[Congressional Record Volume 153, Number 137 (Monday, September 17, 2007)]
[Senate]
[Pages S11596-S11603]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN:
  S. 2058. A bill to amend the Commodity Exchange Act to close the 
Enron loophole, prevent price manipulation and excessive speculation in 
the trading of energy commodities, and for other purposes; to the 
Committee on Agriculture, Nutrition, and Forestry.
  Mr. LEVIN. Mr. President, today I am introducing the Close the Enron 
Loophole Act to help prevent price manipulation and dampen the 
excessive speculation that have unfairly increased the cost of energy 
in the U.S.
  This legislation is the product of more than 4 years of work 
examining U.S. energy commodity markets by the Senate Permanent 
Subcommittee on Investigations, which I chair. That work has shown that 
U.S. market prices for crude oil, natural gas, jet fuel, diesel fuel 
and other energy commodities are more unpredictable and variable than 
ever before, and too often are imposing huge cost increases on the 
backs of working American families and businesses. The legislation I am 
introducing today is essential to help ensure that our energy markets 
provide prices that reflect the fundamentals of supply and demand for 
energy instead of prices boosted by manipulation or excessive 
speculation. It is also essential to close an egregious loophole in the 
law that was championed by Enron and other large energy traders in the 
heyday of deregulation and that continues to haunt our energy markets 
and harm American consumers through inflated and distorted energy 
prices.
  The ``Enron loophole'' is a provision that was inserted at the last-
minute, without opportunity for debate, into commodity legislation that 
was attached to an omnibus appropriations bill and passed by Congress 
in late December 2000, in the waning hours of the 106 Congress. This 
loophole exempted from U.S. Government regulation the electronic 
trading of energy commodities by large traders. The loophole has helped 
foster the explosive growth of trading on unregulated electronic energy 
exchanges. It has also rendered U.S. energy markets more vulnerable to 
price manipulation and excessive speculation with resulting price 
distortions. This legislation is necessary to close the Enron loophole 
and reduce our vulnerability to manipulation and excessive speculation 
by providing for regulation of the electronic trading of energy 
commodities by large traders.
  A stable and affordable supply of energy is vital to the national and 
economic security of the United States. We need energy to heat and cool 
our homes and offices, to generate electricity for lighting, 
manufacturing, and vital services, and to power our transportation 
sector--automobiles, trucks, boats, and airplanes.
  Over 80 percent of our energy comes from fossil fuels--oil, natural 
gas, and coal. About 50 percent is from oil and natural gas. The U.S. 
consumes around 20 million barrels of crude oil each day, over half of 
which is imported. About 90 percent of this oil is refined into 
products such as gasoline, home heating oil, jet fuel, and diesel fuel.
  The crude oil market is the largest commodity market in the world, 
and hundreds of millions of barrels are traded daily in the various 
crude oil futures, over-the-counter, and spot markets. The world's 
leading exchanges for crude oil futures contracts are the New York 
Mercantile Exchange, NYMEX, and the Intercontinental Exchange, known as 
ICE Futures in London. Futures contracts for gasoline, heating oil, and 
diesel fuel are also traded on these exchanges. Presently, regulatory 
authority over the U.S. crude oil market is split between British and 
U.S. regulators.
  Natural gas heats the majority of American homes, is used to harvest 
crops, powers 20 percent of our electrical plants, and plays a critical 
role in many industries, including manufacturers of fertilizers, 
paints, medicines, and chemicals. It is one of the cleanest fuels we 
have, and we produce most of it ourselves with only 15 percent being 
imported, primarily from Canada. In 2005 alone, U.S. consumers and 
businesses spent about $200 billion on natural gas.
  Only part of the natural gas futures market is regulated. Natural gas 
produced in the United States is traded on NYMEX and on an unregulated 
ICE electronic trading platform located in Georgia. The price of 
natural gas in both the futures market and in the spot or physical 
market depends on the prices on both of these U.S. exchanges.
  Trading abuses plague existing energy markets. The key federal 
regulator, the Commodity Futures Trading Commission, CFTC, reports that 
overall in recent years it has issued several hundred million dollars 
in fines for trading abuses in the energy markets. Several major 
enforcement actions are pending.
  Since 2001, the Senate Permanent Subcommittee on Investigations has 
been examining the vulnerability of U.S. energy markets to price 
manipulation and excessive speculation due to the lack of regulation of 
electronic energy exchanges under the so called ``Enron loophole.'' 
Although the CFTC and Federal Energy Regulatory Commission have brought 
a number of enforcement cases against energy traders, the CFTC's 
ability to prevent abuses before they occur is severely hampered by its 
lack of regulatory authority over key energy markets.
  The Subcommittee first documented the weaknesses in the regulation of 
our energy markets in a 2003 staff report I initiated called, ``U.S. 
Strategic Petroleum Reserve: Recent Policy Has Increased Costs to 
Consumers But Not Overall U.S. Energy Security.'' The report found that 
crude oil prices were ``affected by trading not only regulated 
exchanges like the NYMEX, but also on unregulated `over-the-counter', 
OTC, markets which have become major trading centers for energy 
contracts and derivatives. The lack of information on prices and large 
positions in these OTC markets makes it difficult in many instances, if 
not impossible in practice, to determine whether traders have 
manipulated crude oil prices.''
  In June 2006, the Subcommittee issued a staff report entitled, ``The 
Role of Market Speculation in Rising Oil and Gas Prices: A Need To Put 
the Cop Back on the Beat.'' This bipartisan staff report analyzed the 
extent to which the increasing amount of financial speculation in 
energy markets had contributed to the steep rise in energy prices over 
the past few years. The report concluded that ``[s]peculation has 
contributed to rising U.S. energy prices,'' and endorsed the estimate 
of various analysts that the influx of speculative investments into 
crude oil futures accounted for approximately $20 of the then-
prevailing crude oil price of approximately $70 per barrel.

  The 2006 report recommended that the CFTC be provided with the same 
authority to regulate and monitor electronic energy exchanges, such as 
ICE, as it has with respect to the fully regulated futures markets, 
such as NYMEX, to ensure that excessive speculation in the energy 
markets did not adversely effect the availability and affordability of 
vital energy commodities through unwarranted price increases.
  In June 2007, the Subcommittee released another report, ``Excessive 
Speculation in the Natural Gas Market.'' Our report found that a single 
hedge fund named Amaranth dominated the natural gas market during the 
spring and summer of 2006, and Amaranth's large-scale trading 
significantly distorted natural gas prices from their fundamental 
values based on supply and demand.
  The report concluded that the current regulatory system was unable to 
prevent these distortions because much of Amaranth's trading took place 
on an unregulated electronic market. The report recommended that 
Congress close the ``Enron loophole'' that exempted such markets from 
regulation.
  The Subcommittee's Report describes how Amaranth used the major 
unregulated electronic market, ICE, to amass huge positions in natural 
gas contracts, outside regulatory scrutiny, and beyond any regulatory 
authority. During the spring and summer of 2006, Amaranth held by far 
the largest positions of any trader in the natural gas market. 
According to traders interviewed by the Subcommittee, during this 
period natural gas prices for the following winter were ``clearly out 
of whack,'' at ``ridiculous levels,'' and unrelated to supply and 
demand. At the

[[Page S11597]]

Subcommittee's hearing in June of this year, natural gas purchasers, 
such as the American Public Gas Association and the Industrial Energy 
Consumers of America, explained how these price distortions increased 
the cost of hedging for natural gas consumers, which ultimately led to 
increased costs for American industries and households. The Municipal 
Gas Authority of Georgia calculated that Amaranth's excesses increased 
the cost of their winter gas purchases by $18 million.
  Finally, when Amaranth's positions on the regulated futures market, 
NYMEX, became so large that NYMEX directed Amaranth to reduce the size 
of its positions on NYMEX, Amaranth simply switched those positions to 
ICE, an unregulated market that is beyond the reach of the CFTC. In 
other words, in response to NYMEX's order, Amaranth did not reduce its 
size; it merely moved it from a regulated market to an unregulated 
market.

