[Congressional Record Volume 146, Number 133 (Monday, October 23, 2000)]
[Extensions of Remarks]
[Pages E1878-E1880]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


              COMMODITY FUTURES MODERNIZATION ACT OF 2000

                                 ______
                                 

                               speech of

                         HON. EDWARD J. MARKEY

                            of massachusetts

                    in the house of representatives

                       Thursday, October 19, 2000

  Mr. MARKEY. Mr. Speaker, I rise in support of the motion to suspend 
the rules and pass the bill, H.R. 4541.
  I reluctantly intend to vote for this bill today, despite the fact 
that I have some very serious concerns about both the process that has 
brought this bill to the floor and some of its provisions.
  Let me speak first to the process. In the Commerce Committee, 
Democratic members worked cooperatively with the Republican majority to 
craft a bipartisan bill that addressed investor protection, market 
integrity, and competitive parity issues raised by the original 
Agriculture Committee version of the bill. As a result, we passed our 
bill with unanimous bipartisan support. Following that action, we stood 
ready to work with members of the Banking and Agriculture Committees to 
reconcile our three different versions of the bll and prepare it for 
House floor action. But after just a few bipartisan staff meetings, the 
Democratic staff was told that Democrats would henceforth be excluded 
from all future meetings, and that the Republican majority leader was 
going to take the lead in drafting the bill. What's more, we were also 
told the chairman of the Senate Banking Committee was invited into 
those negotiations--despite the fact that this bill comes within the 
Agriculture Committee's jurisdiction over in the Senate and the Senate 
has not even passed a CEA bill. In fact, the Senate Agriculture 
Committee decided not to include the swaps provisions sought by the 
chairman of the Senate Banking Committee when the committee reported S. 
2697, because these proposals were viewed as so controversial.
  We then went through a period of several weeks in which the 
Republican majority staff caucused behind closed doors. The product 
that resulted from those negotiations was so seriously flawed that it 
was opposed by Treasury, the SEC, the CFTC, the New York Stock 
Exchange, the NASDAQ, and all of the Nation's stock and options 
exchanges, the entire mutual fund industry, and even some of the 
commodities exchanges. Democrats, the administration, the CFTC, and the 
SEC suggested a number of changes to fix the many flaws in this 
language, and over the last several days many of them have been 
accepted. That is a good thing. But I would say to the majority, if you 
had simply continued to work with us and to allow our staffs to meet 
with your staffs, we could have resolved our differences over this bill 
weeks ago. We shouldn't have had to communicate our concerns through e-
mails and third parties. We really should be allowing our staffs to 
meet and talk to each other.
  Having said that, let me turn to the substance of this bill. There 
are two principal areas I want to focus on--legal certainty and single 
stock futures.
  With regard to legal certainly, I frankly think this whole issue is 
overblown. Congress added provisions to the Futures Trading Practices 
Act of 1992 that give the CFTC the authority to exempt over-the-counter 
swaps and other derivatives from the Commodities Exchange Act--without 
having to even determine whether such products were futures. I served 
as a conferee when we worked out this language, and it was strongly 
supported by the financial services industry.
  Now we are told we need to fix the ``fix'' we made to the law back 
then. But, I would note that when former CFTC Chair Brooksley Born 
opened up the issue of whether these exclusions should be modified, she 
was quickly crushed. The other financial regulators immediately 
condemned her for even raising the issue and the Congress quickly 
attached a rider to an appropriations bill to block her from moving 
forward. The swaps industry was never in any real danger of having 
contracts invalidated on the basis of the courts declaring them to be 
illegal futures. They were only in danger of having the CFTC ``think'' 
about whether to narrow or change their exemptions. But the CFTC was 
barred from doing even that!
  What we are doing in this bill is saying--O.K.--we are going to take 
OTC swaps between ``eligible contract participants'' out of the CEA. 
They are excluded from the act.
  Now, I don't have any problem with that. If the swaps dealers feel 
more comfortable with a statutory exclusion for sophisticated 
counterparties instead of CFTC exemptive authority, and the Agriculture 
Committee is willing to agree to an exclusion that makes sense, that's 
fine with me. However, I am not willing to allow ``legal certainty'' to 
become a guise for sweeping exemptions from the antifraud or market 
manipulation provisions of the securities laws. That is simply not 
acceptable.
  While some earlier drafts of this bill would have done precisely 
that, the bill we are considering today does not. That is a good thing, 
and that is why I am willing to support the legal certainty language 
today. However, I do have some concerns about how we have defined 
``eligible contract participant''--that is, the sophisticated 
institutions that will be allowed to play in the swaps market with 
little or no regulation.
  The bill before us today lowers the threshold for who will is an 
``eligible contract participant'' far below what the Commerce Committee 
had allowed. I fear that this could create a potential regulatory gap 
for retail swap participants that ultimately must be addressed.
  The term ``eligible contract participant'' now includes some 
individuals and entities, who should be treated as retail investors--
those who own and invest on a discretionary basis less than $50 million 
in investments. These are less sophisticated institutions and 
individuals, and they are more vulnerable to fraud or abusive sales 
practices in connection with these very complex financial instruments. 
If Banker's Trust can fool Procter and Gamble and Gibson Greetings 
about the value of their swaps what chance does a small municipal 
treasurer or a small business user of one of these products have?
  For example, under one part of this definition, an individual with 
total assets in excess of only $5 million who uses a swap to manage 
certain risks is an ``eligible contract participant'' for that swap. I 
think that threshold is simply too low.
  I don't believe that removal of these retail swap participants from 
the protections of the CEA makes sense, unless the bill makes clear 
that other regulatory protections will apply.
  To this end, the Commerce Committee version of H.R. 4541 would have 
required that certain individuals or entities who own and invest on a 
discretionary basis less than $50 million in investments, and who 
otherwise would meet the definition of ``eligible contract 
participant,'' would not be ``eligible contract participants'' unless 
the counterparty for their transaction was a regulated entity, such as 
a broker-dealer or a bank. That helps assure that they are not doing 
business with some totally fly-by-night entity, but with someone who is 
subject to some level of federal oversight and supervision. It is not a 
guarantee that the investor still won't be ripped off. But it helps 
make it less likely.
  The bill we are considering today weakens this requirement. The 
Commerce provision only applies to governmental entities as opposed to 
individual investors; the threshold for application of the provision to 
such entities is lowered to $25 million; and the list of permissible 
counterparties to the swap is expanded to include some unregulated 
entities.
  I believe the original Commerce Committee investor protection 
provision should be fully restored. Moreover, the bill should clarify 
explicitly that counterparties who may enter into transactions with 
retail ``eligible contract participants'' are subject for such 
transactions to the antifraud authority of their primary regulators.

