[Congressional Record Volume 148, Number 32 (Tuesday, March 19, 2002)]
[Senate]
[Pages S2018-S2034]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
NATIONAL LABORATORIES PARTNERSHIP IMPROVEMENT ACT OF 2001--Resumed
Mr. REID. Mr. President, I maybe misspoke. I ask for the regular
order as it relates to the energy bill that Senator Bingaman has been
marshaling the last several days.
The ACTING PRESIDENT pro tempore. The clerk will report.
The assistant legislative clerk read as follows:
A bill (S. 517) to authorize funding for the Department of
Energy to enhance its mission areas through technology
transfer and partnerships for fiscal years 2002 through 2006,
and for other purposes.
Pending:
Daschle/Bingaman further modified amendment No. 2917, in
the nature of a substitute.
Feinstein amendment No. 2989 (to amendment No. 2917), to
provide regulatory oversight over energy trading markets.
Kerry/McCain amendment No. 2999 (to amendment No. 2917), to
provide for increased average fuel economy standards for
passenger automobiles and light trucks.
Dayton/Grassley amendment No. 3008 (to amendment No. 2917),
to require that Federal agencies use ethanol-blended gasoline
and biodiesel-blended diesel fuel in areas in which ethanol-
blended gasoline and biodiesel-blended diesel fuel are
available.
Bingaman amendment No. 3016 (to amendment No. 2917), to
clarify the provisions relating to the Renewable Portfolio
Standard.
Lott amendment No. 3028 (to amendment No. 2917), to provide
for the fair treatment of Presidential judicial nominees.
Mr. REID. Mr. President, on the energy bill, what is the pending
amendment?
The ACTING PRESIDENT pro tempore. The pending amendment is the Lott
amendment, No. 3028.
Mr. REID. I suggest the absence of a quorum.
The ACTING PRESIDENT pro tempore. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mrs. FEINSTEIN. Mr. President, I ask unanimous consent the order for
the quorum call be rescinded.
The ACTING PRESIDENT pro tempore. Without objection, it is so
ordered.
Amendment No. 2989, As Modified
Mrs. FEINSTEIN. Mr. President, I call for the regular order with
respect to my amendment.
The ACTING PRESIDENT pro tempore. The amendment of the Senator from
California is now pending.
Mrs. FEINSTEIN. Mr. President, I send a modification to the desk.
The ACTING PRESIDENT pro tempore. The amendment is so modified.
The amendment, as modified, is as follows:
At the end, add the following:
DIVISION ____--MISCELLANEOUS
TITLE I--ENERGY DERIVATIVES
SEC. ____1. JURISDICTION OF THE COMMODITY FUTURES TRADING
COMMISSION OVER ENERGY TRADING MARKETS AND
METALS TRADING MARKETS.
(a) FERC Liaison.--Section 2(a)(8) of the Commodity
Exchange Act (7 U.S.C. 2(a)(8)) is amended by adding at the
end the following:
``(C) FERC liaison.--The Commission shall, in cooperation
with the Federal Energy Regulatory Commission, maintain a
liaison between the Commission and the Federal Energy
Regulatory Commission.''.
(b) Exempt Transactions.--Section 2 of the Commodity
Exchange Act (7 U.S.C. 2) is amended--
(1) in subsection (h), by adding at the end the following:
``(7) Applicability.--This subsection does not apply to an
agreement, contract, or transaction in an exempt energy
commodity or an exempt metal commodity described in section
2(j)(1).''; and
(2) by adding at the end the following:
``(j) Exempt Transactions.--
``(1) Transactions in exempt energy commodities and exempt
metals commodities.--An agreement, contract, or transaction
(including a transaction described in section 2(g)) in an
exempt energy commodity or exempt metal commodity shall be
subject to--
``(A) sections 4b, 4c(b), 4o, and 5b;
``(B) subsections (c) and (d) of section 6 and sections 6c,
6d, and 8a, to the extent that those provisions--
``(i) provide for the enforcement of the requirements
specified in this subsection; and
``(ii) prohibit the manipulation of the market price of any
commodity in interstate commerce or for future delivery on or
subject to the rules of any contract market;
``(C) sections 6c, 6d, 8a, and 9(a)(2), to the extent that
those provisions prohibit the manipulation of the market
price of any commodity in interstate commerce or for future
delivery on or subject to the rules of any contract market;
``(D) section 12(e)(2); and
``(E) section 22(a)(4).
``(2) Bilateral dealer markets.--
``(A) In general.--Except as provided in paragraph (6), a
person or group of persons that constitutes, maintains,
administers, or provides a physical or electronic facility or
system in which a person or group of persons has the ability
to offer, execute, trade, or confirm the execution of an
agreement, contract, or transaction (including a transaction
described in section 2(g)) (other than an agreement,
contract, or transaction in an excluded commodity), by making
or accepting the bids and offers of 1 or more participants on
the facility or system (including facilities or systems
described in clauses (i) and (iii) of section 1a(33)(B)), may
offer or may allow participants in the facility or system to
enter into, enter into, or confirm the execution of any
agreement, contract, or transaction under paragraph (1)
(other than an agreement, contract, or transaction in an
excluded commodity) only if the person or group of persons
meets the requirement of subparagraph (B).
``(B) Requirement.--The requirement of this subparagraph is
that a person or group of persons described in subparagraph
(A) shall--
``(i) provide notice to the Commission in such form as the
Commission may specify by rule or regulation;
``(ii) file with the Commission any reports (including
large trader position reports) that the Commission requires
by rule or regulation;
``(iii) maintain sufficient capital, commensurate with the
risk associated with the transaction, as determined by the
Commission;
``(iv)(I) consistent with section 4i, maintain books and
records relating to each transaction in such form as the
Commission may specify for a period of 5 years after the date
of the transaction; and
``(II) make those books and records available to
representatives of the Commission and the Department of
Justice for inspection for a period of 5 years after the date
of each transaction; and
``(iv) make available to the public on a daily basis
information on volume, settlement price, open interest,
opening and closing ranges, and any other information that
the Commission determines to be appropriate for public
disclosure, except that the Commission may not--
[[Page S2019]]
``(I) require the real time publication of proprietary
information; or
``(II) prohibit the commercial sale of real time
proprietary information.
``(3) Reporting requirements.--On request of the
Commission, an eligible contract participant that trades on a
facility or system described in paragraph (2)(A) shall
provide to the Commission, within the time period specified
in the request and in such form and manner as the Commission
may specify, any information relating to the transactions of
the eligible contract participant on the facility or system
within 5 years after the date of any transaction that the
Commission determines to be appropriate.
``(4) Transactions exempted by commission action.--Any
agreement, contract, or transaction described in paragraph
(1) (other than an agreement, contract, or transaction in an
excluded commodity) that would otherwise be exempted by the
Commission under section 4(c) shall be subject to--
``(A) sections 4b, 4c(b), 4o, and 5b; and
``(B) subsections (c) and (d) of section 6 and sections 6c,
6d, 8a, and 9(a)(2), to the extent that those provisions
prohibit the manipulation of the market price of any
commodity in interstate commerce or for future delivery on or
subject to the rules of any contract market.
``(5) No effect on other ferc authority.--This subsection
does not affect the authority of the Federal Energy
Regulatory Commission to regulate transactions under the
Federal Power Act (16 U.S.C. 791a et seq.) or the Natural Gas
Act (15 U.S.C 717 et seq.).
``(6) Applicability.--This subsection does not apply to--
``(A) a designated contract market regulated under section
5; or
``(B) a registered derivatives transaction execution
facility regulated under section 5a.''.
(c) Contracts Designed to Defraud or Mislead.--Section 4b
of the Commodity Exchange Act (7 U.S.C. 6b) is amended by
striking subsection (a) and inserting the following:
``(a) Prohibition.--It shall be unlawful for any member of
a registered entity, or for any correspondent, agent, or
employee of any member, in or in connection with any order to
make, or the making of, any contract of sale of any commodity
in interstate commerce, made, or to be made on or subject to
the rules of any registered entity, or for any person, in or
in connection with any order to make, or the making of, any
agreement, transaction, or contract in a commodity subject to
this Act--
``(1) to cheat or defraud or attempt to cheat or defraud
any person;
``(2) willfully to make or cause to be made to any person
any false report or statement, or willfully to enter or cause
to be entered any false record;
``(3) willfully to deceive or attempt to deceive any person
by any means; or
``(4) to bucket the order, or to fill the order by offset
against the order of any person, or willfully, knowingly, and
without the prior consent of any person to become the buyer
in respect to any selling order of any person, or to become
the seller in respect to any buying order of any person.''
(d) Conforming Amendments.--The Commodity Exchange Act is
amended--
(1) in section 2 (7 U.S.C. 2)--
(A) in subsection (h)--
(i) in paragraph (1), by striking ``paragraph (2)'' and
inserting ``paragraphs (2) and (7)''; and
(ii) in paragraph (3), by striking ``paragraph (4)'' and
inserting ``paragraphs (4) and (7)''; and
(B) in subsection (i)(1)(A), by striking ``section 2(h) or
4(c)'' and inserting ``subsection (h) or (j) or section
4(c)'';
(2) in section 4i (7 U.S.C. 6i)--
(A) by striking ``any contract market or'' and inserting
``any contract market,''; and
(B) by inserting ``, or pursuant to an exemption under
section 4(c)'' after ``transaction execution facility'';
(3) in section 5a(g)(1) (7 U.S.C. 7a(g)(1)), by striking
``section 2(h)'' and inserting ``subsection (h) or (j) of
section 2'';
(4) in section 5b (7 U.S.C. 7a-1)--
(A) in subsection (a)(1), by striking ``2(h) or'' and
inserting ``2(h), 2(j), or''; and
(B) in subsection (b), by striking ``2(h) or'' and
inserting ``2(h), 2(j), or''; and
(5) in section 12(e)(2)(B) (7 U.S.C. 16(e)(2)(B)), by
striking ``section 2(h) or 4(c)'' and inserting ``subsection
(h) or (j) of section 2 or section 4(c)''.
SEC. ____2. RECRUITMENT AND RETENTION OF QUALIFIED PERSONNEL
AT THE COMMODITY FUTURES TRADING COMMISSION.
(a) In General.--Section 2(a)(6) of the Commodity Exchange
Act (7 U.S.C. 2(a)(6)) is amended by adding at the end the
following:
``(G) Personnel matters.--
``(i) In general.--The Chairman may appoint and fix the
compensation of any officers, attorneys, economists,
examiners, and other employees that are necessary in the
execution of the duties of the Commission.
``(ii) Compensation.--
``(I) In general.--Rates of basic pay for all employees of
the Commission may be set and adjusted by the Chairman
without regard to the provisions of chapter 51 or subchapter
III of chapter 53 of title 5, United States Code.
``(II) Additional compensation.--The Chairman may provide
additional compensation and benefits to employees of the
Chairman if the same type and amount of compensation or
benefits are provided, or are authorized to be provided, by
any other Federal agency specified in section 1206 of the
Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (12 U.S.C. 1833b).
``(III) Comparability.--In setting and adjusting the total
amount of compensation and benefits for employees under this
subparagraph, the Chairman shall consult with, and seek to
maintain comparability with, any other Federal agency
specified in section 1206 of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C.
1833b).''.
(b) Conforming Amendments.--
(1) Section 3132(a)(1) of title 5, United States Code, is
amended--
(A) in subparagraph (C), by striking ``or'';
(B) in subparagraph (D), by adding ``or'' at the end; and
(C) by adding at the end the following:
``(E) the Commodity Futures Trading Commission.''.
(2) Section 5316 of title 5, United States Code, is
amended--
(A) by striking ``General Counsel, Commodity Futures
Trading Commission.''; and
(B) by striking ``Executive Director, Commodity Futures
Trading Commission.''.
(3) Section 5373(a) of title 5, United States Code, is
amended--
(A) in paragraph (2), by striking ``or'' at the end;
(B) by redesignating paragraph (3) as paragraph (4); and
(C) by inserting after paragraph (2) the following:
``(3) section 2(a)(6)(G) of the Commodity Exchange Act.''.
(4) Section 1206 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (12 U.S.C. 1833b) is
amended by inserting ``the Commodity Futures Trading
Commission,'' after ``the Farm Credit Administration, ''.
SEC. ____3. JURISDICTION OF THE FEDERAL ENERGY REGULATORY
COMMISSION OVER ENERGY TRADING MARKETS.
Section 402 of the Department of Energy Organization Act
(42 U.S.C. 7172) is amended by adding at the end the
following:
``(i) Jurisdiction Over Derivatives Transactions.--
``(1) In general.--To the extent that the Commission
determines that any contract that comes before the Commission
is not under the jurisdiction of the Commission, the
Commission shall refer the contract to the appropriate
Federal agency.
``(2) Meetings.--A designee of the Commission shall meet
quarterly with a designee of the Commodity Futures Trading
Commission, the Securities Exchange Commission, the Federal
Trade Commission, and the Federal Reserve Board to discuss--
``(A) conditions and events in energy trading markets; and
``(B) any changes in Federal law (including regulations)
that may be appropriate to regulate energy trading markets.
``(3) Liaison.--The Commission shall, in cooperation with
the Commodity Futures Trading Commission, maintain a liaison
between the Commission and the Commodity Futures Trading
Commission.''.
Mrs. FEINSTEIN. Mr. President, I rise on behalf of Senators
Fitzgerald, Cantwell, Corzine, Wyden, Leahy, Boxer, and Durbin in
modifying our amendment on energy derivatives.
As you know, we discussed this issue on the floor before, and the
senior Senator from Texas had some concerns. So we spent a good deal of
time talking with him and his staff. We have also kept in touch with
our cosponsors. We have agreed on some modifications. There are some
modifications that the Senator from Texas sought that the cosponsors
and I could not agree to. So this modification represents where we
agree and not where we disagree.