  This regulatory system makes no sense. It is as if a cop on the beat 
tells a liquor store owner that he must obey the law and stop selling 
liquor to minors, yet the store owner is allowed to move his store 
across the street and sell to whomever he wants because the cop has no 
jurisdiction on the other side of the street and none of the same laws 
apply. The Amaranth case history shows it is clearly time to put the 
cop on the beat in all of our energy exchanges.
  The Subcommittee held two days of hearings relating to issues covered 
in its 2007 report. Both of the major energy exchanges, NYMEX and ICE, 
testified that they would support a change in the law that would 
eliminate the current exemption from regulation for electronic energy 
markets, in order to reduce the potential for manipulation and 
excessive speculation. Consumers and users of natural gas and other 
energy commodities--the American Public Gas Association, the New 
England Fuel Institute, the Petroleum Marketers Association of America, 
and the Industrial Energy Consumers of America--also testified in favor 
of closing the Enron loophole.
  The legislation I am introducing today is intended to end the 
exemption from regulation that electronic energy trading facilities now 
have. The bill includes suggestions made by the exchanges, the CFTC, 
and natural gas users, and I will continue to seek their input as the 
legislative process moves forward.
  Essentially, this bill would restore the CFTC's ability to police all 
U.S. energy exchanges to prevent price manipulation and excessive 
speculation from hiking energy prices. In particular, it would restore 
CFTC oversight of large-trader energy exchanges that were exempted from 
regulation in the 2000 Commodity Futures Modernization Act by means of 
the Enron loophole. The bill would require the CFTC to oversee these 
facilities in the same manner and according to the same standards that 
currently apply to futures exchanges like NYMEX. Because these energy 
exchanges currently restrict trading to large traders, however, the 
bill would not require them to comply with rules applicable to retail 
trading or trading by brokers on behalf of smaller traders. In all 
other respects, however, including the rules that create position 
limits and accountability levels to stop price manipulation and 
excessive speculation, the bill would apply the same rules to energy 
exchanges like ICE as currently apply to futures exchanges like NYMEX.
  The bill also would require large trades in U.S. energy commodities 
conducted from within the United States on a foreign board of trade to 
be reported to the CFTC. This provision is intended to ensure that the 
CFTC has a more complete view of the positions of U.S. energy traders 
buying or selling energy commodities for delivery in the United States. 
This provision could be waived by the CFTC if the CFTC reaches 
agreement with the foreign board of trade to obtain the same 
information.
  Preventing price manipulation and excessive speculation in U.S. 
energy markets is not an easy undertaking. I welcome good-faith 
comments on how this bill can be improved. I want to make it clear, 
however, that in my opinion the Enron loophole has got to be closed. 
Recent cases have shown us that market abuses and failures did not stop 
with the fall of Enron. They are still with us. We cannot afford to let 
the current situation continue, allowing energy traders to use 
unregulated markets to avoid regulated markets. It's time to put the 
cop back on the beat in all U.S. energy markets. The stakes for our 
energy security and for competition in the market place are too high to 
do otherwise.
  I ask unanimous consent that the text of the bill, a bill summary, 
and a section-by-section analysis be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2058

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Close the Enron Loophole 
     Act''.

     SEC. 2. ENERGY TRADING FACILITIES.

       (a) Definitions.--Section 1a of the Commodity Exchange Act 
     (7 U.S.C. 1a) is amended by redesignating paragraphs (13) 
     through (33) as paragraphs (15) through (35), respectively, 
     and by inserting after paragraph (12) the following:
       ``(13) Energy commodity.--The term `energy commodity' means 
     a commodity (other than an excluded commodity, a metal, or an 
     agricultural commodity) that is--
       ``(A) used as a source of energy, including but not limited 
     to--
       ``(i) crude oil;
       ``(ii) gasoline, diesel fuel, heating oil, and any other 
     product derived or refined from crude oil;
       ``(iii) natural gas, including methane, propane, and any 
     other gas or liquid derived from natural gas; and
       ``(iv) electricity; or
       ``(B) results from the burning of fossil fuels to produce 
     energy, including but not limited to carbon dioxide and 
     sulfur dioxide.
       ``(14) Energy trading facility.--The term `energy trading 
     facility' means a trading facility that--
       ``(A) is not a designated contract market; and
       ``(B) facilitates the execution or trading of agreements, 
     contracts, or transactions in an energy commodity that are 
     not spot sales of a cash commodity or sales of a cash 
     commodity for deferred shipment or delivery, and that are 
     entered into on a principal-to-principal basis solely between 
     persons that are eligible commercial entities at the time the 
     persons enter into the agreement, contract, or transaction; 
     and
       ``(i) facilitates the clearance and settlement of such 
     agreements, contracts, or transactions; or
       ``(ii) the Commission determines performs a significant 
     price discovery function in relation to an energy commodity 
     listed for trading on a trading facility or in the cash 
     market for the energy commodity. In making a determination 
     whether a trading facility performs a significant price 
     discovery function the Commission may consider, as 
     appropriate--

       ``(I) the extent to which the price of an agreement, 
     contract, or transaction traded or executed on the trading 
     facility is derived from or linked to the price of a contract 
     in an energy commodity listed for trading on a designated 
     contract market;
       ``(II) the extent to which cash market bids, offers, or 
     transactions in an energy commodity are directly based on, or 
     quoted at a differential to, the prices generated by 
     agreements, contracts, or transactions in the same energy 
     commodity being traded or executed on the trading facility;
       ``(III) the volume of agreements, contracts, or 
     transactions in the energy commodity being traded on the 
     trading facility;
       ``(IV) the extent to which data regarding completed 
     transactions are posted, disseminated, or made available 
     immediately after completion of such transactions, with or 
     without a fee, to other market participants and other 
     persons;
       ``(V) the extent to which an arbitrage market exists 
     between the agreements, contracts, or transactions traded or 
     executed on the trading facility and a contract in an energy 
     commodity listed for trading on a designated contract market; 
     and
       ``(VI) such other factors as the Commission determines 
     appropriate.''.

       (b) Commission Oversight of Energy Trading Facilities.--
     Section 2(h) of the Commodity Exchange Act (7 U.S.C. 2(h)) is 
     amended--
       (1) in paragraph (3)(B) after ``an electronic trading 
     facility'' by inserting ``that is not an energy trading 
     facility''; and
       (2) by adding at the end the following:
       ``(7) Energy trading facilities.--Notwithstanding any other 
     provision of this Act, an energy trading facility shall be 
     subject to the provisions of section 2(j) of this Act.''.
       (c) Standards Applicable to Energy Trading Facilities.--
     Section 2 of the Commodity Exchange Act (7 U.S.C. 2) is 
     amended by adding the following new subsection:
       ``(j) Registration of Energy Trading Facilities.--
       ``(1) In general.--It shall be unlawful for any person to 
     enter into an agreement, contract, or transaction for future 
     delivery of an energy commodity that is not a spot sale of a 
     cash commodity or a sale of a cash commodity for deferred 
     shipment or delivery, on

[[Page S11598]]

