[Congressional Record Volume 146, Number 118 (Thursday, September 28, 2000)]
[Pages H8436-H8437]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


  The SPEAKER pro tempore. Under a previous order of the House, the 
gentlewoman from New York (Mrs. Maloney) is recognized for 5 minutes.
  Mrs. MALONEY of New York. Mr. Speaker, last week's announcement by 
President Clinton that the Federal Government would swap 30 million 
barrels of oil from the Strategic Petroleum Reserve was welcome news to 
myself and many other Members from the Northeast. I remember all too 
well the effect that last winter's dramatic spike in heating oil prices 
had on my constituents' heating bills. While the OPEC countries should 
do the right thing and increase supplies, here on Capitol Hill 
lobbyists are working behind the scenes to increase their companies' 
bottom lines at the expense of the public and taxpayers.
  I want to take this opportunity to bring to the attention of my 
colleagues an important piece of energy legislation that may soon be 
placed on suspension. The Commodity Futures Modernization Act of 2000, 
H.R. 4541, which was passed by the Committees on Banking and Financial 
Services, Commerce and Agriculture. This is important legislation for 
our Nation's financial services and our economy in general.
  I am concerned that a provision excluding trading in energy 
derivatives from proper regulation has been added to this legislation 
and that the House may not have an opportunity at this late date to 
debate this provision. The legislation, as reported by the Committee on 
Banking and Financial Services, increases the legal certainty of 
financial derivatives by excluding them from regulation by the 
Commodity Futures Trading Commission. These financial instruments are 
used by financial institutions and large businesses to offset interest 
rates, foreign currency, credit and other risks. When used by qualified 
investors, financial derivatives can reduce risk and increase the 
efficiency of the economy.
  In drafting the Commodity Futures Modernization Act, the House 
committees closely followed the recommendations of the report of the 
President's working group on financial markets. The working group, 
comprised of the Federal Reserve, SEC, OCC, and CFTC, produced its 
report after months of study of the derivatives market. A central 
recommendation of the working group was that the exclusion from CFTC 
regulation should be limited to financial derivatives. Financial 
derivatives are based on underlying commodities of infinite supply, 
such as interest rates.
  CFTC Chairman William Rainer elaborated on this distinction before 
the House Committee on Agriculture, and I quote,

       H.R. 4541 diverges, however, from the President's 
     recommendations by codifying an exemption for most provisions 
     of the Commodity Exchange Act for transactions in energy and 
     metal commodities. In recommending an exclusion from the CEA 
     for financial derivatives, the working group differentiated 
     between trading financial products and nonfinancial products.

  Continuing, he said,

       The CFTC has already exempted many types of energy trading 
     from the provisions of the Commodity Exchange Act. But the 
     exemption for energy commodities included in H.R. 4541 
     expands the scope.

[[Page H8437]]

                              {time}  1430

  ``The Commission's 1993 energy exemption is confined to parties with 
a capacity to make or take delivery. But this act would extend the 
exemption beyond those acting in a commercial capacity to encompass all 
eligible contract participants as defined in the bill.''
  In other words, the bill that the House may be asked to vote on 
contains an exclusion for energy products that was not recommended by 
the report which the House otherwise followed in drafting the bill.
  Contributing to my concern is that the public and the CFTC may be 
handcuffed in monitoring energy derivative prices if trading that 
currently occurs on energy future exchanges moves to private, 
multilateral electronic exchanges that the energy companies themselves 
may own.
  Given the historically high energy prices we are currently facing, I 
believe now is the wrong time to limit our regulators in policing fraud 
in the energy markets. Again the CFTC, the regulator, agrees with me on 
this point. Last week I received a letter from Chairman Rainer in which 
he wrote of the provisions in this bill.
  He said, ``Charging the Commission with the responsibility to police 
for fraud and manipulation, however, without conferring authority to 
right regulations where necessary, leaves the CFTC inadequately 
equipped to fulfill these responsibilities.''
  Mr. Speaker, I include for the Record the following letter from 
Chairman Rainer:
                                            U.S. Commodity Futures