I begin by explaining two terms in the amendment. The first term is
``a derivative.'' A derivative is a financial instrument traded on or
off an exchange, the price of which is directly dependent upon an
underlying commodity, such as natural gas or electricity. An ``over-
the-counter'' or ``swap'' contract is an agreement whereby a floating
price is exchanged for a fixed price over a specified period. It
involves no transfer of physical energy, and both parties settle their
contractual obligations in cash.
Although energy derivatives make up only 4 percent of all derivative
transactions, energy swaps make up 80 percent of all energy
derivatives. So these are important terms.
What our amendment does is subject electronic exchanges, such as
Enron Online, Dynegydirect, and IntercontinentalExchange--these
exchanges trade energy derivatives--to the similar oversight reporting
and capital requirements as other exchanges, such as the Chicago
Mercantile Exchange, the New York Mercantile Exchange, and the Chicago
Board of Trade. However, since the vast majority of energy derivative
transactions are over the
[[Page S2020]]
counter, the Commodity Futures Trading Commission has insufficient
authority, at present, to investigate and prevent fraud and price
manipulation, and parties making these trades are not required to keep
records of their trades. In other words, there is no transparency.
There is no record and there is no oversight of these particular
trades.
So our amendment simply requires these parties to keep records of
their transactions, which is what most companies do in any event.
If it turns out there is a fraud allegation, the CFTC will have a
record to review. This is the same fraud and manipulation authority the
Commodity Futures Trading Commission has for every other commodity and
it is the same authority they had until Congress passed the Commodity
Futures Modernization Act in 2000. That act exempted energy and metals
trading from regulatory oversight, and excluded it completely if the
trade was done electronically. Before this act, it was all included.
Following the act, it was excluded. That was around June of 2000.
The problem and why we need this legislation: Presently, energy
transactions--those about which I am not speaking, but the other energy
transactions--are regulated by the Federal Energy Regulatory Commission
when there is actually a delivery of the energy commodity.
What do I mean? If I buy natural gas from you, and you deliver that
natural gas to me, the Federal Energy Regulatory Commission has the
authority to ensure that this transaction is both transparent and
reasonably priced. In other words, FERC has regulatory authority when
the energy is actually delivered. However, energy transactions have
become increasingly complex over the past decade. So, today, energy
transactions do not always result in a direct delivery, and thus a
giant loophole has opened where there is no transparency, no records,
and no oversight. And that is not when I sell it to you to deliver it
but when I sell it to you and you sell it to somebody else, who sells
it to somebody else, who sells it to somebody else, and then it is
delivered. Those interim trades are in no way, shape, or form
transparent. They are done in secret. There is no oversight and there
is no record.
So I can purchase from you a derivatives contract, which is a promise
that you will deliver natural gas to me at some point in the future. I
may never need to physically own that gas, so I can at a small profit
sell that gas to someone, who can then turn around and sell it yet to
someone else, and so on and so forth, as I have just pointed out. The
promise of a gas delivery can literally change hands dozens of times
before the commodity is ever delivered. Even then, it may never get
delivered if the spot market price is lower than the future price that
comes due on that day. That is what I meant about saying it is very
complicated.
In fact, about 90 percent of the energy trades represent purely
financial transactions, not regulated by either the Federal Energy
Regulatory Commission, or the CFTC. So as long as there is no delivery,
there is no price transparency. We do not know the price or the terms
for 90 percent of the energy transactions. Let me repeat that. Today,
no one knows the price or the terms for 90 percent of the energy
transactions.
Again, this lack of transparency and oversight only applies to
energy. It does not apply if you are selling wheat or pork bellies or
any other tangible commodity. As I said, there is a very big loophole
here. What we seek to do is simply close that loophole.
How did this happen? The answer is, the Commodity Futures
Modernization Act, signed into law in 2000, exempted energy and
minerals trading from regulatory oversight and also exempted electronic
trading platforms from oversight. That is the online trading that
occurs. In a sense, what the legislation did was set up two different
systems: treating electronic trading platforms differently from other
platforms, and treating energy commodities different from other
commodities.
Up until 2000, energy derivative transactions were regulated in a
similar fashion to other transactions, and all energy transactions were
subject to antifraud and antimanipulation oversight. Electronic trading
platforms were treated like all other platforms. These were the
standards that were in place until June of 2000. Up until that time, if
a gas or electricity commodity was delivered, FERC had oversight, and
there was transparency; if there was not delivery, the CFTC had the
authority. So the loophole arose just 2 years ago.
At the time of the 2000 legislation, no one knew how the exemptions
would affect the energy market. It was a new market. They wanted to see
growth. So they kind of unleashed it and said: All this can go on
without the light of day.
We have a much better idea today because of what we have learned
since then. It didn't take long for Enron Online and others in the
energy sector to take advantage of this new freedom--and, to an extent,
secrecy--by trading energy derivatives absent any regulatory oversight
or transparency. Thus, after the 2000 legislation was enacted, Enron
Online began to trade energy derivatives bilaterally, over the counter,
in a one-to-one transaction, without being subject to any regulatory
oversight whatsoever.
It should not surprise anyone that, without transparency, prices went
right up. Was Enron and its energy derivatives trading arm, Enron
Online, the sole reason California and the West had an energy crisis 18
months ago? Of course not. Was it a contributing factor to the crisis?
I believe it was.
Unfortunately, because of the energy exemptions in the 2000
Commodities Futures Modernization Act, which took away the CFTC's
authority to investigate, we may never know for sure since there are no
records.
For me, this issue comes down to some fundamental questions. Why
shouldn't there be transparency in the energy market? Why should the
CFTC not have antifraud, antimanipulation authority when there is fraud
and manipulation in the market? And why shouldn't California's energy
ratepayers and customers and consumers and ratepayers in other States
enjoy the same CFTC protections as ranchers and farmers do today?
The modification of our amendment results from the discussions my
cosponsors and I had with Senator Phil Gramm, who approached us to
express his concern that our bill could inadvertently impact financial
derivatives. We made several changes to accommodate Senator Gramm's
concerns, and we were hopeful we could reach agreement with him.
However, there are four additional points where we did not reach
agreement: exempting energy swaps from CFTC antifraud and
antimanipulation authority; deleting all public price-transparency
requirements; exempting all electronic exchanges from requirements that
they maintain sufficient capital to carry out their operations, based
on risk; and finally, eliminating metal derivatives from oversight.
As I said before, energy swaps--this is a point of contention between
us--comprise as much as 80 percent of energy derivatives transactions
so this change would have taken the teeth out of our amendment. We
consulted with our cosponsors. They did not want to agree to it. I
believe Senator Fitzgerald is coming to the Chamber to speak to this.
Additionally, our amendment states that electronic trading forums
should hold capital commensurate with the risk, which seems a
reasonable expectation to me. The public can already access information
from nonelectronic exchanges simply by picking up the business section
of a daily newspaper. I don't understand the rationale for wanting to
limit the public's access to data on electronic exchanges.
There is ample evidence that fraud and manipulation can occur and
have already occurred in the metal sector.
This was borne out by several scandals over the past decade,
including the 1996 Sumitomo case. In Sumitomo, it was found that U.S.
consumers were overcharged $2.5 billion because of a Japanese company's
manipulation of the copper markets. These were changes that we simply
could not agree to.
Why do my cosponsors and I feel so strongly about the need to pass
this amendment? First, the debate is nothing new. In November of 1999,
the Federal Reserve, the Department of Treasury, the SEC, and the CFTC
issued a report on derivatives titled ``Over the Counter Derivative
Markets and the Commodity Exchange Act, A Report of
[[Page S2021]]
the President's Working Group on Financial Markets.'' This report was
signed by the Federal Reserve Chairman, the then-Secretary of Treasury,
the then-SEC Chairman, and the then-CFTC Chairman.
What the report found was the case had not been made that energy or
other tangible commodities should be exempted from CFTC oversight. In
fact, the report found that because of the immaturity of the energy
market, the lack of liquidity in the market and finite supplies in
energy markets, energy markets were more susceptible to manipulation
than the deep and liquid financial markets.
Recent history has certainly borne that to be correct. These
commodities are more subject to manipulation.
On June 21, 2000, shortly after the President's working group issued
its report, the Banking Committee and Agriculture Committee held a
hearing on the report and Senator Lugar's Commodity Futures
Modernization Act. Let me read from the committee report:
The Commission has reservations about the bill's exclusions
of OTC derivatives from the Commodities Exchange Act. On this
point the bill diverges from the recommendations of the
President's Working Group, which limited the proposed
exclusions to financial derivatives. The Commission believes
the distinction drawn by the Working Group between financial
(nontangible) and non-financial transactions was a sound one
and respectfully urges the Committees to give weight to that
distinction.
Eight days later, Chairman Lugar marked up his CFMA bill in
conference. This is what he had to say:
The Chairman's Mark also addresses concerns regarding this
bill's exclusion of institutional energy transactions from
the act. Our bill no longer excludes those transactions from
the act. With the resolution of this provision, the CFTC has
indicated it will fully support our legislation.
Much to his credit, Chairman Lugar eliminated the exemption for
energy transactions to accommodate the CFTC and the President's working
groups. But--and this is a big ``but''--Enron and others lobbied in the
House and, as it turned out, this was never reflected in the final
provision that passed Congress as part of a much bigger bill at the end
of the 106th Congress. There is already a legislative history.
More recently, the Senate Energy and Natural Resources Committee held
a hearing on January 29 on energy derivative trading, where CFTC
Chairman Jim Newsome and FERC Chairman Pat Wood both testified and
explained the regulatory burdens that prevent them from fully
investigating Enron Online.
Let me be candid; I am truly amazed at the opposition to this
amendment. Why should anyone be able to set up an online trading
platform without any reporting, disclosure, or capital requirements and
without any regulatory oversight whatsoever? Why should companies that
are engaging in an over-the-counter transaction not have to keep a
record of this transaction? Everyone else does. And why, if there is
fraud or market manipulation, should there not be a regulatory agency
that can investigate and cite wrongdoing?
What I cannot understand is how this amendment is somehow
antibusiness. On the contrary, the amendment is all about making
markets work.
I call your attention to the recently released report by the
Cambridge Energy Research Associates Study and Accenture titled
``Energy Restructuring at a Crossroads, Creating Workable Competitive
Power Markets.''
The report cites 12 recommendations for making energy markets
function effectively, including having the CFTC expand its oversight to
include energy derivative trading, as it did before 2000.
The report recognizes that transparency, disclosure, and reporting
requirements instill confidence in markets and provide assurances for
investors that there will not be fraud and manipulation.
This is also why the amendment is supported by the Chicago Mercantile
Exchange, the New York Mercantile Exchange, Cambridge Energy Research
Associates, Mid-America Energy Holding Company, PG&E, and Southern
California Edison. They have to pay the higher prices for energy if it
is traded back and forth. They want to know if these trades increase
prices for the purposes of manipulation. Calpine, the American Public
Gas Association, the American Public Power Association, the Texas
Independent Producers and Royalty Association, the California Municipal
Utilities Association, the Consumers Union, the Consumer Federation of
America, the Derivatives Institute, U.S. PIRG, the Transmission Access
Policy Study Group, and all four FERC Commissioners.
I would like to read into the Record the letter from the Chairman of
the Federal Energy Regulatory Commission, Mr. Pat Wood, III, dated
March 7:
Thank you for calling to my attention your proposed
amendment to clarify federal oversight of financial
transactions involving energy commodities. Your amendment
would clarify that these transactions are within the
jurisdiction of the Commodity Futures Trading Commission,
thus revoking current exemption for such transactions under
the Commodity Exchange Act and extending the Act to apply
comprehensively to financial transactions based on energy
commodities.
From our first meeting last Spring, you know how strongly I
feel about customers having access to the broadest range of
useful market information. Information on financial as well
as physical transactions is a key part of market
transparency. Billions of dollars are now at stake in these
markets. The consequences of a major participant's collapse
are illustrated by the Enron bankruptcy. Federal oversight of
such trading is appropriate. Your amendment can ensure
greater transparency in these markets, and this transparency
can help provide an early warning signal to those charged
with protecting the public interest.
Mr. President, I ask unanimous consent to print other letters in the
Record.
There being no objection, the letters were ordered to be printed in
the Record, as follows:
Edison International,
March 7, 2002.
Hon. Dianne Feinstein,
U.S. Senate, Washington, DC.
Dear Senator Feinstein: Thank you for asking Edison
International for our views on your amendment to S. 517, the
Senate Energy Policy Act of 2002. As you know, Edison shares
your concern over possible manipulation of the California
electricity market by some market participants, which helped
contribute to the serious problems the state faced from out
of control energy prices. Your amendment would provide for
transparency in the electric derivatives trading market, an
industry that is currently exempted from regulation under the
Commodity Futures Modernization Act of 2000 (CFMA).
I support your amendment, with a suggestion for your
consideration to further refine it. Our company and others
use energy derivatives trading to protect and hedge their
actual physical assets, as opposed to companies that conduct
trading with no or few physical assets. There should be
guidance in the final language which recognizes the
difference between these two types of businesses,
particularly regarding any further capital requirements.
Otherwise companies that trade in order to hedge physical
assets may be required to pay twice--once in order to obtain
capital for the assets and a second time in order to meet any
capital requirements to back their trades.
Thanks again for all your efforts on behalf of California
consumers and businesses.
Sincerely,
John F. Bryson,
Chairman of the Board and
Chief Executive Officer.
____
PG&E Corporation,
Washington, DC, March 6, 2002.
Hon. Dianne Feinstein,
U.S. Senate, Hart Senate Office Building, Washington, DC.
Dear Senator Feinstein: We are writing today in reference
to the amendment you will be offering to the Senate Energy
bill, containing the substance of legislation you and several
of your colleagues introduced earlier to provide regulatory
oversight over energy trading markets, as amended.