     or through an energy trading facility unless such facility is 
     registered with the Commission as an energy trading facility.
       ``(2) Applications.--Any trading facility applying to the 
     Commission for registration as an energy trading facility 
     shall submit an application to the Commission that includes 
     any relevant materials and records, consistent with the Act, 
     that the Commission may require.
       ``(3) Commission action.--The Commission shall make a 
     determination whether to approve an application for 
     registration as an energy trading facility within 120 days 
     after such application is submitted.
       ``(4) Criteria for registration.--To be registered as an 
     energy trading facility, the applicant shall demonstrate to 
     the Commission that the trading facility meets the criteria 
     specified in this paragraph.
       ``(A) Prevention of price manipulation and excessive 
     speculation.--The trading facility shall have the capacity to 
     prevent price manipulation, excessive speculation, price 
     distortion, and disruption of the delivery or cash-settlement 
     process through market surveillance, compliance, and 
     enforcement practices and procedures, including methods for 
     conducting real-time monitoring of trading and comprehensive 
     and accurate trade reconstructions.
       ``(B) Monitoring of trading.--The trading facility shall 
     monitor trading to prevent price manipulation, excessive 
     speculation, price distortion, and disruption of the delivery 
     or cash-settlement process.
       ``(C) Contracts not readily susceptible to manipulation.--
     The trading facility shall list for trading only contracts 
     that are not readily susceptible to manipulation.
       ``(D) Financial integrity of transactions.--A trading 
     facility that facilitates the clearance and settlement of 
     agreements, contracts, or transactions by a derivatives 
     clearing organization shall establish and enforce rules and 
     procedures for ensuring the financial integrity of such 
     agreements, contracts, and transactions.
       ``(E) Ability to obtain information.--The trading facility 
     shall establish and enforce rules that will allow the trading 
     facility to obtain any necessary information to perform any 
     of the functions described in this subsection, including the 
     capacity to carry out such international information-sharing 
     agreements as the Commission may require.
       ``(F) Position limits or accountability levels.--To reduce 
     the threat of price manipulation, excessive speculation, 
     price distortion, or disruption of the delivery or cash-
     settlement process, the trading facility shall adopt position 
     limits or position accountability levels for speculators, 
     where necessary and appropriate.
       ``(G) Emergency authority.--The trading facility shall 
     adopt rules to provide for the exercise of emergency 
     authority, in consultation and cooperation with the 
     Commission, where necessary and appropriate, including the 
     authority to--
       ``(i) liquidate open positions in any contract;
       ``(ii) suspend or curtail trading in any contract; and
       ``(iii) require market participants in any contract to meet 
     special margin requirements.
       ``(H) Daily publication of trading information.--The 
     trading facility shall make public daily information on 
     settlement prices, volume, open interest, and opening and 
     closing ranges for actively traded contracts on the facility.
       ``(I) Deterrence of abuses.--The trading facility shall 
     establish and enforce trading and participation rules that 
     will deter abuses and shall have the capacity to detect, 
     investigate violations of, and enforce those rules, including 
     means to--
       ``(i) obtain information necessary to perform the functions 
     required under this section; or
       ``(ii) use technological means to capture information that 
     may be used in establishing whether rule violations have 
     occurred.
       ``(J) Trade information.--The trading facility shall 
     maintain rules and procedures to provide for the recording 
     and safe storage of all identifying trade information in a 
     manner that enables the facility to use the information for 
     the purposes of assisting in the prevention of price 
     manipulation, excessive speculation, price distortion, or 
     disruption of the delivery or cash-settlement process, and 
     providing evidence of any violations of the rules of the 
     facility.
       ``(K) Trading procedures.--The trading facility shall 
     establish and enforce rules or terms and conditions defining, 
     or specifications detailing, trading procedures to be used in 
     entering and executing orders traded on the facility, 
     including procedures to provide participants with impartial 
     access to the trading facility.
       ``(L) Compliance with rules.--The trading facility shall 
     monitor and enforce the rules of the facility, including any 
     terms and conditions of any contracts traded on or through 
     the facility and any limitations on access to the facility.
       ``(M) Disclosure of general information.--The trading 
     facility shall disclose publicly and to the Commission 
     information concerning--
       ``(i) contract terms and conditions;
       ``(ii) trading conventions, mechanisms, and practices;
       ``(iii) financial integrity protections; and
       ``(iv) other information relevant to participation in 
     trading on the facility.
       ``(N) Fitness standards.--The trading facility shall 
     establish and enforce appropriate fitness standards for 
     directors, members of any disciplinary committee, and any 
     other persons with direct access to the facility, including 
     any parties affiliated with any of the persons described in 
     this paragraph.
       ``(O) Conflicts of interest.--The trading facility shall 
     establish and enforce rules to minimize conflicts of interest 
     in the decision making process of the facility and establish 
     a process for resolving such conflicts of interest.
       ``(P) Recordkeeping.--The trading facility shall maintain 
     records of all activities related to the business of the 
     facility in a form and manner acceptable to the Commission 
     for a period of 5 years.
       ``(Q) Antitrust considerations.--Unless necessary or 
     appropriate to achieve the purposes of this Act, the trading 
     facility shall endeavor to avoid--
       ``(i) adopting any rules or taking any actions that result 
     in any unreasonable restraint of trade; or
       ``(ii) imposing any material anticompetitive burden on 
     trading on the facility.
       ``(5) Criteria for energy trading facilities.--To maintain 
     the registration as an energy trading facility, the trading 
     facility shall comply with all of the criteria in paragraph 
     (4). Failure to comply with any of these criteria shall 
     constitute a violation of this Act. The trading facility 
     shall have reasonable discretion in establishing the manner 
     in which it complies with the criteria in paragraph (4).
       ``(6) Position limits and accountability levels.--
       ``(A) Duty of commission.--The Commission shall ensure that 
     the position limits and accountability levels applicable to 
     contracts in an energy commodity listed for trading on a 
     designated contract market and the position limits and 
     accountability levels applicable to similar contracts in the 
     same energy commodity listed for trading on an energy trading 
     facility--
       ``(i) appropriately prevent price manipulation, excessive 
     speculation, price distortion, and disruption of the delivery 
     or cash-settlement process; and
       ``(ii) are on a parity with each other and applied in a 
     functionally equivalent manner.
       ``(B) Commission review.--Upon learning that a person has 
     exceeded an applicable position limit or accountability level 
     in an energy commodity, the Commission shall obtain such 
     information as it determines to be necessary and appropriate 
     regarding all of the positions held by such person in such 
     energy commodity and take such action as may be necessary and 
     appropriate, in addition to any action taken by an energy 
     trading facility or a designated contract market, to require, 
     or direct an energy trading facility or a designated contract 
     market to require, such person to limit, reduce, or liquidate 
     any position to prevent or reduce the threat of price 
     manipulation, excessive speculation, price distortion, or 
     disruption of the delivery or cash-settlement process.
       ``(C) Information to commission.--In order to make any 
     determination required under this section, the Commission may 
     request all relevant information regarding all of the 
     positions held by any person in the energy commodity for 
     which the person has exceeded a position limit or 
     accountability level, including positions held or controlled 
     or transactions executed on or through a designated contract 
     market, an energy trading facility, an exempt commercial 
     markets operating pursuant to sections 2(h)(3) through 
     paragraph (5) of this Act, an exempt board of trade operating 
     pursuant to section 5d of this Act, a derivative transaction 
     execution facility, a foreign board of trade, over-the-
     counter pursuant to sections 2(g), or 2(h)(1) and (2) of this 
     Act, and in the cash market for the commodity. Any person 
     entering into or executing an agreement, contract, or 
     transaction with respect to an energy commodity on a 
     designated contract market or on an energy trading facility 
     shall retain such books and records as the Commission may 
     require in order to provide such information upon request, 
     and upon request shall promptly provide such information to 
     the Commission or the Department of Justice. Notwithstanding 
     this requirement to retain and provide position information, 
     the Commission may alternatively choose to obtain any of the 
     position information specified in this paragraph from the 
     trading facility at which such positions are maintained.
       ``(D) Criteria for commission determination.--In making any 
     determination to require a limitation, reduction, or 
     liquidation of any position with respect to an energy 
     commodity, the Commission may consider, as appropriate--
       ``(i) the person's open interest in a contract, agreement, 
     or transaction involving an energy commodity relative to the 
     total open interest in such contracts, agreements, or 
     transactions;
       ``(ii) the daily volume of trading in such contracts, 
     agreements or transactions;
       ``(iii) the person's overall position in related contracts, 
     including options, and the overall open interest or liquidity 
     in such related contracts and options;
       ``(iv) the potential for such positions to cause or allow 
     price manipulation, excessive speculation, price distortion, 
     or disruption of the delivery or cash-settlement process;
       ``(v) the person's record of compliance with rules, 
     regulations, and orders of the Commission, a designated 
     contract market, or an energy trading facility, as 
     appropriate;
       ``(vi) the person's financial ability to support such 
     positions on an ongoing basis;

[[Page S11599]]

