[Congressional Record Volume 148, Number 27 (Tuesday, March 12, 2002)]
[Senate]
[Pages S1775-S1776]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ENERGY DERIVATIVES TRAINING
Mr. ENZI. Madam President, I rise to address the issue of
derivatives. The name itself would almost put people to sleep; the
details of it are very complicated. It is a process that is done by
major corporations, which is what brings it to our attention at the
moment. Unfortunately, the proposition that is before us is an answer
looking for a problem. It is not a solution to what has happened.
Enron has raised many concerns regarding the state of our energy
markets. However, as investigations into the collapse of the company
are showing, the failure of Enron was likely due to unethical and
possibly illegal accounting techniques used by executives at the
company. We need to make one thing clear: The trading of energy
derivatives had nothing to do with the collapse of Enron. In fact,
Enron's trading platform was one of the most lucrative parts of the
company.
Enron is not an accounting problem; it is not a business problem. It
is probably a fraud problem.
During debate on the Commodities Futures and Modernization Act, we
examined extensively the oversight and regulation of energy
derivatives. It was done the right way. It was done with hearings, with
committee markup, with floor debate. This has been brought directly to
the floor. It has bypassed the other processes.
What we concluded using the correct process was the proper amount of
oversight for a new and emerging business. We did the debate on the
Commodities Futures and Modernization Act, and we examined extensively
the oversight and regulation of the energy derivatives--the way it is
supposed to be done. What we concluded was the proper amount of
oversight for a new and emerging business had been put into law.
If we start to regulate an industry that is in its infancy, we run
the risk of stifling competition and reducing the possibility of it
reaching its full potential.
Federal Reserve Chairman Alan Greenspan testified last week before
the Senate Banking Committee. I want to echo a few of his comments
regarding the regulation of energy derivatives.
Chairman Greenspan said it was crucially important that we allow
those types of markets to evolve amongst professionals who are most
capable of protecting themselves far better than either we, the Fed,
CFTC, or the OCC could conceivably do. The important issue is that
there is a significant downside if we regulate where we do not have to
in this area. Because one of the major--and indeed the primary--areas
for regulation and protection of the system is counter-party
surveillance--that the individual private parties, looking at the
economic events of the status of the people with whom they are doing
business. . . . We've got to allow that system to work, because if we
step in as government regulators, we will remove a considerable amount
of the caution that is necessary to allow those markets to evolve. And
while it may appear sensible to go in and regulate, all of our
experience is that there is a significant downside when you do not
allow counter-party surveillance to function in an appropriate manner.
I think we are glazing the eyes over here, but essentially Mr.
Greenspan said it is too early to do anything based on the act that we
already did.
Selling derivatives is a way for companies that can't afford risk to
pass it on to companies that are willing. We have done that for a long
time in the insurance business. This is another form of corporate
insurance.
There is no indication that trading of energy derivatives contributed
in any way to the collapse of Enron. However, if, in fact, Members
think we need to look at legislation in this area, we should examine it
in a reasonable process--not by offering on the floor amendments to a
newly enacted piece of legislation. I certainly appreciate and respect
Members' attention to examining the energy markets, but we should take
that through the committee process so Members have a chance to hear
testimony and pose questions to experts in this area.
It is a difficult area; it is a complicated area. Supporters of this
amendment claim that Enron has such a large market share of this
business that they were able to provide undue influence over the energy
trading.
To the contrary, during and after the collapse of Enron, there were
no interruptions of trading. Other market participants stepped in and
assumed volume. There were no price swings or collapses of the energy
market. This is a perfect example of market forces working the way they
were intended.
The CFMA provided legal certainty for commercial parties not executed
on futures exchanges--legal certainty, taking away some of the risk,
selling some of the risk. This amendment could be interpreted to cover
all transactions between commercial parties conducted either by e-mail
or over the phone. The effect of this amendment would likely be
decreased market liquidity because of increased legal and transactional
uncertainties. Additionally, energy companies may be discouraged from
using derivatives to hedge price risks. This could result in more price
volatility in energy markets, which will hurt the very consumers the
legislation seeks to help.
This amendment would also require electronic trading exchanges to set
aside capital, even if they do not participate in trading. For
instance, the Intercontinental Exchange allows buyers and sellers of
energy derivatives to exchange offers through an electronic program.
This exchange is already regulated by the CFTC and gives the CFTC
access to its trading screens. This amendment would require the
Intercontinental Exchange to set aside capital, even though it only
facilitates transactions and does not trade. This requirement could
force ICE to cease operations--forcing buyers and sellers of energy
derivatives into the over-the-counter market. This is why CFTC Chairman
Newsome has said the CFTC does not require this new authority.
[[Page S1776]]
Because of my concern for this issue, I recently wrote to the
Chairman of the Securities and Exchange Commission to get his views
regarding this amendment. Mr. Pitt responded:
The Securities and Exchange Commission believes this
legislative change is premature at this time.
I ask unanimous consent that this entire letter be printed in the
Record.
There being no objection, the letter was ordered to be printed in the
Record, as follows:
United States Security
and Exchange Commission,
Washington, DC, March 11, 2002.
Hon. Michael B. Enzi,
U.S. Senate, Senate Russell Office Building, Washington, DC.
Dear Senator Enzi: Thank you for your letter concerning
proposed amendment #2989 (Congressional Record, March 7,
2002, p. S1685), introduced by Senator Dianne Feinstein and
others, to S. 517, the pending Senate energy legislation.
This amendment would repeal key provisions enacted as part of
the Commodity Futures Modernization Act (P.L. 106-534)
applicable to over-the-counter derivatives contracts in
certain energy products.
The Securities and Exchange Commission believes this
legislative change is premature at this time--barely more
than a year after the CFMA's enactment. Because of on-going
federal investigations, the lack of rigorous analysis about
the CFMA's effect on the derivatives markets as a whole, and
the absence of a determination about what role (if any) over-
the-counter derivatives played in the collapse of Enron or
the California energy crisis of last summer, we do not
believe that any action should be taken until all of the
facts are available for evaluation.
Thank you for giving the Commission an opportunity to
comment on this legislative proposal.
Yours truly,
Harvey L. Pitt,
Chairman.
Mr. ENZI. I ask that Members step back and, if there is a problem,
let's address it in a responsible manner through the normal process.
Let's begin to hold hearings on energy trading, and after we have had
time to evaluate what we have learned, we can look forward to a
reasonable solution. This is too early and takes away the opportunity
to sell off risk by some other companies. I ask for you to defeat the
amendment.
I yield the floor.
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