At the outset, we applaud your efforts to ensure public and
consumer confidence in the operation and orderly functioning
of the energy marketplace. As you know, the industry relies
heavily on these markets and products to manage risk for the
benefit of consumers of electricity. We thus appreciate your
willingness to work with us and other market participants to
address areas of interest and concern as the provisions of
your amendment have been debated and refined. As presently
drafted, we view your amendment as providing an increased
level of oversight, while ensuring the continued ability of
market participants to utilize these instruments as part of
overall risk management strategies. We therefore support your
amendment.
Thank you for your hard work in this area, and we look
forward to continuing to work with you and others on matters
of national energy policy.
Sincerely,
Steven L. Kline,
Vice President, Federal Governmental & Regulatory
Relations.
[[Page S2022]]
____
Midamerican Energy Holdings Co.,
Omaha, NE, March 5, 2002.
Hon. Dianne Feinstein,
U.S. Senate,
Washington, DC.
Dear Senator Feinstein: I am writing in support of your
effort to ensure that there is transparency and appropriate
federal oversight of energy futures trading markets.
As I testified before the Senate Energy and Natural
Resources Committee last month, I have long been concerned
that the type of exchange run by Enron before its collapse
offered opportunities for manipulation. Enron was the largest
buyer, the largest seller and the operator of an unregulated
exchange. In view of the revelations of the last several
months regarding Enron, the unregulated nature of these
markets has raised serious concerns regarding the ability of
the federal government to ensure that energy trading and
futures markets are operating in the interest of the public
and market participants.
As the Senate addresses this issue, it is important to
remember that electric and gas markets as a whole responded
to the Enron collapse without disruption, so legislation
should not compromise the liquidity of these markets. I
applaud your determination to keep your amendment focused on
oversight and transparency and am encouraged that you, along
with Senators Cantwell and Wyden, have pledged to work with
market participants to continue to perfect this proposal as
debate on the comprehensive energy bill continues.
Ensuring public confidence in the integrity of energy
futures markets is a critical component of establishing a
modernized regulatory framework for the electric and natural
gas industries. I am pleased to support your effort and
commend you on your work on this important issue.
Sincerely,
David L. Sokol,
Chairman and CEO.
____
American Public Power Association,
Washington, DC, March 7, 2002.
Hon. Dianne Feinstein,
Senate Hart Building,
Washington, DC.
Dear Senator Feinstein: On behalf of the American Public
Power Association (APPA), an association representing the
interests of more than 2000 publicly owned electric utility
systems across the country, I would like to express support
for your amendment regarding the regulatory treatment of
energy derivative transactions which is expected to be
offered during consideration of S. 517, the Energy Policy Act
of 2002.
As we understand it, your amendment repeals exemptions and
exclusions from regulation, originally granted by the
Commodity Futures Trading Commission, for bilateral
derivatives and multi-lateral electronic energy commodity
markets. Further, your amendment helps ensure that entities
involved in running on-line trading forums maintain open
books and records for investigation and enforcement purposes.
Ensuring sufficient regulatory oversight and market
transparency are critical steps towards helping prevent
market abuses and protecting consumers.
As you are aware, on December 3rd Enron filed for Chapter
11 bankruptcy protection. At the same time, forward markets
on the West Coast fell by 30% despite the fact that no other
changes in operations, hydroelectric supply, or fossil fuel
prices took place at the time. This has led some to believe
that Enron may have been using its market dominance to
``set'' forward prices. Your amendment will help avoid such
potential abuses in the future.
APPA commends you for taking a leadership role on this
critical issue. We look forward to working with you on this
and other amendments aimed at providing effective and
sustainable competition while protecting consumers from
market abuses.
Sincerely,
Alan H. Richardson,
CEO & Executive Director.
____
Calpine Corp.,
Washington, DC, March 7, 2002.
Hon. Dianne Feinstein,
Hart Senate Office Building, U.S. Senate, Washington, DC.
Dear Senator Feinstein: I am writing to let you know of
Calpine's support for additional oversight of certain energy
derivative markets, as intended by your proposed amendment to
S. 517. While we have not seen any evidence that energy
trading was the cause of either the California energy crisis
or Enron's demise, we do believe there is a crisis of
confidence in the energy markets and that your amendment will
assist in restoring much needed public confidence in the
energy sector.
We support the amendment's strengthening of the CFTC's
anti-fraud and anti-manipulation authority and its provision
for increased cooperation and liaison between the CFTC and
the FERC. We are also pleased that your amendment addresses
concerns about the oversight and transparency of the
electronic trading platforms. It is important that such
facilities, which play a significant price discovery role in
the energy trading markets, be subject to appropriate
reporting and oversight by the CFTC.
However, I also understand that typical over the counter
bilateral trading operations, such as those that operate from
a trading desk where various potential counterparties are
separately contacted by phone or email, are not intended to
be treated as electronic trading facilities under your
amendment. This is an important distinction and one that I
understand you intend to further clarify in report language.
Calpine would like to thank you for your efforts to
advocate reasonable measures to ensure the integrity of the
important energy trading markets and we stand ready to
provide you with any information or assistance that you may
need.
Sincerely,
Jeanne Connelly,
Vice President--Federal Relations.
____
Austin, TX, March 6, 2002.
Hon. Dianne Feinstein,
U.S. Senator, Hart Senate Office Building, Washington, DC.
Dear Senator Feinstein: We understand that later today, you
will introduce an important measure designed to bring greater
transparency to natural gas markets. We believe that improved
transparency will reduce price-markups charged in
transactions that take place after natural gas leaves the
wellhead and before it reaches the burner tip. Thus your
measure will benefit both consumers and producers. We support
the modified version of S. 1951 that you intend to offer as
an amendment to the Senate Energy Bill.
We understand that the amendment:
(1) will not grant any price control authority under the
Federal Power Act or Natural Gas Act;
(2) will continue to allow energy commodities (actually all
commodities other than agricultural commodities) to be traded
on electronic trading facilities that currently qualify as
exempt commercial markets, provided that the trading
facilities register, meet net capital requirements, file
reports, and maintain books and records;
(3) will require participants in such markets to maintain
books and records; and
(4) will apply these requirements to electronic trading
facilities which permit execution with multiple parties and
non-binding bids and offers, and will require books and
records to be kept by participants in facilities that permit
bilateral negotiations.
TIPRO believes that this measure will tend to improve price
transparency in natural gas markets, leading to a more
efficient and stable marketplace. The relatively modest
requirements outlined above should not unduly reduce
liquidity for gas traders. Accordingly, TIPRO endorses your
amendment.
Sincerely,
Gregory Moredock,
National Energy Policy Committee Chairman.
____
American Public Gas Association,
Fairfax, VA, March 5, 2002.
Re: S. 517
Hon. Dianne Feinstein,
Hart Senate Office Building, U.S. Senate, Washington, DC.
Dear Senator Feinstein: The American Public Gas Association
(APGA) is very pleased that you have taken the lead to amend
the Commodity Exchange Act (CEA). You revisions to S. 517,
which amends the CEA, brings the trading of energy products,
including natural gas spot and forward prices, under the
appropriate jurisdiction of Commodity Futures Trading
Commission (CFTC). As a result, your amendment will reduce
the various risks imposed on consumers by a partially
unregulated energy trading market.
As you know, Enron operated in what was essentially an
unregulated environment. While there will be much more to
come in the wake of Enron, one thing is perfectly clear
today--our federal government has an obligation to make sure
that no important trading activities fall between the cracks
leaving some energy markets without a federal agency with
oversight authority. Your amendment remedies this glaring
deficiency.
APGA is fully committed to support your effort to reverse
the action Congress took just 15 months ago in the
Commodities Futures Modernization Act (CFMA). The CFMA
amended the CEA by allowing some energy contracts to be
traded with no government oversight. We firmly believe that
the CFTC must have at its disposal the necessary jurisdiction
and authority to protect the operational integrity of energy
markets so that (1) transactions are executed fairly, (2)
proper disclosures are made to customers, and (3) fraudulent
and manipulative practices are not tolerated.
In December of 2000, when the CFMA was under consideration
in the Senate, APGA submitted a Statement for the Record to
the U.S. Senate Committee on Energy and Natural Resources
during a hearing on the ``Status of Natural Gas Markets.'' In
the statement, we expressed a concern that the proposed
legislation would codify an exemption for energy commodity
transactions that would shield those energy transactions from
the oversight and review of the CFTC. Enron took advantage of
this gap in regulatory oversight. Your amendment will close
that gap. Consumers across the country will benefit from your
efforts because they are less likely to be victimized by
activities that occur in a market where the CFTC exercises
oversight.
Again, public gas utilities and the hundreds of communities
that we serve commend you for your thoughtful and deliberate
leadership on this very important issue. While there may be
some who will oppose this amendment, one need not look far to
see whether the opposition is looking out for the best
interests of Wall Street or Main Street. We pledge to work
with you in any way we
[[Page S2023]]
can to pass this much-needed amendment. Please let me know
how I can assist you.
Sincerely,
Bob Cave,
President.
____
U.S. Commodity Futures
Trading Commission,
Washington, DC, March 7, 2002.
Hon. Dianne Feinstein,
U.S. Senate,
Washington, DC.
Dear Senator Feinstein: Thank you for calling to ask that I
provide you with my views of your proposed amendment to the
energy bill pending before the Senate. The amendment would
bring transparency to markets and provide Congress and the
public with the assurance that no exchange offering energy
commodity derivatives transactions would go completely
unregulated. Moreover, it would restore to the federal
government those basic tools necessary to detect and deter
fraud and manipulation. Therefore, I strongly support the
amendment.
In my previous correspondence with you, I indicated that
under the current law none of our federal regulators could
give you any definitive assurance that there was no
manipulative or fraudulent activity in energy markets in the
wake of the Enron collapse. This is due, in part, to the lack
of transparency demanded of energy markets and more
significantly to the fact that certain exchange markets such
as EnronOnline are completely unregulated.
Consumers are the ultimate beneficiaries of properly
functioning derivatives markets, whether those markets are
private--like EnronOnline--or public--like the New York
Mercantile Exchange. By the same token, consumers are the
ultimate victims when markets are manipulated, or otherwise
affected by unlawful behavior.
I am a firm believer in the efficiencies that derivatives
markets bring to bear on cash commodity markets and the
consequent benefits to market users and to consumers.
However, such derivatives markets should, in the public
interest, adhere to certain, minimal regulatory obligations.
Your amendment is a prudent response to the issues
highlighted by the Enron episode.
Sincerely,
Thomas J. Erickson,
Commissioner.
Mrs. FEINSTEIN. I thank the Chair.
To summarize, if the western energy markets over the past 2 years
have shown us anything, it is that the light of day and records must be
available on all transactions. If the western energy markets and
California have shown us anything, it is that there must be Federal
oversight. And if what has happened in the last 2 years tells us
anything, it is that the trading of these particular commodities should
not be in secret.
Mr. President, this amendment aims to clear up those three points. It
does so. I recognize there is opposition. I recognize the banks oppose
it. Why do the banks oppose it? Because they have set up an online
trading exchange, the IntercontinentalExchange, to do just what Enron
Online did. Dynegy opposes it. Williams opposes it because they are
doing the same thing now.
There is this burgeoning market of trading up the price of energy in
secret. It is wrong. The light of day must be shed on it, and it should
be treated as are all other aspects of trades. My cosponsors and I feel
very strongly about this.
I yield the floor.
The ACTING PRESIDENT pro tempore. The Chair recognizes the Senator
from Texas.
Mr. GRAMM. Mr. President, how can a case be more overwhelming than
the case of the Senator from California? Who could possibly be in favor
of a situation where transactions could be undertaken and no records
kept? Who could possibly be in favor of granting a license for fraud
and manipulation? The answer is no one.
The problem is that each of these points that is outlined has no
factual basis in the law. The plain truth is that there is extensive
recordkeeping currently required under law. That recordkeeping was
strengthened in the 2000 extension of the authorization of the
Commodity Exchange Act. I will read from the legislation as we get to
it.
The 2000 Act provided specific antifraud authority for the CFTC in
exactly the areas for which the Senator from California calls. It
provided authority to intervene in the case of price manipulation. In
fact, everything that the proponents of this amendment claim they are
for is part of current law as amended by the 2000 Act.
I have offered and we have negotiated--and I thank the Senator from
California for the negotiations--to try to work out an agreement so
that we can have an amendment go forward with broad support. We have
failed to succeed in that effort, and I will outline in a moment why we
have failed to do that.
Before I do, let me start at the beginning. This amendment has as
strong a coalition of opponents as any amendment that has been offered,
and not one of them opposes what the proponents of the amendment say
they want to do. Not one of them opposes required recordkeeping. Not
one of them opposes the granting of antifraud authority. Not one of
them opposes granting the ability to intervene in the case of price
manipulation. Every opponent of this amendment favors what the
proponents of the amendment say that it does, but they oppose what the
amendment in fact does.
I will read from the list of the opponents: Alan Greenspan,
testifying twice before committees of Congress--the Financial Services
Committee in the House and the Banking Committee in the Senate. In as
strong words as Alan Greenspan ever utters and in as clear a form as he
could possibly pronounce it, he opposes this amendment, not because he
opposes the intent of the Senator from California, but because he
opposes what the amendment, if adopted, would do--the unintended
consequences--which is what this debate is about.
The Secretary of the Treasury is adamantly opposed to this amendment
and has joined Chairman Greenspan in talking about the potential
impacts on the American economy of a decision we would make in this
proposal that has nothing to do with energy futures but everything to
do with a swap industry which is now $75 trillion in annual volume and
which has become part of virtually every business in America where that
business tries to insure itself against risk.
These swaps are tailored transactions between two economic entities
that are able, through their transaction, to provide greater certainty
in providing jobs, growth, and opportunity for the American economy. In
fact, Chairman Greenspan has said that the growth in the derivatives
markets may very well be a major factor in the resilience of the
American economy today and why we, in fact, did not have a recession.