       ``(vii) any justification provided by the person for such 
     positions; and
       ``(viii) other such factors determined to be appropriate by 
     the Commission.''.
       (d) Information for Price Discovery Determination.--
       (1) Section 2(h)(5)(B) of the Commodity Exchange Act (7 
     U.S.C. 2(h)(5)(B)) is amended by adding the following new 
     clause:
       ``(iv) to the extent that the electronic trading facility 
     provides for the trading of agreements, contracts, or 
     transactions in an energy commodity, provide the Commission 
     with such information as the Commission determines necessary 
     to evaluate whether the energy trading facility performs a 
     significant price discovery function in relation to a 
     contract in an energy commodity listed for trading on a 
     trading facility or in the cash market for the energy 
     commodity, including the provision of such requested 
     information on a continuous basis.''.
       (2) Section 5a(b) of the Commodity Exchange Act (7 U.S.C. 
     7a(b)) is amended by adding the following new paragraph:
       ``(5) Price discovery for energy commodity.--A registered 
     derivatives transaction execution facility shall, to the 
     extent that it provides for the trading of any contract of 
     sale of a commodity for future delivery (or option on such 
     contract) based on an energy commodity, provide the 
     Commission with such information as the Commission determines 
     necessary to evaluate whether the registered derivatives 
     transaction execution facility performs a significant price 
     discovery function in relation to a contract in an energy 
     commodity listed for trading on a trading facility or in the 
     cash market for the energy commodity, including the provision 
     of such requested information on a continuous basis.''.
       (e) Conforming Amendments.--The Commodity Exchange Act is 
     amended--
       (1) in paragraph 29 of section 1a (7 U.S.C. 1a)--
       (A) in subparagraph (C) by deleting ``and'';
       (B) in subparagraph (D) by deleting the period and 
     inserting ``; and'';
       (C) by adding at the end the following:
       ``(E) an energy trading facility registered under section 
     2(j).'';
       (2) in subsection (a) of section 4 (7 U.S.C. 6(a))--
       (A) in paragraph (1) by inserting ``registered energy 
     trading facility or a'' after ``subject to the rules of a''; 
     and
       (B) in paragraph (2) by inserting ``or energy trading 
     facility'' after ``derivatives transaction execution 
     facility'';
       (3) in subsection (c) of section 4 (7 U.S.C. 6(c)), by 
     inserting ``registered energy trading facility or'' in the 
     parenthetical after ``including any'';
       (4) in subsection (a) of section 4a (7 U.S.C. 6a)--
       (A) in the first sentence by inserting ``or energy trading 
     facilities'' after ``derivatives transaction execution 
     facilities''; and
       (B) in the second sentence by inserting ``or energy trading 
     facility'' after ``derivatives transaction execution 
     facility'';
       (5) in subsection (b) of section 4a (7 U.S.C. 6a), by 
     inserting ``or energy trading facility'' after ``derivatives 
     transaction execution facility'' wherever it appears;
       (6) in subsection (e) of section 4a (7 U.S.C. 6a)--
       (A) in the first sentence--
       (i) by inserting ``or by any energy trading facility'' 
     after ``registered by the Commission'';
       (ii) by inserting ``or energy trading facility'' after 
     ``derivatives transaction execution facility'' the second 
     time it appears;
       (iii) by inserting ``energy trading facility'' before ``or 
     such board of trade'' each time it appears; and
       (B) in the second sentence, by inserting ``or energy 
     trading facility'' after ``registered by the Commission'';
       (7) in section 4e (7 U.S.C. 6e), by inserting ``or energy 
     trading facility'' after ``or derivatives transaction 
     execution facility'';
       (8) in section 4i (7 U.S.C. 6i), by inserting ``or energy 
     trading facility'' after ``derivatives transaction execution 
     facility'';
       (9) in section 4l (7 U.S.C. 6l), by inserting ``or energy 
     trading facilities'' after ``derivatives transaction 
     execution facilities'' wherever it appears in paragraphs (2) 
     and (3);
       (10) in section 5c(b) (7 U.S.C. 7a-2(b)), by inserting ``or 
     energy trading facility'' after ``derivatives transaction 
     execution facility'' wherever it appears in paragraphs (1), 
     (2), and (3);
       (11) in section 6(b) (7 U.S.C. 8(b))--
       (A) by inserting ``or energy trading facility'' after 
     ``derivatives transaction execution facility'' wherever it 
     appears; and
       (B) by inserting ``section 2(j) or'' before ``sections 5 
     through 5b''; and
       (12) in section 6d(1) (7 U.S.C. 13a-2(1)), by inserting 
     ``energy trading facility'' after ``derivatives transaction 
     execution facility''.

     SEC. 3. REPORTING OF U.S. ENERGY TRADES.

       Section 2 of the Commodity Exchange Act (7 U.S.C. 1a) is 
     amended by adding at the end the following:
       ``(k) Domestic Energy Trades on a Foreign Board of Trade.--
       ``(1) Definitions.--In this subsection:
       ``(A) Domestic terminal.--The term `domestic terminal' 
     means a technology, software, or other means of providing 
     electronic access within the United States to a contract, 
     agreement, or transaction traded on a foreign board of trade.
       ``(B) Reportable contract.--The term `reportable contract' 
     means a contract, agreement, or transaction for future 
     delivery of an energy commodity (or option thereon), or an 
     option on an energy commodity, for which the underlying 
     commodity has a physical delivery point within the United 
     States and that is executed through a domestic terminal.
       ``(2) Record keeping.--The Commission, by rule, shall 
     require any person holding, maintaining, or controlling any 
     position in any reportable contract under this section--
       ``(A) to maintain such records as directed by the 
     Commission for a period of 5 years, or longer, if directed by 
     the Commission; and
       ``(B) to provide such records upon request to the 
     Commission or the Department of Justice.
       ``(3) Reporting.--The Commission shall prescribe rules 
     requiring such regular or continuous reporting of positions 
     in a reportable contract in accordance with such requirements 
     regarding size limits for reportable contracts and the form, 
     timing, and manner of filing such reports under this 
     paragraph, as the Commission shall determine.
       ``(4) Equivalent means of obtaining information.--The 
     Commission may waive the requirement under paragraph (3) if 
     the Commission determines that the foreign board of trade is 
     providing the Commission with equivalent information in a 
     usable format pursuant to an agreement between the Commission 
     and the foreign board of trade or a foreign futures 
     authority, department or agency of a foreign government, or 
     political subdivision thereof.
       ``(5) Other rules not affected.--
       ``(A) In general.--Except as provided in clause (ii), this 
     paragraph does not prohibit or impair the adoption by any 
     board of trade or energy trading facility licensed, 
     designated, or registered by the Commission of any bylaw, 
     rule, regulation, or resolution requiring reports of 
     positions in any agreement, contract, or transaction for 
     future delivery of an energy commodity (or option thereon), 
     or option on an energy commodity, including any bylaw, rule, 
     regulation, or resolution pertaining to filing or 
     recordkeeping, which may be held by any person subject to the 
     rules of the board of trade or energy trading facility.
       ``(B) Exception.--Any bylaw, rule, regulation, or 
     resolution established by a board of trade or energy trading 
     facility described in clause (i) shall not be inconsistent 
     with any requirement prescribed by the Commission under this 
     paragraph.''.

     SEC. 4. ANTIFRAUD AUTHORITY.

       Section 4b of the Commodity Exchange Act (7 U.S.C. 6b) is 
     amended--
       (1) by redesignating subsections (b) and (c) as subsections 
     (c) and (d), respectively; and
       (2) by striking ``SEC. 4b.'' and all that follows through 
     the end of subsection (a) and inserting the following:

     ``SEC. 4B. CONTRACTS DESIGNED TO DEFRAUD OR MISLEAD.

       ``(a) Unlawful Actions.--It shall be unlawful--
       ``(1) for any person, in or in connection with any order to 
     make, or the making of, any contract of sale of any commodity 
     in interstate commerce or for future delivery that is made, 
     or to be made, on or subject to the rules of a designated 
     contract market, for or on behalf of any other person; or
       ``(2) for any person, in or in connection with any order to 
     make, or the making of, any contract of sale of any commodity 
     for future delivery, or other agreement, contract, or 
     transaction subject to paragraphs (1) and (2) of section 
     5a(g), that is made, or to be made, for or on behalf of, or 
     with, any other person, other than on or subject to the rules 
     of a designated contract market--
       ``(A) to cheat or defraud or attempt to cheat or defraud 
     the other person;
       ``(B) willfully to make or cause to be made to the other 
     person any false report or statement or willfully to enter or 
     cause to be entered for the other person any false record;
       ``(C) willfully to deceive or attempt to deceive the other 
     person by any means whatsoever in regard to any order or 
     contract or the disposition or execution of any order or 
     contract, or in regard to any act of agency performed, with 
     respect to any order or contract for or, in the case of 
     paragraph (2), with the other person; or
       ``(D)(i) to bucket an order if the order is represented by 
     the person as an order to be executed, or is required to be 
     executed, on or subject to the rules of a designated contract 
     market; or
       ``(ii) to fill an order by offset against the order or 
     orders of any other person, or willfully and knowingly and 
     without the prior consent of the other person to become the 
     buyer in respect to any selling order of the other person, or 
     become the seller in respect to any buying order of the other 
     person, if the order is represented by the person as an order 
     to be executed, or is required to be executed, on or subject 
     to the rules of a designated contract market unless the order 
     is executed in accordance with the rules of the designated 
     contract market.
       ``(b) Clarification.--Subsection (a)(2) of this section 
     shall not obligate any person, in or in connection with a 
     transaction in a contract of sale of a commodity for future 
     delivery, or other agreement, contract or transaction subject 
     to paragraphs (1) and (2) of section 5a(g), with another 
     person, to disclose to the other person nonpublic information 
     that may be material to the market price, rate, or level of 
     the commodity or transaction, except as necessary to make any 
     statement made to the other person in or in connection with 
     the transaction, not misleading in any material respect.''.