[[Page E1879]]

  I also have some concerns with the breadth of the exemption in 
section 106 of this bill, and its potential anticompetitive and 
anticonsumer effects. There may be less anticompetitive ways to address 
an energy swaps exemption in a way that provides for fair competition 
and adequate consumer protections in this market. Such a result would 
be in the public interest. What is currently in the bill is not, and I 
would hope that it could be fixed as this bill moves forward.
  Let met now turn to the provisions of this bill that would allow the 
trading of stock futures. These new
  Now, I have serious reservations about the impact of single stock 
futures on our securities markets. In all likelihood, these products 
are going to be used principally by day traders and other speculators. 
Now, there is nothing inherently wrong with speculation. It can be an 
important source of liquidity in the financial markets. But one of the 
purposes of the federal securities laws has traditionally been to 
control excessive speculation and excessive and artificial volatility 
in the markets, and to limit the potential for markets to be 
manipulated or used to carry out insider trading or other fraudulent 
schemes.
  I am concerned about the prospect for single stock futures to 
contribute to speculation, volatility, market manipulation, insider 
trading, and other frauds. That is why it is so important for the 
Congress to make sure that if these products are permitted, that they 
are regulated as securities and are subject to the same types of 
antifraud and sales practice rules that are otherwise applied to other 
securities. I think that this bill, if the SEC and the CFTC properly 
administer it, can do that.
  First, with respect to excessive speculation, the current bill 
provides that the margin treatment of stock futures must be consistent 
with the margin treatment for comparable exchange-traded options. This 
ensures that (1) stock futures margin levels will not be set at 
dangerously low levels and (2) stock futures will not have unfair 
competitive advantage vis-a-vis stock options.
  The bill provides that the margin requirements for security future 
products shall be consistent with the margin requirements for 
comparable option contracts traded on a securities exchange registered 
under section 6(a) of the Exchange Act of 1934.
  A provision in the bill directs that initial and maintenance margin 
levels for a security future product shall not be lower than the lowest 
level of margin, exclusive of premium, required for any comparable 
option contract traded on any exchange registered pursuant to section 
6(a) of the Exchange Act of 1934. In that provision, the term lowest is 
used to clarify that in the potential case where margin levels are 
different across the options exchanges, security future product margin 
levels can be based off the margin levels of the options exchange that 
has the lowest margin levels among all the options exchanges. It does 
not permit security future product margin levels to be based on option 
maintenance margin levels. If this provision were to be applied today, 
the required initial margin level for security future products would be 
20 percent, which is the uniform initial margin level for short at-the-
money equity options traded on U.S. options exchanges.
  Second, with respect to market volatility, the bill subjects single 
stock futures to the same rules that cover other securities, including 
circuit breakers and market emergency requirements.
  Third, with respect to fraud and manipulation, the bill subjects 
single stock futures to the same type of rules that are in place for 
all other securities. These include the prohibitions against 
manipulation, controlling person liability for aiding and abetting, and 
liability for insider trading.
  Fourth, among the bill's most important provisions are those 
requiring the National Futures Association to adopt sales practice and 
advertising rules comparable to those of the National Association of 
Securities Dealers. Under the bill, the NEA will submit rule changes 
related to sale practices to the SEC for the Commission's review. 
Because investors can use single stock futures as a substitute for the 
underlying stock, they will expect and should receive the same types of 
protections they receive for their stock purchases. It is significant 
that in its new role, the NFA will be subject to SEC oversight as a 
limited purpose national securities association. The SEC is very 
familiar with the sales practice rules necessary to protect investors. 
I expect the NFA to work closely with the SEC to ensure such 
protections apply to all investors in security futures products 
regardless of the type of intermediary--broker-dealer or futures 
commission merchant--that offers the product.
  Fifth, the bill applies important consumer and investor protections 
found in the Investment Company Act of 1940 to pools of single stock 
futures. This ensures that investors in pools of single stock futures 