I urge my colleagues to read the letter which the Secretary of the
Treasury and the Chairman of the Board of Governors of the Federal
Reserve System sent to the two leaders.
I ask unanimous consent the letter to which I just referred be
printed in the Record.
There being no objection, the letter was ordered to be printed in the
Record, as follows:
March 12, 2002.
Hon. Trent Lott,
U.S. Senate,
Washington, DC.
Dear Senator Lott: We are writing to express our serious
concerns with an amendment to be offered by Senator Feinstein
and others to S. 517, the national energy policy bill. We are
committed to ensuring the integrity of the nation's energy
markets. However, we question whether it is necessary to
reopen the Commodity Futures Modernization Act of 2000 (CFMA)
to achieve that objective. Amending the CFMA as proposed by
Senator Feinstein could re-introduce legal uncertainties into
off-exchange derivatives markets and other markets--
uncertainties that were thought to have been settled as a
result of the CFMA's enactment.
Accordingly, we urge Congress to defer action on Senator
Feinstein's proposal until the appropriate committees of
jurisdiction have a change to hold hearings on the amendment
and carefully vet the language through the normal committee
processes.
The CFMA expressly maintained the Commodity Futures Trading
Commission's (CFTC) anti-fraud and anti-manipulation
authority with respect to off-exchange energy derivatives
markets covered by the Commodity Exchange Act (CEA). Thus, it
appears that the CFTC may have sufficient current authority
to address instances of fraud or price manipulation in energy
derivatives markets. Congress should carefully evaluate the
adequacy of the CFTC's current authority before it attempts
to re-open the CFMA.
The CFMA was the culmination of a long, difficult process,
which provided much needed clarification regarding the scope
of the CEA for all off-exchange derivatives instruments, not
just energy products. Any effort to undo the delicate
compromises achieved in that legislation should be undertaken
only after careful reflection. Otherwise, such legislation
could jeopardize the contribution that off-exchange
derivatives have made to the dispersion of risk in the
economy. These instruments may well have contributed
significantly to the economy's impressive resilience to
financial and economic shocks and imbalances.
[[Page S2024]]
Similar letters have been sent to Senators Harkin, Lugar,
Sarbanes, Gramm, and Daschle.
Sincerely,
Paul H. O'Neill,
Secretary, Department of the Treasury.
Alan Greenspan,
Chairman, Board of Governors of the Federal Reserve System.
Mr. GRAMM. This amendment is also opposed by the Securities and
Exchange Commission, which has the principal responsibility in the
American economy for antifraud and antimanipulation enforcement with
regard to securities transactions. If their whole purpose in existing,
if their major mandate, is to deal with exactly the problems which the
amendment proposes to deal with, why is the SEC adamantly opposed to
this amendment? Because of unintended consequences, because the
amendment, in fact, does not achieve its stated goals, but it does
other things that are potentially very harmful to the economy.
The Chairman of the Commodity Futures Trading Commission, the very
Commission that would be empowered by this amendment, has come out in
very strong opposition to the amendment. This amendment is opposed by
the International Swaps and Derivatives Association, the American
Bankers Association, the ABA Securities Association, the Financial
Services Roundtable, the Futures Industry Association, the Securities
Industry Association, and the Chamber of Commerce of the United States.
Why would the Chamber of Commerce of the United States be opposed to
this amendment? Are they in favor of fraud, manipulation, and the
absence of recordkeeping? No. They are concerned that the amendment
will have a harmful effect outside the futures area as it relates to
natural gas and electricity, and, in the process, will do harm to the
entire economy.
This amendment is strongly opposed by the National Mining
Association. I can understand bringing Enron into the debate as it
relates to natural gas and electricity, but why we should bring in
mining I do not understand. There will at some point in this debate be
an amendment which is part of our disagreement, to focus the provisions
of this amendment on natural gas and electricity. If that is the
concern, then why not focus the attention on that concern rather than
getting into areas such as metals? I have seen no evidence--in fact, I
will point out that Chairman Greenspan has seen no evidence--that
derivatives trading by Enron, or by anybody else, had anything to do
with the energy spike in prices in California.
Going back to the beginning, first of all, this is a debate I was
pulled into when the 2000 bill was written. The provision relating to
energy was written in the House, and the version of those provisions
that finally passed in the House and came to the Senate was never
changed again. My concern about the bill at the time, that held the
bill up for 3 months and almost killed the bill at the end of 2000 in
the final session of that Congress, the lameduck session of that
Congress, had to do with exactly the issue which is before us, and that
is unintended consequences.
Nobody in the Senate knows what a derivative is, and I speak for
myself in saying that deep down I have a conception of what a
derivative is. I might pass a freshman course in finance in college in
giving a definition of derivative, but these are very complicated,
tailored instruments, each instrument being unique, which is why it
has, from the very beginning of its trading, been deregulated.
One of the arguments that has been made over again, as the debate on
this amendment has started, is that somehow the 2000 legislation
exempted these derivatives and swaps from regulation. That is totally
false, totally inaccurate. They have never been regulated. In fact,
Congress acted in passing the Futures Trading Practice Act in 1992 to
give the CFTC specific power to exempt these derivatives and swaps as
being inappropriate for regulation under the CFTC, which has the job of
regulating futures, not tailored swaps between sophisticated customers.
The Congress passed the Futures Trading Practice Act in 1992 that
directed the CFTC to grant these exemptions. Those exemptions were
granted. The exemption for energy was granted under the Clinton
administration with a Democrat Chairman of the CFTC. That issue has
never been controversial before. Nor have these swaps and derivatives
ever come under Federal regulation in terms of an ongoing regulatory
process.
In fact, the 2000 Act, far from exempting something which had never
been subject to regulation, added to the strength of the CFTC exactly
the powers that the proponents of this amendment would like us to
believe their amendment does, and they believe their amendment does.
There is no bad faith on this amendment. It is simply trying to
understand very complicated issues when no Member of the Senate knows
what a derivative is. It is very difficult to understand what swaps
are, impossible to comprehend a $75 trillion industry. Unless one is
directly involved in mining, banking, or securities, it is very
difficult for me to comprehend what this whole market is about.
All I know is, it has grown to $75 trillion. It is the envy of the
world, and Alan Greenspan, who is not the embodiment of God's voice on
Earth, when it comes to financial matters in the U.S. economy, speaks
with more knowledge and more authority than anybody else when he says
that disturbing these markets could have a detrimental impact on the
economy and that the resilience of the economy in the face of the
recession might very well have been due to the growth of this
derivatives market. I say at least let's put a little sign up that
says: Danger, high voltage. Do not be fooling around in here if you do
not know what you are doing.
Let's talk about these issues. As we have listened to these speeches
and been moved by them--I have been moved by them to support the intent
of the amendment--we are really not far apart, and I will outline where
we differ.
First of all, let me quote from the 2000 Act that the Congress
adopted in the waning days of the session in the year 2000. I will go
to page 43 of the Senate companion bill, S. 3283. This is in paragraph
(4) of section 2(h) of the Commodity Exchange Act. Paragraph (4)(B)
gives the Commodity Futures Trading Commission the power to intervene
and enforce any action where fraud is present.
In listening to the proponents of this amendment, one would believe
there is no power whereby the CFTC can intervene in cases of fraud. Not
only does that power exist, but it was strengthened in the 2000
legislation, a provision written in the energy section of the bill in
the House of Representatives.
In paragraph (4)(C), we have the provision relating to price
manipulation, and the Commission is given the power to intervene in
cases where price manipulation occurs.
As we have listened to this debate, we have heard the question, well,
how can you do anything if these markets are conducted with no records?
I will read the language of the bill in paragraph (4)(D):
. . . such rules and regulations as the Commission may
prescribe if necessary to ensure timely dissemination by the
electronic trading facility of price, trading volume, and
other trading data to the extent appropriate, if the
Commission determines that the electronic trading facility
performs a significant price discovery function for
transactions . . .
It then goes on and specifically outlines the power of the
Commission. Now, let me make it clear that I am in favor of, and will
support, strengthening these provisions. I am in favor of giving the
CFTC the power to require that records be kept, to require that they be
kept to the level so that you can reconstruct the transaction, to
require that the data under the Commodity Exchange Act be kept for 5
years so that you can reconstruct individual transactions. I am willing
to support--and so are all the opponents of this bill, as far as I am
aware--strengthening antiprice manipulation and strengthening the anti-
fraud provisions.
The point I want to make is these provisions are already law, and
they are in the 2000 Act. To the extent they can be strengthened
without affecting other markets that are in no way related to
electricity and natural gas so that we can deal with what the
proponents of this amendment intend to achieve, I am in favor of it.
The problem is the amendment, as now written, does many things that go
beyond this.
[[Page S2025]]
If we can focus it on electricity and natural gas, if we can limit it
to these provisions, we would have an agreement, and I assume we would
get a unanimous vote.
But here are some problems, and let me outline them. First of all,
everybody needs to understand that we have a wholesale market for swaps
and derivatives, tailor-made products. These are products that are not
sold on exchanges. Let me make it clear. I have been chairman of the
Banking Committee. I have worked with the exchanges in Chicago and New
York. As we say in our business, I have many friends who are associated
with the exchanges in Chicago and New York. But when they go to bed
every night and they say their prayers, they say: God, please kill the
$75 trillion swaps industry and make those people buy these derivatives
and swaps on my market and pay me a commission and buy them in
thousand-unit lots. If you love me, God, please do this for me. Now, it
may hurt the American economy, but it would be so good for me.
Now, there is an element of that going on here. There was an element
of it going on in the 2000 Act. There has been an element of it going
on forever. People try to promote their own interests, we understand
that. There is no issue where all the special interests are on one
side. There seems to be a conception that we try to perpetrate that
there is good and there is evil and there are special interests and
public interests and they are competing against each other. The plain
truth is normally there are special interests all over the ballpark.
And that is not all bad. I will note that I have always felt if you are
going to catch hell no matter what you do, even lawmakers will do the
right thing.
There has been an ongoing effort, since the emergence of derivatives
and swaps, to force them on to the futures exchanges. I could give you
a long and, in this case, happy history. It will suffice to simply say
this: First of all, these swaps have never been sold on market
exchanges such as the Chicago Mercantile Exchange, Chicago Board of
Trade, the New York Mercantile Exchange. They sell standardized
products at both the wholesale and retail level. When we are talking
about swaps, we don't have a retail swap industry in America. When the
2000 bill was written--and I was involved in those sections of that
legislation that had to do with banking products--we simply allowed the
swaps business as it related to wholesale users, namely banks,
securities companies, manufacturers, et cetera, to function on an over-
the-counter basis. We agreed that the case would be different should
a retail market ever occur in these products--that is, a situation
where individuals would buy them; your aunt might buy one. I can't
imagine, and I would not advise that, I would not do it--but we agreed
in the 2000 bill, in the bank products section of the bill that if a
retail market ever came into existence, at that point a decision would
be made as to who would regulate it and how.
Now, these products have never been under regulation, are not sold on
exchanges; they are individually negotiated instruments, highly
sophisticated and, obviously, they yield great value because people buy
and sell them--$75 trillion worth. Alan Greenspan, as I said, said
these have now become a mainstay and a stabilizing influence in the
American economy.
Here are the problems that I see with the amendment as it is written.
I will elaborate some on each of them. First of all, it permits the
CFTC to regulate contracts regardless of whether they are futures
contracts. The CFTC has jurisdiction over futures. It does not have,
never has had, and I hope never will have jurisdiction over non-futures
derivatives or swaps at the wholesale level. As the amendment is now
written, it would impose CFTC regulations on companies operating
electronic bulletin boards, where bids and offers are posted for
various commodities--facilities such as Blackbird, as one example--even
if futures contracts are not traded on those bulletin boards. My view
is, if our objective is to provide more information--and I am for more
information--why should we be taking action to kill off bulletin boards
that are simply providing purchase and sale prices to customers?
Another point, this amendment--and I don't quite understand why it
does it--would make the use of advanced technology a trigger for CFTC
regulation, so that if a bank or an insurance company, or an investment
company sets up an electronic computer system whereby people can come
together, negotiate, purchase, and sell a swap or a derivative, if they
use the computer to do it, they could come under regulation. If they do
the same transaction over the phone, they don't come under CFTC
regulation.
This amendment brings under the Commodity Exchange Act and under the
jurisdiction of the CFTC instruments that are not futures. The CFTC is
an agency that is trained and has expertise in futures; that is, say
that I am contracting to deliver natural gas at the hub in Louisiana on
a certain date, and so I sell a future for that delivery, and someone
buys it. That is the kind of transaction that the CFTC is chartered to
regulate. It is not chartered, nor has it ever been chartered, nor has
it ever regulated, these tailored swaps and derivatives.
Let me quote Alan Greenspan because he has gone out of his way to
make statements on this, and he has been asked questions about this.
Since this has been raised in relation to energy and to California, in
particular, let me just, if I can, go through some of the things Alan
Greenspan has said without wasting everybody's time in reading huge
volumes of statements. Chairman Greenspan of the Federal Reserve Board
on March 7, 2000, stated before the Senate Banking, Housing, and Urban
Affairs Committee that with respect to the existence of a nexus between
energy derivatives and Enron's demise: ``I haven't seen any.''
Alan Greenspan said, when questioned before the Banking Committee,
that he saw no relationship between derivatives and the demise of
Enron. In fact, the derivatives part of Enron has subsequently been
sold to another company that is in the process of reinvigorating it,
creating 800 jobs, and paying off some of the debt of Enron, including
debt to employees. This is a part of Enron that is alive and well,
though not under the control of Enron, which as we know is in
bankruptcy.
Chairman Greenspan stated before the House Banking Committee on the
same issue:
What I sense happened is that they ran [why Enron failed]
into losses which they basically endeavored to obscure. It
had nothing to do with derivatives.
I could go through the quotes in greater detail, but when asked, Did
derivatives have anything to do with the price hike in California?
Chairman Greenspan said no. When asked if they had anything to do with
the failure of Enron, he said it had nothing to do with derivatives.