[[Page S11600]]

     SEC. 5. COMMISSION RULEMAKING.

       Not later than 180 days after the date of enactment of this 
     Act, the Commission shall issue a proposed rule regarding the 
     requirements for an application for registration for an 
     energy trading facility, and not later than 270 days after 
     the date of enactment of this Act, shall issue a final rule.

     SEC. 6. EFFECTIVE DATE.

       (a) In General.--Except as provided in this section, this 
     Act shall become effective immediately upon enactment.
       (b) Trading Facilities.--With respect to any trading 
     facility operating on the date of enactment of this Act in 
     reliance upon the exemption set forth in section 2(h)(3) of 
     the Commodity Exchange Act with respect to an energy 
     commodity, the prohibition in section 2(j)(1) of the 
     Commodity Exchange Act, as added by this Act, shall not 
     apply, if the trading facility submits an application to the 
     Commission for registration as an energy trading facility 
     within 180 days after the Commission promulgates a final rule 
     regarding the requirements for an application for 
     registration for an energy trading facility, prior to a 
     determination by the Commission on whether to approve such 
     application.
       (c) Extensions.--(1) At the time the Commission approves an 
     application by a trading facility operating on the date of 
     enactment of this Act in reliance on the exemption set forth 
     in section 2(h)(3) of the Commodity Exchange Act for 
     registration as an energy trading facility, the Commission 
     shall, upon the written request of the facility, grant an 
     extension of up to 180 days to fully implement a requirement 
     applicable under this Act to an energy trading facility.
       (2) The Commission may in its discretion, upon the written 
     request of the facility and for good cause, grant an 
     additional extension of up to 6 months to fully implement a 
     requirement for which an initial extension has been granted 
     under paragraph (1).
       (3) The Commission may not grant any extension under 
     paragraphs (1) or (2) for any information reporting or 
     recordkeeping requirement.
       (d) Domestic Trading on Foreign Boards of Trade.--Section 3 
     of this Act shall take effect 180 days after the date of the 
     enactment of this Act.
                                  ____


              Summary of the Close the Enron Loophole Act

       Closes the ``Enron Loophole.'' The bill would close the 
     Enron loophole and require government oversight of the 
     trading of energy commodities by large traders to prevent 
     price manipulation and excessive speculation.
       Since 2000, the ``Enron loophole'' in Sec. 2(h)(3) of the 
     Commodity Exchange Act has exempted from oversight the 
     electronic trading of energy commodities by large traders. As 
     a hedge fund known as Amaranth Advisors demonstrated in the 
     natural gas market in 2006, the Enron loophole makes it 
     impossible to prevent traders from distorting energy prices 
     through large trades on these unregulated exchanges. Under 
     this bill, a trading facility that functions as an energy 
     exchange would be subject to Commodity Futures Trading 
     Commission (CFTC) oversight to prevent price manipulation and 
     excessive speculation. The bill would:
       Require oversight of Energy Trading Facilities (ETFs). ETFs 
     would have to comply with the same standards that apply to 
     futures exchanges, like NYMEX, to prevent price manipulation 
     and excessive speculation. The only difference would be that 
     regulatory provisions governing retail trading and brokers on 
     a futures exchange would not apply because trading on an ETF 
     is restricted to large traders trading amongst themselves. 
     ETFs would function as self-regulatory organizations under 
     CFTC oversight in the same manner as futures exchanges.
       Require ETFs to establish trading limits on traders, such 
     as position limits or accountability levels, to prevent price 
     manipulation and excessive speculation, subject to CFTC 
     approval, in the same manner as futures exchanges. Position 
     limits set a ceiling on the number of contracts that a trader 
     can hold at one time on a trading facility; accountability 
     levels, when exceeded, trigger a review by regulators of a 
     trader's holdings in order to prevent price manipulation and 
     excessive speculation. The CFTC would ensure that position 
     limits and accountability levels for similar contracts on 
     different exchanges are on parity with each other and applied 
     in a functionally equivalent manner. The CFTC would also 
     ensure that a trader's positions on multiple exchanges and 
     other markets, when combined, are not excessive.
       Define ``energy commodity'' as a commodity used as a source 
     of energy, including crude oil, gasoline, heating oil, diesel 
     fuel, natural gas, and electricity, or results from the 
     burning of fossil fuels, including carbon dioxide and sulfur 
     dioxide.
       Define ``energy trading facility'' as a trading facility 
     that trades contracts in an energy commodity (other than in 
     the cash or spot market) between large traders (``eligible 
     commercial entities''), and provides either for the clearing 
     of those contracts or a price discovery function in the 
     futures or cash market for that energy commodity. Clearing 
     services, which are already subject to CFTC oversight, 
     generally guarantee the performance of a contract, and 
     facilitate the trading of those contracts. A trading facility 
     performs a price discovery function when the price of 
     transactions are publicly disseminated and can affect the 
     prices of subsequent transactions.
       Require large-trader reporting for domestic trades on 
     foreign exchanges. Large trades of U.S. energy commodities 
     taking place from the United States on foreign exchanges 
     would have to be reported to the CFTC. Traders would be 
     relieved of this reporting requirement if the CFTC reached 
     agreement with a foreign board of trade to obtain the same 
     information.
                                  ____