will enjoy the same protections as other investors in other funds that 
invest in securities.
  In addition to these provisions, the bill also addresses a number of 
other important matters. It allows for coordinated clearance and 
settlement of single stock futures. It assures that securities futures 
are subject to the same transaction fees applicable to other 
securities. It requires decimal trading. And it provides Treasury with 
the authority to write rules to assure tax parity, so that single stock 
futures do not have tax advantages over stock options.
  In addition to these provisions, the bill represents a substantial 
change from the status quo in which the SEC and the CFTC have shared 
responsibility for ensuring that all futures contracts on securities 
indexes meet requirements designed to ensure, among other things, that 
they are not readily susceptible to manipulation.
  This bill gives the CFTC the sole responsibility for ensuring that 
index futures contracts within their exclusive jurisdiction meet the 
standards set forth in this bill. Most important among these 
requirements is that a future on a security index not be readily 
susceptible to manipulation. Because the futures contract potentially 
could be used to manipulate the market for the securities underlying an 
index, it is critical that the CFTC be vigilant in this responsibility. 
Relying solely on the market trading the product to assess whether it 
meets the statutory requirements is not enough.
  In particular, the CFTC should consider the depth and liquidity of 
the secondary market, as well as the market capitalization, of those 
securities underlying an index futures contract. Perhaps even more 
importantly, the CFTC should require that a market that wants to offer 
futures on securities indexes to U.S. investors--whether it is a U.S. 
or foreign market--have a surveillance sharing agreement with the 
market or markets that trade securities underlying the futures 
contract. The CFTC should require that these surveillance agreements 
authorize the exchange of information between the markets about trades, 
the clearing of those trades, and the identification of specific 
customers. This information should also be available to the regulators 
of those markets.
  Finally, if a foreign market or regulator is unable or unwilling to 
share information with U.S. law enforcement agencies when needed, they 
should not be granted the privilege of selling their futures contracts 
to our citizens.
  There is one other important matter that I had hoped would be 
satisfactorily resolved today, but unfortunately, it has not. Last 
night, the Republican staff deleted language that appeared in earlier 
drafts that would have amended section 15(i)(6)(A) of the Securities 
Exchange Act of 1934 to clarify that single-stock futures, futures 
based on narrow stock indices, and options on such futures contracts 
(``security futures products'') are not ``new hybrid products''. I 
believe that this deleted language should have been reinserted into the 
legislation.
  Let me explain why. Currently, a new hybrid product is defined as a 
product that was not regulated as a security prior to November 12, 
1999, and that is not an identified banking product under section 206 
of the Gramm-Leach-Bliley act. Unless an amendment to the definition is 
made, security futures products potentially would fall within this 
definition.
  Section 15(i) of the 1934 act provides that the Securities and 
Exchange Commission must consult with the Federal Reserve Board before 
commencing a rulemaking concerning the imposition of broker-dealer 
registration requirements with respect to new hybrid products. Section 
15(i) also empowers the Federal Reserve Board to challenge such a 
rulemaking in court.
  This provision was never intended to apply to situations where the 
Congress has decided by law to expand the definition of securities. 
What we are doing today in this bill is establishing a comprehensive 
regulatory system for the regulation of security futures products. 
Under this system, it is clear that intermediaries that trade 
securities futures products must register with the
  H.R. 4541 rests on a system of joint regulation. That means that both 
the SEC and the CFTC are assigned specific tasks designed to maintain 
fair and orderly markets for these security futures products.
  Amending the language on page 170 to exclude securities regulation of 
security futures only because they are sold by banks would create an 
anomalous result. A bank selling securities futures could register with 
the CFTC as a futures commission merchant but, unlike other entities, 
it might not have to notice register with the SEC. Effectively, half of 
the regulatory framework that the SEC and CFTC negotiated over with the 
Congress for many months would disappear. There is no public interest 
to be served in eliminating SEC oversight over issues such as insider 
trading frauds, market manipulation, and customer