He also stated before the Senate Banking Committee on March 7:
We've got to allow for that system to work because if we
step in as government regulators we will remove a
considerable amount of caution.
In other words, not only did he say he was concerned about us getting
into other areas, but he was concerned, if we had more Government
regulation of these sophisticated instruments, people would come to
rely on the Government and actually might be less cautious in financial
matters.
I quote the following:
I think that act [the 2000 commodity exchange
reauthorization] in retrospect was a very sound program,
passed by the Congress, and I don't see any particular need
to revisit any of the issues that were discussed at length at
this time.
Let me read what he said in particular in response to a question by
Senator Miller of Georgia who asked the following question, and I am
reading from the raw transcript. In response to Senator Miller of
Georgia who asked whether there is a nexus between energy derivatives,
including their regulation and the California energy crisis, here is
what Chairman Greenspan said:
We don't need to revert to derivatives to get a judgment as
to why prices did what they did. My recollection is that 2
years ago or so the sort of capacity buffer that the
California electric power system has was the typical 15
percent for its summer back loads, which is what generally a
regulated industry has because you respectively guarantee a
rate of return on capability which is not being used, but
that 15 percent kept prices down. As the years went on, the
demand went up in California and no new capacity came on
stream. That 15 percent gradually
[[Page S2026]]
dissolved because there's no way to have inventory of
electricity--there are battery systems--but they are just
inadequate. You get into a situation where the demand load,
if it is running up against a limited capacity and the demand
tends to be price inelastic, you can get some huge price
spikes. So you don't need derivatives to explain what
happened to price.
Now, let me try to sum up because I have covered a lot of areas.
Mr. LOTT. Will the Senator yield?
Mr. GRAMM. I am happy to yield.
Mr. LOTT. With all due respect to the Senators in the Chamber who
perhaps understand this issue, I have serious doubts how many Senators
really understand what we are talking about here. I was trying to
understand what the Senator was saying, and it sounds pretty
complicated to me. I hope we won't do a test here to ask Senators to
define what a derivative is. In fact, we have been checking Webster's,
trying to make sure we understand the definition of derivative. After
having read the definition, I don't think it clears up anything.
Who has jurisdiction of this? Is it the Agriculture Committee or is
it the Banking Committee?
Mr. GRAMM. They both have jurisdiction. The Agriculture Committee has
jurisdiction as it relates to fundamental commodities. The Banking
Committee has jurisdiction as it relates to financial products. You
have a problem in that the amendment applies not just to futures but to
other derivatives and to swaps, which are under the jurisdiction of the
Banking Committee.
The problem is, the last time we dealt with this area, we spent 4
months dealing with it in committee. We dealt with it extensively in
debate and conference and ended up, in total, taking about 7 months to
deal with it.
Mr. LOTT. Has this amendment been considered or had hearings in
Banking, or in Agriculture, as to its implications and what the impact
would be?
Mr. GRAMM. No.
Mr. LOTT. Isn't this clearly an extremely complicated area with which
we are dealing?
Mr. GRAMM. There are two approaches, it seems to me, that make sense.
One is to call on the major agencies--the Fed, the SEC, and the CFTC--
to take a look at the amendment on a truncated basis, say 45 days, and
give a comprehensive report and definition. That would be one approach.
The other approach would be to try to work out the concerns that the
SEC and the Federal Reserve have raised. Those concerns are trying to
narrow this down to electricity and natural gas, which is the real
concern.
Mr. LOTT. If the Senator will yield, I was under the impression there
had been serious and extended negotiations between yourself and Senator
Feinstein and perhaps others in trying to work out a compromise.
Mr. GRAMM. There were serious negotiations. I think Senator Feinstein
made a good effort on her part. Senator Fitzgerald was involved. When
it got right down to it, an agreement could not be reached on the
narrowing of this to include futures but not swaps and or other
derivatives, to focus it just on electricity and natural gas, which is
where the concern is.
The reason Chairman Greenspan has chosen to speak out on this on
three different occasions, the reason he has talked to Members, and
when they called him, called them back, is that he is very concerned
about unintended consequences. The problem is it is hard to debate
unintended consequences.
Mr. LOTT. One final point and I will let the Senator give his
summation. This is a very complicated area that could have unintended
consequences, no question. We should not be trying to write legislation
in this area in the Senate without very careful thought and
consideration by committees. I think it is a very serious mistake to be
considering this amendment in this way.
Just so Senators will understand, Webster's defines ``derivative''
as:
The limit of the ratio of the change in a function to the
corresponding change in its independent variable as the
latter change approaches zero.
I am sure you got that. That makes my point. We don't know what we
are doing here, and we should not be acting in this area.
Mr. DORGAN. Will the Senator from Texas yield for a question?
Mr. GRAMM. I am happy to yield for a question.
Mr. DORGAN. Mr. President, the minority leader was asking about the
definition of a derivative. I ask the Senator from Texas, could he not
find the definition of a derivative by talking to people who used to
run Long Term Capital Management? As the Senator from Texas will
recall, it lost a fortune sufficient so that it almost took down the
American economy.
The Fed had to have a Sunday night rescue package to try to prevent
LTCM from collapsing. I would expect an awfully good definition of
derivatives. They are risks that are now falling through the cracks of
regulators, which come from an understanding of Long Term Capital
Management.
Mr. GRAMM. If the Senator will yield, I would respond that, if we had
a hearing, I do not think they would be the people we would call on to
give us advice. I was thinking of the Chairman of the SEC, perhaps
former Chairmen, the Chairman of the Commodity Futures Trading
Commission, the Chairman of the Board of Governors of the Federal
Reserve System.
I might say about Long Term Capital, that they went broke by making
bad decisions. They didn't go broke because of the existence of
financial instruments. They went broke because they made bad choices in
the use of those instruments. You cannot blame the instrument. It is
like blaming thermometers--saying I hate thermometers because every
time they register above 100 degrees it is hot. It is not the
thermometer's fault. So it is clear that we have had people go broke. I
guess my feeling is that we simply need to know more about this.
As I have said from the beginning, if we can make some simple changes
in this I could be for it, and I believe everybody who I quoted here
today would be for it. Let me just tell you what the amendments would
be.
First of all, the focus of this amendment is supposed to be on
natural gas and electricity. The problem is, when you get into energy
in general, and also into metals, you cast a very wide net. And while
the plain truth is--and I believe it--that there is no evidence to
substantiate any claim that the price spike in California had anything
to do with the existence of derivatives on natural gas and on
electricity, under the circumstances and especially given the precedent
set in the 2000 law, I am in favor of, and I believe everyone who
opposes the amendment is in favor of, strengthening the provisions of
law related to antimanipulation, anti-fraud, and recordkeeping. That
much we agree to. That part of the amendment is agreed to.
But I believe, and all these other groups from the bankers to the
Federal Reserve Board, to the SEC, to the CFTC believe, that one of the
ways you could improve this--they are all still very nervous about this
amendment, even if we made all these changes--but if you could narrow
it just to electricity and natural gas they would see that as an
improvement.
The amendment is about the CFTC, and it ought to be about futures,
not about swaps. That is getting into another agenda, and that agenda
is basically expanding markets on exchanges. And we should not be
getting involved in deciding where a product is bought and sold and who
ought to be buying and selling and who should benefit economically and
who should not.
This whole question of capital is a very important issue. At the risk
of just overstating the case and oversimplifying, this is the problem.
Many of these mechanisms, whereby trades are sold--or undertaken--just
bring buyers and sellers together. They never take ownership of the
derivative or the swap. So to make them put up capital based on the
transactions, if they don't ever take ownership, how does it make any
sense to make them put up some part of $75 trillion when none of
their own money is at risk?
So that requirement, if you are not very careful, ends up killing off
the market for no purpose. If you are not taking ownership, if all you
are doing is bringing a bank and an insurance company together, why
should you have to put up capital based on the transaction?
Then you have the toughest of the issues, and I admit this is a hard
one. If you look at it one way, it seems like how can anybody be
against it. If you look at it another way, it makes little sense. This
is the point.
[[Page S2027]]
What we have agreed to in this amendment, sitting down--and again I
thank the Senator from California for being willing to sit down and try
to work it out--what we have agreed to is extensive recordkeeping,
under the Commodity Exchange Act. Any of these platforms that bring
together buyers and sellers of these instruments would have to keep
records for 5 years--which is the same thing that any futures dealer
has to do. They would have to keep them at a level where the individual
transaction could be reconstructed. They would have to make it
available to the CFTC when the CFTC is looking at a potential for fraud
and a potential for price manipulation. And they have to provide it in
whatever form the CFTC wants: price, trading volume, other trading data
to the extent appropriate, which the Commission determines as being
appropriate.
The question is, Should they have to make it public? This is the
question. When you are talking about the prices that you and I see
every day when we go to Wal-Mart or when we go to buy a pair of tennis
shoes, we are used to dealing in the world we deal in as consumers
where people not only want to make prices public, but they pay money to
publish them in the newspaper. But Wal-Mart does not make public what
it pays for the things it buys. Wholesale transactions in America are
proprietary information.
So that is part of the reason you have this tremendous opposition
from the entire financial structure of the country. Everyone has agreed
to the CFTC having the data in whatever form they want, and the ability
to intervene. But when you are dealing with wholesale proprietary
information as to how people are brought together in these
transactions, where if I am a trading floor, or if I am one of these
people who is a middle man, bringing buyers and sellers together, and I
have a way of doing it, I don't want to share my trade secrets with
somebody else.
So we are not talking about retail prices. The CFTC has total access
if there is fraud, price manipulation--they can intervene. But in terms
of these wholesale transactions requiring that these prices be made
public, and that these transactions would be made public, it would be
like requiring a shoe store to make public what it paid Nike for tennis
shoes.
That is something we do not do in any industry in America of which I
am aware. Granted, if you are choosing which side to be on in the
debating club in high school, you want to be on the side of disclosure
of wholesale prices. But if you are trying to have efficiency in the
running of the greatest economy in the history of the world, you want
retail prices to be public, you want the Government to have access to
data so, if somebody is engaged in an illegal, fraudulent, or
manipulative activity, you can intervene, but to make people make
public wholesale prices is something we do not do because that is
proprietary information. How people put their business together, what
kind of deals they make with Nike--that is private information.
So I urge my colleagues, again: Can we focus this down on electricity
and natural gas to be sure we do not have these unintended
consequences?
Second, can we focus it just on futures?
Third, can we at least require that capital requirements are not
based on the transactions that come through your purview but on any
risk you take or ownership you take? Can you imagine if you had some
job collecting money and consummating transactions for somebody, and
you had to put up capital based not on what you invested or the risk
you have, but of your gross and net volume? No company in America that
has a huge volume could possibly deal with the problem. When you are
dealing with a $75 trillion industry, it becomes even more important.
And, finally, any information that Government needs to prevent
wrongdoing in wholesale transactions--if there is something we have not
agreed to that would make people feel more confident, I am willing to
sit down to try to see if we can work it out. But proprietary
information on a wholesale level is something that we do not do in
other places.
So I urge my colleagues, if we can, there are two ways of working
this out, it seems to me: One, to do an amendment to send the matter to
these three agencies for evaluation on an expedited basis. Let them
report back. Let the committees of jurisdiction hold a hearing so we
can hear from people who know something about this area, rather than
simply talking among ourselves. That is one approach.
Another approach is to go back one more time and see if we can deal
with these concerns. When the people who have been entrusted by us to
make these markets work, and work fairly, and work efficiently--such as
Chairman Greenspan--when they and their staff have raised an issue, it
seems to me we have an obligation to try to see if we understand it and
to see if we can fix the concern.
So my guess is we are probably agreed on 90 percent of the things
that are in this amendment. But the 10 percent we differ on is very
important.
Finally--and I will conclude because I see the leader, with the right
of prior recognition, in the Chamber--let me say if we could work
something out, I think we would serve the public's interest. I think
having a series of votes, where we really do not understand what we are
doing, is not in the public's interest. You feel uncomfortable as a
Senator saying that, but these are complicated issues.
Mr. President, I yield the floor.
The PRESIDING OFFICER. The Republican leader.
Mr. LOTT. Mr. President, a further definition of ``derivative'': ``A
financial instrument whose characteristics and value depend upon the
characteristics and value of an underlying instrument or asset,
typically a commodity, bond, equity, or currency. Examples are futures
and options.''
I am sure that further clarifies the earlier definition that was
read.
Amendment No. 3033 To Amendment No. 2989
Mr. President, I send a second-degree amendment to the desk and ask
for its immediate consideration.
The PRESIDING OFFICER. The clerk will report the amendment.
The legislative clerk read as follows:
The Senator from Mississippi [Mr. Lott] proposes an
amendment numbered 3033 to amendment No. 2989.
Mr. LOTT. Mr. President, I ask unanimous consent reading of the
amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:
At the appropriate place, add the following:
SEC. . FAIR TREATMENT OF PRESIDENTIAL JUDICIAL NOMINEES.
(a) Findings.--The Senate finds that--
(1) the Senate Judiciary Committee's pace in acting on
judicial nominees thus far in this Congress has caused the
number of judges confirmed by the Senate to fall below the
number of judges who have retired during the same period,
such that the 67 judicial vacancies that existed when
Congress adjourned under President Clinton's last term in
office in 2000 have now grown to 96 judicial vacancies, which
represents an increase from 7.9 percent to 11 percent in the
total number of Federal judgeships that are currently vacant;
(2) thirty one of the 96 current judicial vacancies are on
the United States Courts of Appeals, representing a 17.3
percent vacancy rate for such seats;
(3) seventeen of the 31 vacancies on the Courts of Appeals
have been declared ``judicial emergencies'' by the
Administrative Office of the U.S. Courts;
(4) during the first 2 years of President Reagan's first
term, 19 of the 20 circuit court nominations that he
submitted to the Senate were confirmed; and during the first
2 years of President George H. W. Bush's term, 22 of the 23
circuit court nominations that he submitted to the Senate
were confirmed; and during the first 2 years of President
Clinton's first term, 19 to the 22 circuit court nominations
that he submitted to the Senate were confirmed; and
(5) only 7 of President George W. Bush's 29 circuit court
nominees have been confirmed to date, representing just 24
percent of such nominations submitted to the Senate.
