[Congressional Record Volume 146, Number 156 (Tuesday, January 2, 2001)]
[Senate]
[Pages S11946-S11947]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
THE COMMODITY FUTURES MODERNIZATION ACT OF 2000
Mr. SARBANES. Mr. President, I ask to print in the Record a
letter from the President's Working Group on Financial Markets strongly
supporting the Commodity Futures Modernization Act of 2000.
The act provides certainty for over-the-counter swaps and authorizes
a new financial product, the ``security future,'' to be traded under a
regulatory scheme that protects investors against fraud, market
manipulation and insider trading.
The act contains three principal components. It would provide legal
certainty that specified types of swaps which are traded over-the-
counter are not regulated as futures. The Report of the President's
Working Group on Over-the-Counter Derivatives Markets and the Commodity
Exchange Act, issued in November 1999, strongly recommended that
Congress enact legislation to provide OTC swaps with legal certainty in
order to ``reduce systemic risk in the U.S. financial markets and
enhance the competitiveness of the U.S. financial sector.''
In addition the act would authorize trading in futures on single
stocks and narrow-based stock indices. These are new investment
products which, until now, have been prohibited from trading by the
Shad-Johnson Accord, which this act would repeal. By authorizing
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securities futures, the act would allow financial markets to increase
the number of products they trade and give investors additional
investment options. The Securities and Exchange Commission and the
Commodity Futures Trading Commission negotiated the proposed regulatory
regimen over securities futures, which is designed to protect investors
against fraud, insider trading and market manipulation. The regulatory
regimen will call for joint regulation by both the SEC and CFTC of
these markets and the intermediaries that trade in them. Imposing
strong investor protections is absolutely necessary if we are to allow
trading in these new investment products.
The act also contains regulatory relief provisions for the futures
markets that would codify recent CFTC regulations.
I would like to highlight certain important aspects of titles III and
IV of the act.
Title III addresses the SEC's authority over security-based swap
agreements. It carefully carves out products traditionally viewed as
securities in exclusions from the definition of swap agreements. It is
important to note that title III does not eliminate the SEC's existing
authority to regulate products that are securities.
Title III applies anti-fraud and anti-manipulation provisions of the
Federal securities laws to securities-based swap agreements, including
those entered into by banks. Title III amends section 10(b) of the
Securities Exchange Act of 1934 and its anti-fraud protections to apply
to ``any securities-based swap agreement.'' In extending these
protections, the act makes explicit that rules promulgated under
section 10(b) to address fraud, manipulation, or insider trading apply
to securities-based swap agreements. Thus, current and future anti-
fraud rules will apply to swap agreements to the same extent as they do
to securities. This will enhance protection for investors and for the
financial markets, and will permit the SEC to respond as necessary to
developments in these markets.
Title III states that existing judicial precedent relating to various
securities statutes and rules is applicable to securities-based swaps
to the same extent as it is to securities. Thus, for example, cases
interpreting these statutory provisions which establish theories of
liability and private rights of actions would apply directly to
securities-based swaps.
Title IV, Legal Certainty for Bank Products Act of 2000, clarifies
the current law, under which the CFTC does not regulate traditional
banking products. Such products include deposit accounts, CDs, banker's
acceptances, letters of credit, loans, credit card accounts, and loan
participations. When a question arises, title IV provides a mechanism
for determining whether a product is an ``identified,'' or traditional,
banking product. To qualify as an identified banking product, section
403 requires two conditions to be met: (1) that the product cannot have
been either prohibited by the Commodity Exchange Act or regulated by
the CFTC on or before December 5, 2000, and (2) that the bank has
obtained a certification from its regulator that the bank product was
commonly offered by any bank prior to December 5, 2000. The latter test
requires that the product was actively bought, sold, purchased, or
offered by or to multiple customers and is not just a transaction
customized for a single client or handful of clients.
Section 405 excludes a hybrid product from the Commodity Exchange Act
if under a ``predominance test'' it is primarily an identified banking
product and not a contract, agreement or transaction appropriately
regulated by the CFTC. The act dictates how to resolve disputes about
the application of this test.
The bill's definition of ``security future'' does not include
products excluded under title IV and other sections of the Commodity
Exchange Act, e.g., certain swaps, identified banking products, etc.
Thus, the new grants of authority of this act to the SEC would not
extend to these products. However, these exclusions do not limit the
definition of ``security'' or the SEC's jurisdiction under existing
statutes. For example, the SEC has, and will continue to have,
jurisdiction over all over-the counter options.
The act will have a significant impact on the futures markets as well
as on the securities markets and investors. The United States
investment markets are the envy of the world. This act is intended to
strengthen those markets as it provides legal certainly for over-the-
counter swaps, authorizes the trading of futures on single stocks and
narrow-based stock indices, and gives regulatory relief for the futures
markets.
The letter from the President's Working Group on Financial Markets
follows:
December 15, 2000.
Hon. Paul S. Sarbanes,
Ranking Member, Committee on Banking, Housing, and Urban
Affairs, U.S. Senate, Washington, DC.
Dear Senator Sarbanes: The Members of the President's
Working Group on Financial Markets strongly support the
Commodities Futures Modernization Act. This important
legislation will allow the United States to maintain its
competitive position in the over-the-counter derivative
markets by providing legal certainty and promoting
innovation, transparency and efficiency in our financial
markets while maintaining appropriate protections for
transactions in non-financial commodities and for small
investors.
Sincerely,
Lawrence H. Summers,
Secretary, Department of the Treasury.
Alan Greenspan,
Chairman, Board of Governors of the Federal Reserve.
Arthur Levitt,
Chairman, Securities and Exchange Commission.
William J. Rainer,
Chairman, Commodity Futures Trading Commission.
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