
     diminish its importance. Since today's legislation will have 
     to be reintroduced in January 1997, we believe this course of 
     action is prudent, since not only the Administration but also 
     various interested private groups will have the opportunity 
     to confer between now and the end of the year. We urge them 
     to do so. Independent of both efforts, we are considering a 
     variety of specific reforms to the Treasury amendment, and 
     will be interested to compare these ideas to those of the 
     private sector and the Administration. We intend that the 
     reintroduced version of today's bill will propose a solution 
     to the Treasury amendment problem.
       We invite public comment on the Commodity Exchange Act 
     Amendments. We believe this bill represents sound policies. 
     We want to take full account, however, of other views. As we 
     said in August, the bill is neither an opening gambit nor a 
     least common denominator. It represents our best judgment of 
     how the Act should prudently be changed, but our minds remain 
     open.
       The Agriculture Committee's work on the Commodity Exchange 
     Act has been bipartisan and collegial. Like the 1996 farm 
     bill, the landmark new food safety law and other important 
     laws originated by the committee, this legislative effort is 
     one on which we have worked together. Our cooperation will 
     continue.

 Mr. LEAHY. Mr. President, today Senator Lugar and I are 
introducing legislation to amend the Commodity Exchange Act. This 
legislation updates and streamlines U.S. futures trading law.
  There is a strong interest in maintaining a viable futures market. 
Senator Lugar's and my review of committee testimony combined with the 
informal meetings with the industry, regulators, and interested 
academics has convinced us that it is appropriate to make these 
revisions to the CEA.
  I do not expect that this bill will become law during this session. 
But introducing it now will afford an opportunity to engage in an 
active public discussion and debate over the changes that we propose 
here today.
  It is my experience that such a dialog helps develop solid bipartisan 
legislation. As with most issues, there are many interests that must be 
balanced. And, Senator Lugar and I have strived to strike the right 
balance between these interests. But we will profit from the dicussions 
that this bill is sure to prompt.
  I am pleased to join my colleague in offering this bill. Senator 
Lugar and I have worked together on futures issues since we came to the 
Agriculture Committee. We did the same on this bill--working to ensure 
that these markets remain competitive while still maintaining effective 
provisions on customer protection and market integrity such as the 1992 
audit trail provisions.
  I look forward to continuing our discussions.
                                 ______