(b) Sense of the Senate.--It is the Sense of the Senate
that, in the interests of the administration of justice, the
Senate Judiciary Committee shall hold hearings on the
nominees submitted by the President on May 9, 2001, by May 9,
2002.
Mr. LOTT. Mr. President, I have made the point here--and Senator
Gramm was making the point very strongly--that this first-degree
amendment clearly needs additional work, additional consideration. The
committees of jurisdiction should have an opportunity to work on it. I
had hoped that some accommodation could be worked out. I am still
hopeful of that. But I do not think we are ready to go forward at this
time.
[[Page S2028]]
Having said that, I also think it is very important the Senate take a
position with regard to judicial nominations. This second-degree
amendment is the resolution that was offered last week. There has been
no indication of how we would proceed on that. All it would say is the
first nine circuit judge nominations that were offered last May--May of
2001--would have a hearing--just a hearing--by May 9, 2002.
This issue is very important to our country, and it needs to be
considered in the order in which it was pending before we came back to
the Feinstein amendment.
I yield the floor.
The PRESIDING OFFICER. The Senator from Illinois.
Amendment No. 2989, As Modified
Mr. FITZGERALD. Mr. President, I am pleased to rise in support of
Senator Feinstein's amendment. I want to address and rebut a number of
things my good friend from Texas said.
I have as much respect for Senator Gramm as I do for anybody in this
body. It is going to be a great shame that he is retiring this year
because I will miss him dearly. I think this is, perhaps, the first
time in my 3 years in the Senate that I have ever risen in opposition
to Senator Gramm, but I do disagree with him. I do not think this is a
complicated issue.
I think it is a relatively simple issue. I think what it comes down
to is that 2 years ago, when we passed the Commodity Futures
Modernization Act, we patterned our bill after the recommendations of
the Presidential Working Group, which included the Chairman of the
CFTC, the Chairman of the SEC, and the Chairman of the Federal Reserve
Board. And they had recommended that we create three categories of
regulation.
One was a designated contract market which would be our Board of
Trade and Mercantile Exchange in Chicago or the NYMEX in New York.
There would be heavy regulation on those designated contract markets.
The other recommended level of regulation was the so-called DTEF, the
derivatives transaction execution facilities. Those would be online
bilateral trading facilities that could be trading derivatives online.
They would be regulated but with lighter regulation than the full-blown
regulation of designated contract markets.
And, finally, we created an exclusion for financial OTC derivatives.
The opponents of this amendment have created the false impression that
somehow the amendment by Senator Feinstein and myself intrudes upon the
now essentially excluded financial derivatives industry. There is no
regulation by the CFTC to speak of for all the financial derivatives
that are out there, mainly between banks. Our amendment would not
impose any regulation on the banks in that regard or on others who
engage in purely financial derivative transactions. This has nothing to
do with that.
Instead, we are simply closing off an exemption that applied to just
a handful of online trading companies that happen to be trading energy
and metals. At the last minute, over in the House, they were exempted,
not just from one or two levels but from all levels of regulation. And
this exemption applied to literally just a handful of companies. It was
a special carveout that is upheld by absolutely no public policy
rationale.
The companies that benefited from this exemption included, of course,
Enron Online. There is a company called ICE, the
IntercontinentalExchange; they benefited from this exemption.
The reason banks are interested in this issue is not because they are
worried we are imposing some kind of legal uncertainty on financial
derivatives but, instead, because a couple of banks have a big
ownership interest in this totally exempt energy online trading
facility, ICE.
And, finally, there is another company called TradeSpark that is
owned by a couple of energy companies.
So you have three companies that essentially got a special carveout
from the whole scheme of regulation that originated with the
President's Working Group.
The President's Working Group, in essence, said financial
derivatives, interest rate swaps, for example, between banks would be
exempt from regulation by the CFTC.
I take issue with Senator Gramm when he says no Member of the Senate
knows what a derivative is. I do. I grew up in a banking family. I was
on the board of many banks. I was a general counsel of a publicly
traded bank holding company. We used to enter into interest rate swaps.
When our banks wanted to do a lot of fixed rate mortgages, we wanted
interest rate protection. We would go protect ourselves against an
increase in interest rates by entering a swap with another bank.
There should be no fear, whatsoever, out there that that market would
be disturbed by our amendment because it has absolutely nothing to do
with it. We would not impose any requirements on banks entering into
interest rate swaps, for example. Instead, the intent of our amendment
is to close off an exemption, a special carveout for online energy
trading companies that makes no sense.
The President's Working Group distinguished between financial
commodities of an infinite supply, such as interest rate swaps, and
said those should be excluded. And they are excluded. We maintain that
exclusion.
But they said: Finite commodities such as agricultural commodities--
corn, soybeans, pork bellies--or metals--gold, silver--finite physical
commodities such as that in which there is a finite supply and in
which, theoretically at least, the market could be cornered, there
should be some regulation for those markets.
The President's working group further said that there should be full-
bore regulation if the trading is in an open outcry pit such as we have
at the Board of Trade and the Mercantile Exchange in Chicago. There is
full-blown regulation. But there is a lighter degree of regulation,
some regulatory oversight, for online exchanges that trade those
physical, finite-quantity commodities.
It is that level of regulation that we are seeking to impose on these
now exempt online energy transaction facilities.
Senator Gramm cited section 4(g) of the Commodities Act. He said we
already have recordkeeping requirements in the CFMA; we already have
the ability for the CFTC to go after fraud if they find it.
I looked at section 4(g). Guess what. Section 4(g) does say that the
Commission shall adopt rules requiring that a contemporaneous written
record be made, as practical, of all orders for execution on the floor
or subjected to the rules of each contract market--a contract market is
a board of trade like the Chicago Board of Trade--or a derivatives
transaction execution facility. Those are the online transaction
facilities we are talking about that are regulated.
The fact is, earlier in this act we created a special category for
these online energy and metal firms such as ICE which is in turn owned
by Morgan Stanley and Goldman Sachs. They have a rifleshot exemption in
this code, and this section 4(g) that Senator Gramm talked about does
not apply to them because they are exempt from the definition of
derivatives transaction execution facility. That is back earlier in the
act.
What we need to do is close this loophole. What public policy
rationale upholds the picking out of a couple of online firms and
saying: You are going to be exempt from the requirements of the act? It
doesn't make any sense.
Now, we did have good-faith negotiations with Senator Gramm. He has
proposed regulating natural gas and electricity contracts that are
traded online but exempting metals and oil contracts. Why does that
make any sense? Shouldn't everybody be playing on a level regulatory
playing field? Why should some business have a regulatory advantage?
That isn't what America is all about. We want all businesses to be
playing on the same level playing field. If some succeed because they
work harder, have better products, and they are smarter, that is great.
But when they succeed or make a lot of money because the Government has
sponsored some special advantage based on their power and their
adeptness at playing the political game in Washington, that is not
right. That is not what America is all about, giving a special carve-
out to a few companies. It doesn't make sense.
Now, I happen to agree with Senator Gramm on one point. I have seen
no evidence that the trading by online energy trading firms had
anything to do
[[Page S2029]]
with the spike in oil or electricity prices on the west coast. I
certainly doubt that is the case.
But that is not why I am here supporting this amendment. Instead, I
am supporting this amendment because I think price discovery is very
important to consumers.
Senator Gramm was saying we never require retailers to disclose the
wholesale prices they pay. That is true. But this is not really
analogous to going to buy something at Wal-Mart. This is more analogous
to buying a stock from a broker. You call up your broker, and you ask
them to buy 100 shares of IBM stock. They can look up on the New York
Stock Exchange and get one of the latest quotes, and they can tell you.
Let's just say it is $100 a share. You go buy the 100 shares for $100 a
share, and then your broker gets a commission.
The problem with this kind of trading is that the customer can't see
the prices. In the case of your going to your broker and buying 100
shares of IBM, you can find out what the price was on the New York
Stock Exchange. It is different with an online energy trading firm. You
may call them up and say you want a contract for, let's say, natural
gas or something, and you will pay $265 for the contract.
Well, what if the person from the online energy company looks up and
he finds he can buy it at $263? But then he resells it to you at $265.
You never would know the difference, would you, because you would never
know the wholesale price at which he got it.
I am sure no one at Enron Online would ever cheat their customer in
the way I just described. I am sure that would never happen, or that
this would ever happen in ICE or TradeSpark--that they would use their
superior knowledge of the wholesale market and the lack of knowledge of
their customer to make a few extra points. I am sure that would never
happen.
But let's just say that this could happen, that there could be some
dishonest people in those companies. And in addition to wanting to make
a commission for selling that contract at $265, they might want to take
a little bit of markup, a little bit of kickback. It probably happens
in the political business when we all buy our direct mail. You are
always wondering how much your direct mail firm is actually paying for
their printing and mailing. You know they are marking it up, and you
try to guard against it.
But that very same thing could happen when you are trading with one
of these online customers. That is why I do believe it is important for
the CFTC to have the ability to require these companies to report their
volumes and to report their prices. That is protection for the
consumer.
Oddly, I think ICE, Enron Online, and TradeSpark would have more
customers if they were regulated by the CFTC than they now have. I will
tell you this: I would never go trade with them because I would have no
idea at what wholesale prices they were buying. I wouldn't use them. I
would go to a regulated board of trade where I could be sure there were
some safeguards for me. I wouldn't trade with somebody such as that, an
online energy company. And I believe their businesses are smaller than
they otherwise would be if there were some protections for consumers.
It is much like our stock markets. Our capital markets have exploded
in the last 50 or 60 years. We have the best capital formation markets
in the world. I do believe that our securities laws have helped foster
that strong capital market. If you go back to the 1920s and before,
when there was really no regulation, or go back before the Federal
Trade Commission, when there was absolutely no regulation of our stock
markets, the little guys didn't get involved in that at all because
they figured it was an insider game and that the deck was stacked
against them. They were right; the deck was stacked against them.
Since we have put in protections for the consumer, we have banned
insider trading and made a lot of manipulative practices illegal, more
and more Americans have felt comfortable investing in the stock market
to the point that we now have over 50 percent of Americans investing
their own stocks directly or indirectly. If there were this light level
of regulation that Senator Feinstein and I are suggesting with our
amendment, that would be good for these companies that want to uphold
this special privilege that exempts them from all regulatory oversight.
Now, I also note that there is a Senator who probably knows as much
as any of the derivatives experts in this country about derivative
transactions, and that is Senator John Corzine of New Jersey. Senator
Corzine was chairman of Goldman Sachs, which is an owner of
IntercontinentalExchange. He has joined us as a cosponsor of this
amendment.
I think this is an outstanding amendment. I think it is very simple.
We are closing off a special deal that just applies to a few firms.
There is no public policy rationale that supports the special deal
these firms have. We are making the treatment of all firms the same
under the Commodity Futures Modernization Act. It makes perfect sense.
We are doing so in a way that was originally recommended by the
President's Working Group.
I appreciate the hard work of my colleague from California and also
my colleague from Texas. We have had a lot of negotiations. I think one
thing we have done is conclusively demolish any argument that this
represents any threat at all to financial derivatives. They are not
affected in any way.
Senator Gramm initially said this was his primary concern. We worked
on it, and we have modified the amendment to make it crystal clear that
we have no intent of affecting the financial derivatives markets. Those
are excluded and will continue to be excluded. We are simply trying to
close off a special loophole that applies to a handful of companies. I
think it is very good public policy. Let's close this exemption that
was stuck in by the House at the last minute when they passed the CFMA.
I yield the floor.
The PRESIDING OFFICER. The Senator from Washington is recognized.
Mr. GRAMM. Mr. President, might I ask if the Senator will give me
about 3 minutes to respond to these points before they get cold in
everybody's mind? Would that work for her?
Ms. CANTWELL. How long?
Mr. GRAMM. I think I can do it in 3 minutes.
Ms. CANTWELL. I will wait.
Mr. GRAMM. Mr. President, first of all, I thank the distinguished
Senator for giving me 3 minutes. She did not have to do that.
Let me be brief. First of all, if you go back and read the Commodity
Exchange Act, as amended, you will find that what I said, in fact, was
correct. There are exempt commodities, which have always been exempt,
have never been regulated, but they are exempt, except as provided in
these paragraphs.
Then we go through a reference to anti-fraud, anti-price
manipulation, and recordkeeping. So they are exempt from the normal
process because these are huge wholesale markets among sophisticated
dealers that have never come under regulation. But they are not exempt
from anti-fraud, anti-price manipulation, and from recordkeeping. I
wanted to be sure that we all knew that was true.
The Senator says the working group favored his amendment. There is
only one problem with that. Every member of the working group has
written a letter opposing the amendment. The Chairman of the Federal
Reserve Board, the Secretary of the Treasury, the Chairman of the
Commodity Futures Trading Commission, and the Securities and Exchange
Commission Chairman are the members of the working group. The Senator
takes a sentence from their report that he says bolsters his
argument. But every member of the working group who wrote the report,
and who is charged with it today, opposes the amendment. I have seen no
evidence that anybody who held these positions during the Clinton
administration supports the amendment either.
Special carve-out? There is no special carve-out. We are getting back
to a myth. Let me remind my colleagues that, as I look at the 2000 bill
as it was passed, Senator Fitzgerald was an original cosponsor of the
bill. What this legislation did was simply clarify to a legal certainty
something the President, the Secretary of the Treasury, and the Federal
Reserve Board wanted to do, and that was that these sophisticated
wholesale products that had never been regulated by anybody
[[Page S2030]]
in the history of this country--and since we invented them, and nowhere
else were they started, that I am aware of--that they were exempt from
normal regulation, but they were subject to anti-fraud, anti-price
manipulation, and recordkeeping.
