[Congressional Record Volume 146, Number 118 (Thursday, September 28, 2000)]
[House]
[Pages H8436-H8437]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
URGING LEADERSHIP TO GIVE H.R. 4541 FULL HEARING
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]]
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``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
responsibilities.
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.
Sincerely,
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.
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