[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]] {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 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. ____________________