In terms of buying a stock, that is where all this confusion comes
from. The example is a good one, but it has nothing to do with the
point. We are not talking about the same product. Every swap is not a
future, it is a specific, custom contract. They are not homogeneous. If
they are, then they are not exempt. These are individually negotiated
contracts. They are not bought by individual, retail investors, such as
our colleague from Illinois. They are bought by banks and mining
companies and those businesses trying to protect themselves against
risk.
I thank the Senator from Washington for yielding me this time.
The PRESIDING OFFICER. The Senator from Washington is recognized.
Ms. CANTWELL. Mr. President, I rise to urge my colleagues to approve
this amendment that we have been debating, which would subject energy
derivatives trading to the same degree of regulatory scrutiny as many
other commodities. Senator Feinstein and others have worked hard to
bring about a fair resolution to this issue, and to the chaos brought
upon many Western States in the electricity crisis as it unfolded.
What I think is important to understand is exactly what this
amendment does. First and foremost, my colleagues must recognize that
this legislation is designed to close a specific loophole--the Enron
loophole--that allowed Enron and other online traders to sell energy
futures behind closed doors, without any form of safeguards for
consumers or investors whatsoever.
At its core, our amendment would allow the Commodity Futures Trading
Commission to treat energy futures similar to other regulated commodity
futures. It does not give the CFTC any new powers that it does not
already have over many other futures markets. This legislation deals
specifically with energy futures, without tampering with regulation of
financial derivatives as much of the floor debate would lead you to
believe.
Some have claimed that by subjecting energy derivatives to the same
level of regulatory scrutiny as other commodities, we would be imposing
some sort of unacceptable level of ``uncertainty'' on these markets. I
find that argument fundamentally flawed. How, then, does one explain
the prominence and global importance of other American markets, such as
NYMEX, already under the CFTC jurisdiction? They don't seem to be
struggling because of oversight and scrutiny by the CFTC.
In fact, I believe that by subjecting trading platforms, such as
Enron Online, to the same transparency and antifraud rules as other
types of exchanges, we will actually be increasing the confidence of
market participants. They can know with certainty that prices for
energy derivatives are not the result of manipulation. And believe me,
in my State, consumers have a lot of doubt about why they are paying a
50-percent rate increase in energy prices. Under this amendment,
consumers can rest assured that they will not become the casualties of
gaming in these markets. That is very important.
To quote the New York Mercantile Exchange, the world's largest trader
of energy futures:
With numerous reports of reduced confidence in market
integrity in the wake of the Enron bankruptcy, never has it
been more important to restore faith in that great American
resource, our competitive markets.
Some have suggested that there has not yet been conclusive evidence
that Enron manipulated derivative markets and, they argue, that alone
is reason enough not to proceed.
Mr. President, there never will be conclusive evidence of such market
manipulation, if Enron Online and businesses like it are allowed to
continue operating in secret. I ask the opponents of this amendment to
think about the ramifications of this situation on the ongoing
investigation into price manipulation in my home state. As I said, in
my State, consumers have seen rates increase up to 50 percent in long-
term contracts that they are going to have to live with for many years.
In fact, Enron is still buying power at cheap prices, marking it up,
and selling it to utilities at higher prices because of these long-term
contracts. Yet, FERC's investigation into these price hikes has been
severely hampered by the lack of information surrounding swaps
transactions done in secret.
The task of investigating Enron's collapse and Enron Online's impact
on energy markets has been made infinitely more complex by virtue of
the fact that no one was required to maintain books or records that
would have shown this clear pattern of irregular trading. Instead, we
are saddled with this post hoc investigation that may well last years.
Some colleagues talked a lot about the President's Working Group
recommendations, and some have suggested we delay this legislation.
What is interesting is that many of the names thrown about this
morning, Alan Greenspan, then-Secretary of Treasury Larry Summers, SEC
Chairman Arthur Levitt, and CFTC Chairman Bill Ranier, were signatories
to the President's Working Group report given to Congress before
passage of the Commodity Futures Modification Act of 2000. While it is
true that the report supported exemptions for over-the-counter
derivatives, the report included significant cautionary notes.
The President's Working Group basically issued a warning saying:
commodities with finite supplies are more easily subject to price
manipulation.
Obviously, those of us from the West know how finite the energy
supplies can be, as California, Washington, and other States
experienced the unbelievable skyrocketing of prices.
What we, the cosponsors of this amendment, are talking about here is
how to implement the Working Group's recommendations on antifraud
provisions. We are saying transaction information should be collected
and kept. Then, if there is a suspicion of fraud, investigators will
have something tangible to examine.
The Working Group unanimously recommended that there should be an
exclusion for bilateral transactions between sophisticated
counterparties, but it made specific note: Other than transactions that
involve nonfinancial commodities with finite supplies.
The Working Group recommended an exclusion from the Commodity
Exchange Act for derivatives traded on electronic trading systems
provided systems limit participation to sophisticated counterparties
trading for their own accounts and are not used to trade contracts that
involve nonfinancial commodities--again culling out nonfinancial
commodities with finite supplies.
The Working Group noted the danger of exempting these transactions,
including energy derivatives, from regulatory scrutiny, and they did
this in November of 1999. These are precisely the transactions that our
amendment would put under the jurisdiction of the CFTC.
Unfortunately, these cautionary notes were not heeded by Congress and
were instead translated into a statutory exemption for bilateral energy
derivatives and electronic exchanges in the context of the Commodity
Futures Modernization Act of 2000. I can tell you, my State has
suffered greatly because of this exemption and has not been able to
find out whether price manipulation has actually occurred.
I also suggest that my colleagues take note of the Working Group's
recommendation that the regulatory regime should be reevaluated from
time to time. In the aftermath of Enron's collapse, a reevaluation is
certainly warranted.
Again, to quote from the President's Working Group:
Although this report recommends the enactment of
legislation to clearly exclude most over-the-counter
financial derivatives transactions from the Commodities
Exchange Act, this does not mean that transactions may not,
in some instances, be subject to a different regulatory
regime or that a need for regulation of currently unregulated
activities may not arise in the future.
Specifically, the Working Group recommends the enactment of a limited
regulatory regime aimed at enhancing market transparency and efficiency
may become necessary. That is what we are doing.
We are saying that these things may have come about because of the
Enron collapse. We have seen, while Congress may have acted in 2000
thinking this
[[Page S2031]]
exemption was the right thing to do, this exemption cost consumers--if
not the high rates they are paying directly--it has at least cost them
confidence in the system.
We must restore that confidence by opening up the energy derivatives
market to transparency and oversight. I urge my colleagues to support
this very important amendment and to tell the American public that
Congress is acting to protect them from the kinds of loopholes that
Enron was able to walk through and cost consumers higher energy prices
in this country.
I yield the floor.
The PRESIDING OFFICER. The Senator from California.
Mrs. FEINSTEIN. Mr. President, I thank the Senator from Washington. I
do not know anyone who has been more concerned about what has been
happening with electricity markets than Senator Cantwell. She has
really tried to help her constituents and the consumers in this area. I
am very pleased she has been in the leadership of this amendment.
I particularly thank the Senator from Illinois, Mr. Fitzgerald, for
straightening out the record from the perspective of somebody
intimately involved in the banking industry.
Let me tell you how all of this boils down for me. It is this: Should
some parts of this trading community essentially be exempt from any
form of transparency, from recordkeeping or from oversight? That is the
bottom line. We are not trying to do anything that is horrendous. All
we are saying is they should have oversight, they should keep records,
and there should be information for the public that the Commodity
Futures Trading Commission would find to be nonproprietary. This is, in
essence, all we are trying to do.
I have a hard time understanding how one has to have a large degree
of sophistication in the industry to want to shed the light of day on
some of these trades.
Maybe California was impacted by these trades and maybe California
was not impacted by these trades, but I can tell you this: The price of
electricity in California in 1999 was $7 billion. The price the next
year was $27 billion. It went up fourfold. Something happened other
than the fact there was a huge demand and no supply. There was trading.
We saw it with natural gas coming in to California. Natural gas
prompts the price of electricity, and when it is $59 a decatherm in
southern California and $8 a decatherm in New Mexico, when the cost of
transportation from New Mexico to that place in California is only $1,
one has to look at what has happened to boost that price way up.
So all we are saying is to put it back the way it was before. Give
the CFTC jurisdiction.
It is being made light of that the CFTC does not support this action.
The CFTC has three members. One of the members supports what we are
trying to do, and his name is Thomas Erickson.
I will quickly read what he says.
This amendment would bring transparency to markets and
provide Congress and the public with the assurance that no
exchange offering energy commodity derivatives transactions
would go completely unregulated. Moreover, it would restore
to the Federal Government those basic tools necessary to
detect and defer fraud and manipulation. Therefore, I
strongly support the amendment.
That is one member of the regulatory body out of three members to
whom we are trying to give this responsibility. So there is nothing
nefarious about the amendment.
As I pointed out, all members of the FERC support the amendment, as
well as the Chairman of the FERC, whose letter I read into the Record.
They know something about these matters. They know what derivatives
are. They know the transparency and recordkeeping and oversight.
Whether there was a carve-out for two or three companies or not, I am
not going to comment because I do not know. I do know there is this one
narrow exemption whereby all of these online trades go on not in the
light of day but in the dark of night, so to speak. Nobody knows what
they are. There are no records kept of them. Therefore, whether the
CFTC thinks it has some jurisdiction or not does not really make a
difference because they cannot go back and look at records of trades,
compare them wholesale versus retail prices, and know whether there was
any price manipulation or not. So sure, investigate. If there are no
records, there is no evidence. Therefore, there is not much that is
going to come from the investigation.
So all we are trying to say is because this has become a huge,
burgeoning online business, subject it to all of the same regulations
and oversight that every other part of the trading community has. It
does not take a Philadelphia lawyer to understand that. I do think it
benefits consumers, I do think it benefits responsible trading, and I
do think it benefits a level playing field for everyone who is trading
in these markets. I think it provides that level of consumer
protection. Some people, say, oh, there is a reason why the NYMEX and
the Chicago Board of Trade want it. They want to force everybody on
their exchanges. No, not true. If it is easier to trade online, you can
trade online, no problem with it, but there should be a record kept of
the trades. There should be transparency, and information that the CFTC
deems is not proprietary but should be in the public domain can, in
fact, be in the public domain, and that, finally, there is some
regulatory body that when there is an allegation of fraud would step
in.
For example, I would like the CFTC to take a look at the California
situation, evaluate the record and tell us, was there price
manipulation? Was online trading of natural gas manipulated to
artificially raise prices? They might try to do it now, but they would
have no records on which to base any investigation. Therefore, that is
what this amendment is all about.
Sure, I know there are people who do not like it. There are people
who have tried to obfuscate about it, but is the consumer going to be
better off because the light of day is shed on these trades in a market
that is billions and billions of dollars? I think so. I cannot
understand how anybody feels disadvantaged because there is
transparency, there is oversight, or there is recordkeeping that is
required in every single level of trading on any market that exists in
America today.
So if anyone takes the time to read these letters, I think they will
find we are doing nothing nefarious. We are simply trying to bring the
light of day to provide a record and to provide some regulatory
oversight to a huge, burgeoning market.
When I talked to Mr. Greenspan, and I did on two occasions, what he
was concerned with was financial certainty. What I would say to him is
this brings financial certainty. This lets everybody who trades online
know there is some regulation. Just as you have regulation with FERC,
if you deliver natural gas directly to an entity, if you are trading
gas in between the delivery, there also is certainty--a certainty that
one must keep a record, a certainty that the record can become public,
and a certainty that there is some Federal oversight as there is
everywhere else.
I see no reason at all why there should be this widespread exemption,
particularly at a time when we have seen these prices escalate beyond
anyone's expectation. Nobody could think that someone could be selling
electricity at $30 a megawatt and overnight have that price go to $300
and then $3,000 without the opportunity for the light of day to be shed
on it, and also have some records and some oversight.
It is a very simple thing we are doing. It existed before the year
2000. All we are saying is give the CFTC this oversight. It is
supported by FERC. It is supported by the New York Merchantile
Exchange. It is supported by the Chicago Exchange. It is supported by
people who deal in electricity and natural gas, the municipal systems.
It may not be supported by the banks that want to run an exchange in
this secret way. It may not be supported by some who would like to see
this anonymity continue. But if my colleagues believe that light of day
is important, then please vote for this amendment.
I yield the floor.
The PRESIDING OFFICER (Mrs. Carnahan). The Senator from Idaho.
Mr. CRAPO. Madam President, I appreciate the opportunity to rise in
opposition to this amendment. We have heard a lot of debate today about
a
[[Page S2032]]
very complicated topic that has been discussed, that understanding
derivatives is very difficult to do. Since this debate started and I
began working on this issue, even in years previous as we tried to
address the issue, I still have to go back again and again to the
experts who help us to understand the issue.
The first point I want to make is: We spent the better part of a
year, a couple of years ago, working on this entire issue of how
transactions called derivatives are regulated as they deal with
commodities. We had a Presidential Working Group with which then-
President Clinton worked, and we relied on the advice of that working
group in setting up the model we put forward to help us address how we
in the United States should regulate and manage transactions in
commodities known as derivatives.
I am going to try in a few minutes to give a little bit of structure
to how we did that, but the first point is we spent a tremendous amount
of time with congressional committees working on it over a long period
of time, and with a Presidential panel working on it, and an advisory
group, and we came together with an approach that we then brought forth
as legislation which became law and which President Clinton signed into
law, and which we have now been working under for a few short years.
This amendment will change that approach. Before I get into what we
are talking about and try to put a little order to what the whole
debate is about in terms of the structure of the law, let me state the
conclusion that Alan Greenspan gave in answer to me in a Banking
Committee hearing a few weeks ago when I said to the Chairman: Chairman
Greenspan, is this amendment going to be good for America?