                                           Trading Commission,

                               Washington, DC, September 19, 2000.
     Hon. Carolyn B. Maloney,
     Member of Congress, House of Representatives, Rayburn House 
         Office Building, Washington, DC.
       Dear Representative Maloney: I am pleased to write you on 
     behalf of the Commodity Futures Trading Commission in 
     response to your recent letter asking for the Commission's 
     position with respect to language in H.R. 4541 that would 
     exempt energy and metals products from regulation under the 
     Commodity Exchange Act.
       Before addressing the specifics of the energy and metals 
     exemptions, I would like to emphasize the Commission's 
     support for swift Congressional action on legislation 
     establishing legal certainty for over-the-counter financial 
     derivatives consistent with the unanimous recommendations of 
     the President's Working Group on Financial Markets.
       However, all versions of H.R. 4541 also contain provisions 
     that effectively exempt most forms of trading in energy 
     products from the Commodity Exchange Act, contrary to the 
     recommendations of the PWG. As stated previously in testimony 
     in both the House and Senate, the Commission is deeply 
     concerned that these exemptions are not based upon sufficient 
     evidence to warrant their inclusion in the legislation. One 
     of the principal factors cited by the PWG in recommending an 
     exclusion for OTC financial derivatives was that nearly every 
     dealer in those products is either subject to, or affiliated 
     with, an entity subject to federal financial regulation. This 
     cannot be said with respect to most participants in trading 
     energy products.
       The Commission also notes that the views of other agencies 
     with responsibilities for regulating various aspects of the 
     cash markets in energy products have not been solicited. The 
     recommendations of the President's Working Group on Financial 
     Markets for treatment of OTC financial transactions was 
     preceded by nearly a year of deliberation and study by the 
     four principal agencies of the Working Group, resulting in a 
     consensus on treatment of those products. No such process has 
     been undertaken by the agencies with responsibilities for 
     various aspects of trading in energy products, and we are 
     therefore concerned that the potential consequences of this 
     part of the legislation have not been thoroughly considered.
       While the exemption in energy products is common to all 
     three versions of the legislation--those of the Committees on 
     Agriculture, Banking & Financial Services and Commerce, 
     respectively--the Commerce Committee version extends the 
     exemption to apply to metals products, as well.
       With respect to the exemption for metal commodities, the 
     Commission has serious reservations about the extent to which 
     H.R. 4541 would exempt these products from the CEA. In the 
     Commission's experience, metal commodities have an 
     unambiguous history of susceptibility to manipulation and we 
     believe that futures and options transactions in these 
     commodities require full regulatory oversight by the CFTC to 
     protect the markets and their participants from unlawful 
     practices. For example, in 1998 the Commission settled a 
     major copper manipulation case, in which one company acquired 
     a dominant and controlling cash and futures market position 
     during 1995 and 1996 that caused copper prices worldwide to 
     rise to artificially high levels. That case resulted in the 
     offending company's paying the largest civil monetary penalty 
     in U.S. history to that time. In fact, the President's 
     Working Group Report explicitly stated that these markets 
     have been susceptible to manipulation and to supply and 
     pricing distortions and therefore recommended that they not 
     be excluded from the CEA.
       The Commission recognizes that the legislation attempts to 
     address some of these concerns by providing the agency with 
     anti-fraud and anti-manipulation authority. Charging the 
     Commission with the responsibility to police for fraud and 
     manipulation, however, without conferring commensurate 
     authority to promulgate regulations, where necessary, leaves 
     the CFTC inadequately equipped to fulfill those 
       While there are many important provisions of H.R. 4541 that 
     warrant enactment, the Commission cannot recommend that the 
     Congress move forward on those provisions unless the basic 
     issues outlined here are addressed. The Commission is pleased 
     to continue working with you and other interested parties to 
     reach a satisfactory solution to these important issues.
                                                William J. Rainer.

  Mr. Speaker, I do not believe that now is the time to give big energy 
companies trading in energy derivative products a regulatory pass.
  Let me quote and note that the commodity modernization bill is 
otherwise very, very important legislation for the conduct of our 
Nation's financial services that I support.
  I urge the leadership to give this bill a full hearing in the House 
and not place it on suspension, and I urge my colleagues to remove the 
exemption for energy derivatives so that the public may know what the 
price is.