        Close the Enron Loophole Act Section-by-Section Analysis

     Section 1. Short Title
       The title of this bill is the ``Close the Enron Loophole 
     Act''.
     Sec. 2. Energy trading facilities
       This section amends the Commodity Exchange Act (CEA) to 
     regulate energy trading facilities that are currently exempt 
     from Commodity Futures Trading Commission (CFTC) oversight 
     under section 2(h)(3) of the CEA. After defining the terms 
     ``energy commodity'' and ``energy trading facility,'' this 
     section delineates the criteria required for an energy 
     trading facility to be registered with the CFTC. The 
     specified criteria are based upon existing criteria in the 
     CEA for futures markets (designated contract markets) and 
     derivatives transaction execution facilities so that energy 
     trading facilities will operate under a comparable degree of 
     self-regulation and CFTC oversight as current facilities, 
     taking into account certain differences between the types of 
     markets.
       Section 2(a). Definitions. This section defines the terms 
     ``energy commodity'' and ``energy trading facility.''
       The term ``energy commodity'' means a commodity (other than 
     an excluded commodity, a metal, or an agricultural commodity) 
     that is used as a source of energy or that results from the 
     burning of fossil fuels to produce energy. Examples of energy 
     commodities that are used as a source of energy include crude 
     oil; gasoline, heating oil and other products refined from 
     crude oil; natural gas; and electricity. Examples of energy 
     commodities that result from the burning of fossil fuels to 
     produce energy include carbon dioxide and sulfur dioxide.
       The term ``energy trading facility'' means a trading 
     facility (as defined in section la(33) of the CEA) that: (A) 
     is not a designated contract market (DCM); and (B) 
     facilitates the trading of energy commodities between 
     eligible commercial entities (essentially large, 
     sophisticated traders); and either (i) provides a clearing 
     service for products traded on the facility or (ii) the CFTC 
     determines that trading on the facility provides a price 
     discovery function on a trading facility or in the cash 
     market for an energy commodity.
       The definition of ``energy trading facility'' represents a 
     subset of trading facilities that would otherwise qualify as 
     ``exempt commercial markets'' under current law. In essence, 
     it requires the regulation of energy trading facilities that 
     exhibit the key attributes of a futures exchange--the trading 
     of standardized and cleared contracts for future delivery of 
     a commodity having a finite supply.
       The definition of ``energy trading facility'' excludes the 
     trading of energy commodities that are ``spot sales of a cash 
     commodity or sales of a cash commodity for deferred shipment 
     or delivery,'' since the bill is not intended to apply to the 
     cash market for energy commodities. This exclusion, however, 
     does not encompass contracts that are commonly referred to as 
     ``swaps,'' since swaps are not spot sales of a cash commodity 
     or sales of a cash commodity for deferred shipment or 
     delivery. Because swaps in the energy market are economically 
     and functionally equivalent to futures contracts for energy 
     commodities, this bill ensures that they will be regulated in 
     a functionally equivalent manner.
       The definition restricts the bill's application to energy 
     trading facilities that allow only ``exempt commercial 
     entities'' (ECEs) to participate, meaning large sophisticated 
     traders who trade with each other on a principal-to-principal 
     basis. This restriction is identical to the restriction in 
     current law for trading facilities that qualify as exempt 
     commercial markets under section 2(h)(3). A trading facility 
     that permits brokered or intermediated transactions or 
     participation by persons other than ECEs would not qualify as 
     an energy trading facility subject to the type of regulation 
     provided under this bill. Instead, as is the case under 
     current law, a facility that allows the trading of futures 
     contracts by persons other than ECEs must register with and 
     be designated by the CFTC as a contract market subject to the 
     regulations that apply to a DCM.
       The definition also addresses the concern that, despite the 
     advantages and widespread use of clearing services to 
     facilitate trading, if the presence of a clearing function 
     triggers regulatory oversight, then alternative trading 
     platforms may develop that do not provide clearing services 
     in order to avoid the reporting and monitoring requirements 
     essential to an effective regulatory system. To address this 
     concern, the bill provides that a trading facility that does 
     not provide clearing services still may qualify as an energy 
     trading facility subject to regulation if the CFTC determines 
     the facility ``performs a significant price discovery 
     function in relation to an energy commodity listed for 
     trading on a trading facility or in the cash market for the 
     energy commodity.'' Factors for the CFTC to consider in 
     determining whether a trading facility performs such a 
     significant price discovery function include the extent to 
     which the prices of contracts traded on the facility are 
     linked to or derived from

[[Page S11601]]

     the prices of futures contracts traded on a DCM, the volume 
     of trading on the facility, whether prices of completed 
     transactions are immediately posted or disseminated, and the 
     extent to which traders engage in arbitrage trading between 
     the contracts traded on the facility and those traded on a 
     regulated market.
       Section 2(b). Oversight of Energy Trading Facilities. This 
     section specifies that an energy trading facility, and any 
     agreement, contract, or transaction traded on that facility, 
     shall be subject to the regulatory requirements established 
     in a new CEA section 2(j).
       Section 2(b)(1) amends CEA section 2(h)(3) to exclude 
     energy trading facilities from qualifying as an exempt 
     commercial market in order to make it clear that those 
     facilities must instead comply with the new CEA section 2(j).
       Section 2(b)(2) adds a new section 2(h)(7) to the CEA. This 
     new section provides that notwithstanding any other provision 
     of the CEA, an energy trading facility and persons trading on 
     an energy trading facility are subject to the new CEA section 
     2(j). This clarifying provision means, for example, that a 
     trading facility that meets the criteria for an energy 
     trading facility could not operate as a derivatives 
     transaction execution facility (DTEF) under another provision 
     of the CEA.
       Section 2(c). Standards Applicable to Energy Trading 
     Facilities. This section adds a new section 2(j) to the CEA, 
     specifying the standards that an applicant must meet to 
     register with the CFTC as an energy trading facility.
       Commission Approval of Energy Trading Facilities. A new 
     section 2(j)(1) makes it illegal for any person to enter into 
     an agreement, contract, or transaction on an energy trading 
     facility unless such facility has been registered with the 
     Commission as an energy trading facility. Section 6 of this 
     bill provides a timeline for facilities in operation on the 
     date of enactment of this Act under CEA section 2(h)(3) to 
     submit an application, obtain registration, and comply with 
     these requirements.
       Applications for Operation as Energy Trading Facility. New 
     section 2(j)(2) provides that a facility must submit an 
     application to the Commission for operation as an energy 
     trading facility in order to register as an energy trading 
     facility. The Commission is authorized to establish such 
     application requirements as it deems appropriate. New section 
     2(j)(3) provides that the Commission shall make a 
     determination on any such application within 120 days after 
     receiving it.
       Criteria for Approval of Applications. New section 2(j)(4) 
     specifies the criteria that an applicant must meet for 
     registration as an energy trading facility. Because an energy 
     trading facility may trade instruments that possess the same 
     characteristics as futures contracts traded on a designated 
     contract market, several of the criteria, particularly those 
     regarding prevention of price manipulation, excessive 