His answer to me--and I will read his words in a few minutes if I
need to, but his answer, in essence, was he believed the way we had set
it up was working, that it provided a resiliency to our markets in the
United States and that resiliency was, in his opinion, probably one of
the big factors in our ability to have the strength in our economy to
rebound as fast as we did when the recessionary trends hit us.
In other words, the recessionary trends we are hopefully now starting
to see ourselves grow out of were lessened, and the time we had to
spend in that financial trough was reduced because we had the
resiliency in our derivatives transactions that we put into place as a
result of this very thorough study we went through just a few years
ago.
This amendment seeks to change that. The arguments are in that act we
passed a few years ago. There was a rifleshot created, a specific
exemption for a few commodities that was not fair, and all commodities
should be treated equally. The reality is the reverse. We created basic
categories in the law we passed. This amendment is a rifleshot
amendment to pick out just a couple commodity groups and say these
commodity groups should have been treated differently.
How did the law we passed last time work? The question, again, is how
are we going to regulate derivatives and commodities that are going to
be marketed through derivatives transactions. First, there was an
entire category we said we were going to exclude, we would not
regulate. Those are called financial derivatives. This includes
Treasury bonds, foreign exchange, interest rates, things that happen in
the financial industry.
The Senator from Illinois discussed how banks and others deal in
these transactions. They are totally excluded.
Another category of commodities included, because historically they
have been included and traded on exchanges and derivatives
transactions, was the agricultural commodities. They were included with
full regulation, full coverage. They are now traded on these boards.
All other commodities were exempted. I use the word ``exempt'' as
opposed to ``exclude'' because it is different than how we treat
financial transactions. Financial derivatives were excluded; no
regulation. Agricultural commodities were included; complete
regulation. All other commodities were exempted, meaning they were not
going to be regulated and forced on to the exchanges and forced to be
traded in the ways that the agricultural commodities were, but they
were still subject to very important regulatory controls. The Senator
from Texas has already gone over those. Those were protections against
fraud. They would be subject to the antifraud protections, the anti-
price manipulation protections, and the recordkeeping protections. All
other commodities, other than agricultural and financial transactions,
are still subject to those types of fraud, price manipulation, and
recordkeeping requirements under the act.
What has happened with this amendment? From that category called
``all other commodities,'' the amendment seeks to pick out just two
commodity groups: Energy and minerals. That is the rifleshot, saying we
do not like the categorization we did a few years ago; we need to take
energy and minerals and move them to another category. The arguments
given in favor of it are because we need more recordkeeping control and
protection. That is included under the act.
The other argument is that we should not treat one group different
from any other group. Frankly, as I indicated, we already have
exemptions and exclusions and coverage in different categories. I ask
this question: If the argument is that regulation is good and therefore
we should not have any commodity derivatives transaction that is not
regulated, why not, instead of having a rifleshot amendment that
regulates only energy and mineral transactions, bring all the financial
transactions in as well?
If people are at risk in America today because we are not regulating
derivatives transactions, why shouldn't we have regulated derivatives
transactions and Treasury bonds? People's retirement depends on their
investment in Treasury bonds. Financial transactions, like foreign
exchange and interest rates, are every bit as important to the investor
in America as are energy or mineral transactions--and, in fact,
probably more so if you look at the financial transactions and all of
the other types of commodities not included when we did the act before.
If we do that, we take the resiliency out of the markets and make it
harder for this Nation's financial system to work effectively. If you
accept the argument that everybody should be under the same rules and
nobody should be rifleshot out, we should cover everybody and have no
exclusion for financial transactions and no exclusion for any
commodities. Instead, that is not what the working group recommended.
I make another point. It has been argued somewhat subtly, but I think
the point has been clearly argued, investors are at risk because they
do not have information about these derivatives transactions. These
transactions are not investor transactions. This is not a situation
where an investor is looking at a transaction and saying: I think I
will invest in that derivative or I will see if I can buy into this
derivative transaction.
What is going on is the transfer of risk from those who hold a higher
risk situation but do not want to maintain that risk or are not in a
financial position to maintain that risk to someone in a better
position to maintain risk. We talk about what derivatives transactions
do. They transfer risk from one who cannot manage it as well to one who
can manage it better. It helps our economy be resilient.
These are transactions between extremely sophisticated managers--
whether they be people who are transacting in energy commodities or in
minerals commodities. There is not a situation where an investor is
being shown a document and being asked to invest in a particular
instrument. This is not like a stock market sale or transaction. This
is a negotiated contract between sophisticated buyers and sellers who
are working in the marketplace to try to reduce risk, which brings
strength and stability to the economy and, as Greenspan said, helped in
this last recession to bring us back more rapidly.
What we are being asked to do is to shackle it and make it so that
these transactions cannot occur except over the board. These
transactions have to be regulated like the agricultural transactions.
There has been a lot of talk about who supports and who opposes this
[[Page S2033]]
amendment. There is already in the Record a letter from our Secretary
of the Department of Treasury and from the Chairman of the Board of
Governors of the Federal Reserve System, Paul H. O'Neill and Alan
Greenspan, who strongly say we should maintain the current system. I
read from the very last part of their letter:
[Such legislation] could jeopardize the contribution that
off exchange derivatives have made to the dispersion of risk
in the economy. These instruments may well have contributed
significantly to the economy's impressive resilience to
financial and economic shocks and imbalances.
So you have the Secretary of the Treasury and the Chairman of the
Federal Reserve saying: Do not shackle our economy this way.
We also have the Commodity Futures Trading Commission itself, the
Chairman, representing the majority point of view, stating that there
is no shown reason for us to change the structure we achieved after
such careful debate previously.
We also have the Securities and Exchange Commission saying there is
no need for this change and we should walk carefully.
We are talking about the Government regulators--the Department of
Treasury, the Federal Reserve, the SEC, the CFTC--saying there is no
need for this.
What is the private sector saying? Those opposed to this amendment
are those who deal in these transactions: The International Swaps and
Derivatives Association, the American Bankers Association, the ABA
Securities Association, the Bond Market Association, the Financial
Services Roundtable, the Futures Industry Association, the Securities
Industry Association, and the U.S. Chamber of Commerce, the point being
that those in our economy who deal with derivatives are saying to us:
We don't want to have a rifleshot amendment that takes energy and
mining transactions and moves them over.
Again, I want to go back and summarize a little bit. We have a
situation here in which we had a Presidential working group that said
we should set it up the way we did. We set it up the way we did. It
worked. Those who deal with our financial markets in America have said
it brings us and brought us the resilience we needed this last time
when our economy had the shocks and turmoil we have faced in the last
few years. It has been working.
There was also testimony in the hearings we held before the Banking
Committee and elsewhere, where those who have tried to tie the failure
to regulate derivatives transactions to some kind of problem in the
energy markets in California, or to the Enron collapse, have been able
to show no real evidence of that. If there were evidence of that, then
I think that is something that would be a valid debate for us to have
in the Senate.
Instead, I have sat here now for hours this morning, listening to the
debate, and it has come down to basically two points, as I understand
the reasons that have been put forth for this amendment.
They are that we need to have more information available for
investors and those in the industry who might want to look at these
transactions to see if there was fraud or whatever. And the response to
that argument again is that they are already subject to the Act's anti-
fraud provisions, their anti-price discrimination provisions, and their
recordkeeping provisions, and that these are not investor transactions.
Then there are those who say it is just a good thing for us to have
everybody under the same rules and nobody should get any exemptions. If
that is the case, we should amend the amendment to bring in all
commodities, including those that are excluded, such as the financial
transactions, and those that are exempted, such as the commodities that
are not agricultural.
Again, I am not recommending that. I am simply saying the argument
that everybody should be under the same rules does not carry with
regard to these kinds of transactions. If it did, then the amendment
should be much broader than it is.
The bottom line here is this: If there is some basis for us to
consider changing the law, which we worked so hard to put together a
few years ago, then that process of determining the change that needs
to be made and evaluating the facts and the arguments behind why such a
change should be made should first go through the regular process of
legislating here in this Congress; namely, the committees with
jurisdiction should take jurisdiction over these issues and establish
the analysis. We should hold hearings.
If there is an argument that somehow the Enron situation is connected
to how we regulate derivatives transactions, then we should hold
hearings. Those hearings should probably be in the Agriculture
Committee, which is where the jurisdiction of this amendment lies. But
somewhere we should have hearings to find out whether such a connection
is real and, if so, what the connection is and why it occurred. That
will guide us, then, in terms of figuring out how we might create a
better regulatory mechanism.
The same is true if there are those who contend that somehow the
California energy collapse and the circumstances that occurred there
were caused by failure to properly regulate energy derivatives. Again,
no connection has been made in the minds of those who work in the
marketplace. But if there is an argument that such a connection is
there and that it justifies a change in the law, then shouldn't we have
a study of it? Shouldn't we evaluate it? Shouldn't we have a hearing--
at least one? Shouldn't we let the committees of jurisdiction dig into
this and go through the process we did before? Maybe we need another
Presidential advisory board.
If the results of the last system are not adequate, we could add to
them and supplement them. But we should study the issue and try to find
out what facts justify such an argument and, if there is any validity
to it, what caused it, so we can then understand how to regulate it
better.
The bottom line is that we have had none of this. We have had no
hearings. We have had no committee evaluation. We have had nothing,
other than a several-hour debate in this Chamber. We had a couple hours
of debate a week or so ago and now a couple of hours more today. But we
have not had the opportunity to get to the bottom of all of these
arguments, whether they be factual allegations or arguments about the
proper mode of regulation.
I suggest what we need to do is to refer this amendment to the
appropriate committees of jurisdiction and let them conduct the
studies, conduct the evaluations. In fact, what might even be a better
solution is to refer this issue to the appropriate regulators.
At some point in time I may submit an amendment to do just that, to
let the CFTC and the other appropriate regulators have a period of
time--the Senator from Texas suggested maybe a short period such as 45
days--to dig into this matter and give a report to Congress about what
they have found out about all the alleged contacts between wrongs in
our society that might be related to something here dealing with
derivatives.
Again, if they find anything in that context, then the appropriate
committees of jurisdiction can have hearings and review these issues,
determine if there is any merit whatsoever in proceeding forward with
changing our regulatory scheme, and then in a very effectively fine-
tuned way figure out how we should change the law.
To me it seems very clear; if we do not have the kind of threat that
some suggest we have, and if we do have the potential strength in our
economy that is provided by having this flexible system of commodities
transactions regulations, it would be very dangerous for us to move
into a new regulatory system without understanding where we are
heading.
This is one of those circumstances in which it is far too important
for our economy for us to take a risk of unintended consequences.
One of the most significant things we will face with regard to this
amendment, in my opinion, is the list of unintended consequences that
could occur.
The Senator from Texas indicated earlier it is really hard to debate
unintended consequences because we really don't know what they are,
because they are unintended, uninformed--something of which we are
unaware. It is something about which, if we held hearings and went
through the regular legislative process on this issue, we would
identify. Then whatever consequences flowed from what we were
[[Page S2034]]
doing would be understood and supposedly intended by those who
supported it.
Instead, we are being asked here on very short notice, without the
kind of debate we need, to regulate in a way that is not necessary one
section of our economy--the energy and the minerals transactions
related to derivatives.
Again, if the argument is going to be made that we need to protect
investors in America, it is hard to see that because these are not
investor transactions; they are transactions between highly
sophisticated individuals. If it is true that derivatives are somehow a
threat to the investor community and the safety of the investments of
the American public is at risk because of something wrong with the way
we manage derivatives, then why don't we cover all commodities? As I
said earlier, it seems to me the question of how we regulate Treasury
bonds or foreign exchange or interest rates or other financial
transactions is every bit as important to the American investor as is
the question of how we regulate minerals or how we regulate energy
transactions.
I know in today's climate, with the Enron collapse and with the
energy troubles we faced a few years ago in California, there are those
who want to look at every aspect of financial and other transactions
relating to energy and see if there is some way we can improve it. But
I suggest it does not necessarily mean that more regulation and more
government bureaucracy is the best way to solve these problems,
particularly when you have the Secretary of the Treasury and the
Chairman of the Federal Reserve telling us we have to have the kind of
resiliency in our economy that derivatives provide to us.
In conclusion, I believe the bottom line is that each side can point
to those who support their positions and those who oppose them. Each
side can come up with arguments about why what we are doing now is or
is not working. But no side can say we have the background information
necessary to make this decision, because we have not had the kind of
hearings and congressional evaluation of this issue we should have had.
Because of that, I stand firmly opposed to the amendment. I believe
ultimately the American people will be much better served if we do our
jobs in the Senate the way our procedures are set up to do them. The
procedures and the policies of the Senate have been established to make
very clear that we can have the time to evaluate issues such as this
and do the study necessary to have good, solid support.
I also believe, as has been indicated by those who debate here, if we
went through that process I have suggested--having a study and then
further congressional evaluation and then maybe propose legislation--we
would probably have much more support for whatever came forth, if
anything. We would build the collaboration, we would build the
consensus, and we would come forward, because the one thing that there
has been agreement on today is that nobody wants to have the problems
we saw occur in California.
Nobody wants to see any kind of fraud or abuse from financial
transactions or derivatives transactions. Everybody is willing to make
sure that antifraud provisions and price protection provisions and the
recordkeeping provisions are adequately available for derivatives
transactions as necessary, so that we do not cause or increase any risk
of problems in the economy.
If we will follow the procedures and the processes of the Senate, let
this matter be handled by the committee of jurisdiction, which I
believe is probably the Agriculture Committee, and then let other
related committees handle their parts of it, with studies in support
from the private sector and from our regulating agencies, I believe we
can get the information necessary for us to do a good job, build
consensus, and come forward with a solution that can be broadly
supported on both sides of the aisle.
I thank the Chair very much for this time.
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