[[Page E1880]]

sales practice rules just because a bank traded the security.
  The role of the Federal Reserve Board with respect to new hybrid 
products would be at odds with the regulatory structure for security 
futures products under H.R. 4541. There is no reason to undermine the 
structure of H.R. 4541 by giving the Federal Reserve Board a role in 
the regulation of broker-dealers that trade securities futures 
products.
  If this provision remains in the bill, I believe that in order to 
comply with the intent of Congress, as expressed in title II of this 
bill, the SEC would have to proceed by rule to require all bank Futures 
Commission Merchants seeking to sell single stock futures to, at 
minimum, notice register with the SEC. In addition, the CFTC would have 
to bar bank futures commission merchants from selling the product 
unless they have notice registered with the SEC. This is a convoluted 
way of dealing with a drafting problem that we could and should fix 
right now, but it is the only way to prevent gaping loopholes from 
opening up that could harm investors.
  Because there has been an effort over the last several days to 
address some of the concerns that Democrats have had about tax parity, 
swaps language in section 107 of the bill, mutual fund language, and 
numerous other important provisions, I am reluctantly going to vote for 
this bill today. It is not the bill I would have crafted. It still 
contains some serious flaws. But it is a much better bill than the bill 
that passed out of the Agriculture Committee.
  However, I must also say that if, when this bill goes over to the 
other body, some of the outrageous and anticonsumer provisions that 
were deleted from the House bill in recent days are to be restored, or 
other equally objectionable new provisions are added, I will fight hard 
to defeat this bill. And so, I would suggest to the financial services 
industry and to the administration, if you really want to get this bill 
done this year, you need to forcefully resist anticonsumer or 
anticompetitive changes to the legal certainty language, the tax parity 
language, the single stock futures language, and instead strengthen the 
consumer and market integrity and competitive provisions of the bill in 
the manner I have just described.
  I look forward to working with Members on the other side of the aisle 
and in the other body to achieve that goal. And I hope that we can have 
more of a direct dialog on this bill as it moves forward than we have 
had over the last few weeks.

                          ____________________