     speculation, and price distortion, are identical to the 
     criteria applicable to a designated contract market (DCM). 
     Other DCM criteria are not used, such as those applicable to 
     intermediated or brokered transactions, since those types of 
     transactions are not permitted on an energy trading facility. 
     In addition, because energy trading facilities conduct all 
     trading on a principal-to-principal basis, a number of the 
     criteria applicable to a derivatives transaction execution 
     facility are included in the section. The criteria are as 
     follows.
       New section 2(j)(4)(A): Prevention of Price Manipulation 
     and Excessive Speculation.--This section requires the 
     facility to have the capacity to prevent price manipulation, 
     excessive speculation, price distortion, and disruption 
     through market surveillance, compliance, and enforcement 
     practices and procedures, including methods for conducting 
     real-time monitoring of trading and comprehensive and 
     accurate trade reconstructions. The term ``excessive 
     speculation'' as used in this bill has the same meaning as 
     the term ``excessive speculation'' in section 4a(a) of the 
     Act as ``causing sudden or unreasonable fluctuations or 
     unwarranted changes in the price of such commodity.'' 
     [Equivalent to DCM Criteria: Prevention of Market 
     Manipulation, CEA Sec. 5(b)(2)].
       New Section 2(j)(4)(B): Monitoring of Trading.--This 
     section requires the facility to monitor trading to prevent 
     price manipulation, excessive speculation, price distortion, 
     and disruption of the delivery or cash-settlement process. 
     [Equivalent to DCM Core Principles: Monitoring of Trading, 
     CEA Sec. 5(d)(4); see also DTEF Core Principles: Monitoring 
     of Trading, CEA Sec. 5a(d)(3)].
       New Section 2(j)(4)(C): Contracts Not Readily Susceptible 
     to Manipulation.--This section requires the facility to list 
     for trading only contracts that are not readily susceptible 
     to manipulation. [Equivalent to DCM Core Principles: 
     Contracts Not Readily Susceptible to Manipulation, CEA 
     Sec. 5(d)(3)].
       New Section 2(j)(4)(D): Financial Integrity of 
     Transactions.--This section requires the facility to 
     establish and enforce rules and procedures for ensuring the 
     financial integrity of transactions cleared and settled 
     through the facilities of the energy trading facility. [Based 
     on DCM Criteria: Financial Integrity of Transactions, CEA 
     Sec. 5(b)(5); and DTEF Registration Criteria: Transactional 
     Financial Integrity, CEA Sec. 5a(c)(4)].
       New Section 2(j)(4)(E): Ability To Obtain Information.--
     This section requires the facility to establish and enforce 
     rules that will allow the facility to obtain any necessary 
     information to perform any of the functions described in this 
     subsection, including the capacity to carry out such 
     international information-sharing agreements as the 
     Commission may require. [Equivalent to DCM Criteria: Ability 
     to Obtain Information, CEA Sec. 5(b)(8)].
       New Section 2(j)(4)(F): Position Limits or Accountability 
     Levels.--This section requires the facility to reduce the 
     potential threat of price manipulation, excessive 
     speculation, price distortion, or disruption of the delivery 
     or cash-settlement process, by adopting position limits or 
     position accountability levels for speculators, where 
     necessary and appropriate. [Equivalent to DCM Core 
     Principles: Position Limitation or Accountability, CEA 
     Sec. 5(d)(5)].
       New Section 2(j)(4)(G): Emergency Authority.--This section 
     requires the facility to adopt rules to provide for the 
     exercise of emergency authority to liquidate or transfer open 
     positions in any contract, suspend or curtail trading in any 
     contract, and require market participants in any contract to 
     meet special margin requirements. [Equivalent to DCM Core 
     Principles: Emergency Authority, CEA Sec. 5(d)(6)].
       New Section 2(j)(4)(H): Daily Publication of Trading 
     Information.--This section requires the facility to make 
     public daily information on settlement prices, volume, open 
     interest, and opening and closing ranges for actively traded 
     contracts on the facility. [Equivalent to DCM Core Principle: 
     Daily Publication of Trading Information; CEA Sec. 5(d)(8); 
     see also DTEF Core Principles: Daily Publication of Trading 
     Information, CEA Sec. 5a(d)(5)].
       New Section 2(j)(4)(I): Deterrence of Abuses.--This section 
     requires the facility to establish and enforce trading and 
     participation rules that will deter abuses and to maintain 
     the capacity to detect, investigate, and enforce those rules. 
     [Based on DTEF Registration Criteria: Deterrence of Abuses, 
     CEA Sec. 5a(c)(2)].
       New Section 2(j)(4)(J): Trade Information.--This section 
     requires the facility to maintain rules and procedures to 
     provide for the recording and safe storage of all identifying 
     trade information in a manner that enables the facility to 
     use the information for the purposes of assisting in the 
     prevention of price manipulation, excessive speculation, 
     price distortion, or disruption of the delivery or cash-
     settlement process, and providing evidence of any violations 
     of the rules of the facility. [Based on DCM Core Principles: 
     Trade Information, CEA Sec. 5(d)(10)].
       New Section 2(j)( 4)(K): Trading Procedures.--This section 
     requires the facility to establish and enforce rules or terms 
     and conditions defining, or specifications detailing, trading 
     procedures to be used in entering and executing orders traded 
     on the facility. [Based on DTEF Registration Criteria: 
     Trading Procedures, CEA Sec. 5a(c)(3); see also DCM Criteria: 
     Trade Execution Facility, CEA Sec. 5(b)(4)].
       New Section 2(j)(4)(L): Compliance With Rules.--This 
     section requires the facility to monitor and enforce the 
     rules of the facility, including any terms and conditions of 
     any contracts traded on or through the facility and any 
     limitations on access to the facility. [Equivalent to DTEF 
     Core Principles: Compliance with Rules, CEA Sec. 5a(d)(2); 
     see also DCM Core Principles: Compliance with Rules, CEA 
     Sec. 5(d)(2)].
       New Section 2(j)(4)(M): Disclosure of General 
     Information.--This section requires the facility to disclose 
     publicly and to the Commission information concerning: (i) 
     contract terms and conditions; (ii) trading conventions, 
     mechanisms, and practices; (iii) financial integrity 
     protections; and (iv) other information relevant to 
     participation in trading on the facility. [Equivalent to DTEF 
     Core Principles: Disclosure of General Information, CEA 
     Sec. 5a(d)( 4); see also DCM Core Principles: Availability of 
     General Information, CEA Sec. 5(d)(7)].
       New Section 2(j)(4)(N): Fitness Standards.--This section 
     requires the facility to establish and enforce appropriate 
     fitness standards for directors, members of any disciplinary 
     committee, and any other persons with direct access to the 
     facility, including any parties affiliated with any of the 
     persons described in this paragraph. [Equivalent to DTEF Core 
     Principles: Fitness Standards, CEA Sec. 5a(d)(6); see also 
     DCM Core Principles: Governance Fitness Standards, CEA 
     Sec. 5(d)(14)].
       New Section 2(j)(4)(O): Conflicts of Interest.--This 
     section requires the facility to establish and enforce rules 
     to minimize conflicts of interest in the decision making 
     process of the facility and establish a process for resolving 
     such conflicts of interest. [Equivalent to DTEF Core 
     Principles: Conflicts of Interest, CEA Sec. 5a(d)(7); and DCM 
     Core Principles: Conflicts of Interest, CEA Sec. 5(d)(15)].
       New Section 2(j)(4)(P): Recordkeeping.--This section 
     requires the facility to maintain business records for a 
     period of 5 years. [Equivalent to DTEF Core Principles: 
     Recordkeeping, CEA Sec. 5a(d)(8); and DCM Core Principles: 
     Recordkeeping, CEA Sec. 5(d)(17)].
       New Section 2(j)(4)(Q): Antitrust Considerations.--This 
     section requires the facility to endeavor to avoid: (i) 
     adopting rules or taking any actions that result in any 
     unreasonable restraint of trade; or (ii) imposing any 
     material anticompetitive burden on trading on the facility. 
     [Equivalent to DTEF Core Principles: Antitrust 
     Considerations, CEA Sec. 5a(d)(9); and DCM Core Principles: 
     Antitrust Considerations, CEA Sec. 5(d)(18)].

[[Page S11602]]

       Compliance with Criteria. New section 2(j)(5) provides that 
     an energy trading facility must continue to comply with all 
     of the criteria in section 2(j)(4) to continue operation, and 
     that violation of any of the criteria shall constitute a 
     violation of the Commodity Exchange Act. The trading facility 
     shall have reasonable discretion in establishing the manner 
     in which it complies with these criteria.
       Position Limits and Accountability Levels. New section 
     2(j)(6) directs the Commission to ensure that the position 
     limits and accountability levels that are established for 
     energy trading facilities are on a parity with the position 
     limits and accountability levels established for similar 
     contracts traded on a designated contract market and applied 
     in a functionally equivalent manner. This provision is 
     designed to ensure that there is no regulatory advantage to 
     trading on an energy trading facility compared to a 
     designated contract market, or vice versa.
       Additionally, once a trader's position exceeds a position 
     limit or an accountability level on a particular trading 
     facility, this section directs the Commission to take such 
     action as may be necessary and appropriate, in light of the 
     trader's overall positions in that commodity, to reduce the 
     potential threat of price manipulation, excessive 
     speculation, price distortion, or disruption of the delivery 
     or cash-settlement process.
       Such a comprehensive approach may have to be undertaken by 
     the CFTC, since it may be beyond the authority of a 
     particular trading facility to obtain information about or 
     limit a trader's relevant positions when those positions are 
     outside of the exchange itself. The Commission may direct a 
     trader, or direct a trading facility to direct a trader, to 
     limit, reduce or liquidate any position in any market, as the 
     Commission determines necessary to reduce the potential 
     threat of price manipulation, excessive speculation, price 
     distortion or disruption of the delivery or cash-settlement 
     process.
       In order to make a determination on the appropriate action 
     to take, the Commission is authorized to obtain from a trader 
     information regarding all of the trader's exchange and off-
     exchange positions in that commodity. The Commission will be 
     receiving on a regular basis, through its large trader 
     reporting system, information regarding any trader's 
     positions on a designated contract market or an energy 
     trading facility that exceed the levels for reportable 
     positions; the Commission may choose to request additional 
     information on other positions in the commodity held by the 
     trader if the Commission determines this additional 
     information is necessary to make any determinations required 
     by this section. The authority to obtain this position 
     information parallels the Commission's existing authority 
     under CEA sections 3(b), 4i, and 8a(5) to require traders to 
     retain transaction records for commodities traded on CFTC-
     regulated facilities and provide them to the Commission upon 
     request. The Commission recently described this authority in 
     its proposed rulemaking ``Maintenance of Books, Records and 
     Reports by Traders,'' 72 Fed. Reg. 34413 (June 22, 2007). The 
     information specified to be provided to the Commission under 
     the new section 2(j)(5)(C) is identical to the information 
     specified to be provided to the Commission in that proposed 
     rulemaking.
       The Commission's review of a trader's entire position does 
     not relieve an individual exchange of the authority and 
     responsibility to review a trader's position on that exchange 
     once a position limit or accountability level on that 
     exchange has been exceeded. Rather, it is anticipated that 
     the Commission's comprehensive review of the trader's entire 
     position in a commodity will be undertaken in addition to the 
     review conducted by the individual exchange on which the 
     trader has taken a position in excess of an accountability 
     level or position limit. Based on this comprehensive review, 
     the Commission will then determine whether any additional 
     action, beyond that initially taken by the exchange, is 
     necessary to limit, reduce or liquidate the trader's position 
     to reduce the potential threat of price manipulation, 
     excessive speculation, price distortion, or disruption of the 
     delivery or cash-settlement process. In making or 
     implementing any such determinations, the Commission should 
     continue to work in consultation and cooperation with the 
     affected exchanges.
       New section 2(j)(6)(D) specifies criteria the Commission or 
     an exchange may consider when determining whether to require 
     a trader to limit, reduce, or liquidate a position in an 
     energy commodity in excess of an accountability level. In 
     making any such determination with respect to an energy 
     commodity, the Commission, a designated contract market, or 
     an energy trading facility should consider, as appropriate: 
     (i) the person's open interest in a contract, agreement, or 
     transaction involving an energy commodity relative to the 
     total open interest in such contracts, agreements or 
     transactions; (ii) the daily volume of trading such 
     contracts, agreements or transactions; (iii) the person's 
     overall position in related contracts, including options, and 
     the overall open interest or liquidity in such related 
     contracts and options; (iv) the potential for such positions 
     to cause or allow price manipulation, excessive speculation, 
     price distortion, or disruption of the delivery or cash-
     settlement process; (v) the person's record of compliance 
     with rules, regulations, and orders of the Commission, a 
     designated contract market, or an energy trading facility, as 
     appropriate; (vi) any justification provided by the person 
     for such positions; and (vii) other such factors determined 
     to be appropriate by the Commission.
       The criteria specified in this section are not intended to 
     be the exclusive criteria that may be applied, but are set 
     forth to provide additional guidance to the Commission, the 
     exchanges, and persons trading on the exchanges in addition 
     to the general language pertaining to ``excessive 
     speculation'' in section 4 of the CEA.
       Section 2(d). Information for Price Discovery 
     Determination. This section provides the Commission with the 
     authority to obtain from an electronic trading facility or a 
     derivatives transaction execution facility any information 
     the Commission determines is necessary for the Commission to 
     evaluate whether such a facility performs a price discovery 
     function in relation to a contract in an energy commodity 
     under the definition of energy trading facility.
       Section 2(e). Conforming Amendments. This section amends 
     the CEA in a variety of sections to provide the Commission 
     with a comparable degree of authority over the operation of 
     an energy trading facility that it possesses with respect to 
     a designated contract market or a derivatives transaction 
     execution facility.
     Sec. 3. Reporting of Energy Trades
       Section 3 of the bill adds a new CEA section 2(k) to 
     require persons that trade from within the United States on a 
     foreign board of trade a contract for future delivery of an 
     energy commodity that has a physical delivery point within 
     the United States to keep records of such trades and to 
     report large trades in such contracts to the Commission. The 
     Commission is authorized to waive the reporting requirement 
     if the Commission determines that a foreign board of trade is 
     providing the Commission with equivalent information in a 
     usable format pursuant to an agreement between the Commission 
     and the foreign board of trade. The purpose of this provision 
     is to ensure that U.S. commodity regulators have full access 
     to trading information from U.S. traders conducting 
     transactions from U.S. locations involving U.S. energy 
     commodities such as crude oil and gasoline.
     Sec. 4. Antifraud authority
       Section 4 of the bill amends Section 4b of the CEA, the 
     CFTC's main anti-fraud authority. Section 4b is revised to 
     clarify the CFTC's authority to bring fraud actions in off-
     exchange principal-to-principal futures transactions. In 
     November 2000, the Seventh Circuit Court of Appeals ruled 
     that the CFTC could only use Section 4b in intermediated 
     transactions--those involving a broker. Commodity Trend 
     Service, Inc. v. CFTC, 233 F.3d 981, 991-992 (7th Cir. 2000). 
     As subsequently amended by the CFMA, the CEA now permits off-
     exchange futures and options transactions that are done on a 
     principal-to-principal basis, such as energy transactions 
     pursuant to CEA Sections 2(h)(1) and 2(h)(3).
       Subsection 4b(a)(2) is amended by adding the words `or 
     with' to address the principal-to-principal transactions. 
     This new language clarifies that the CFTC has the authority 
     to bring anti-fraud actions in off-exchange principal-to-
     principal futures transactions, including exempt commodity 
     transactions in energy under Section 2(h) as well as all 
     transactions conducted on derivatives transaction execution 
     facilities. The new Section 4b clarifies that market 
     participants in these transactions are not required to 
     disclose information that may be material to the market 
     price, rate or level of the commodity in such off-exchange 
     transactions. It also codifies existing law that prohibits 
     market participants from using half-truths in negotiations 
     and solicitations by requiring a person to disclose all 
     necessary information to make any statement they have made 
     not misleading in any material respect. The prohibitions in 
     subparagraphs (A) through (D) of the new Section 4b(a) would 
     apply to all transactions covered by paragraphs (1) and (2). 
     Derivatives clearing organizations (DCOs) are not subject to 
     fraud actions under Section 4b in connection with their 
     clearing activities.
       The amendments to Section 4b(a) of the CEA regarding 
     transactions currently prohibited under subparagraph (iv) 
     (found in paragraph 2(D) of this bill) are not intended to 
     affect in any way the CFTC's historical ability to prosecute 
     cases of indirect bucketing of orders executed on designated 
     contract markets. See, e.g., Reddy v. CFTC, 191 F.3d 109 (2nd 
     Cir. 1999); In re DeFrancesco, et al., CFTC Docket No. 02-09 
     (CFTC May 22, 2003) (Order Making Findings and Imposing 
     Remedial Sanctions as to Respondent Brian Thornton).
       This language clarifying the Commission's anti-fraud 
     authority was included in bills in the previous Congress to 
     reauthorize the Commodity Exchange Act, one of which was 
     passed by the House of Representatives (H.R. 4473, passed by 
     the House on Dec. 14, 2005) and the other of which was 
     reported to the full Senate by the Senate Committee on 
     Agriculture, Nutrition, and Forestry (S. 1566, S. Rpt. No. 
     109-119; 109th Cong., 1st Sess.).
     Sec. 5. Commission rulemaking
       Section 5 of the bill requires the CFTC, within 180 days 
     after enactment of this Act, to issue a proposed rule setting 
     forth the process for submitting an application for 
     registration as an energy trading facility. The section 
     requires the CFTC, within 270 days after the date of 
     enactment, to finalize this rule.

[[Page S11603]]

     Sec. 6. Effective date
       Section 6(a) of the bill provides that it shall be 
     immediately effective upon enactment, with several 
     exceptions.
       Existing trading facilities. The first exception applies to 
     existing trading facilities. Section 6(b) provides that a 
     trading facility operating under the exemption in CEA section 
     2(h)(3) on the date of enactment shall have 180 days after 
     the Commission issues a final rule on registration 
     applications to submit such an application. Section 5 of the 
     bill authorizes the Commission to take 270 days to issue this 
     rule. During this period (270 days plus 180 days), the 
     prohibition on trading in the new section 2(j)(1) shall not 
     apply. For any such facility in operation on the date of 
     enactment of this Act that submits an application to the 
     Commission for operation as an energy trading facility within 
     the 180-day period, the suspension of the prohibition in 
     section 2(j)(1) is extended until the Commission makes a 
     determination on whether to approve that application.
       Subsection (c) provides that if the Commission approves the 
     registration as an energy trading facility of a facility 
     operating under the exemption under CEA section 2(h)(3) on 
     the date of enactment of this Act, the facility may submit a 
     written request to the Commission for a 6-month extension to 
     fully implement any requirement made applicable by this Act--
     other than an information reporting or recordkeeping 
     requirement--and that the Commission shall grant any such 
     request. The Commission, in its discretion, may grant an 
     additional 6-month extension. The Commission may not grant 
     any extension for any information reporting or recordkeeping 
     requirement. This section is intended to ensure that 
     facilities currently in operation that must register as an 
     energy trading facility will have sufficient time to come 
     into compliance with the new requirements of this Act, and 
     that the operations of those facilities will not be disrupted 
     during the transition period. Altogether, this section 
     effectively provides existing trading facilities with over 
     two years to come into compliance with the Act.
       Requirements applicable to domestic use of a foreign board 
     of trade. Section 6(d) of the bill states that the reporting 
     requirements applicable to trades from domestic terminals on 
     a foreign board of trade are effective 180 days after 
     enactment.

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