[Congressional Record Volume 154, Number 114 (Friday, July 11, 2008)]
[Senate]
[Pages S6607-S6608]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN (for himself and Mrs. Feinstein):
  S. 3255. A bill to amend the Commodity Exchange Act to provide for 
the oversight of large trades of over-the-counter energy and 
agricultural contracts to prevent price manipulation and excessive 
speculation, and for other purposes; to the Committee on Agriculture, 
Nutrition, and Forestry.
  Mr. LEVIN. Mr. President, today I am introducing, along with Senator 
Feinstein, the Over-the-Counter Speculation Act. This legislation will 
provide the Commodity Futures Trading Commission, CFTC, with the 
ability to detect and prevent price manipulation and excessive 
speculation. In the currently unregulated over-the-counter commodity 
markets, this legislation will close a major loophole in our 
commodities laws that prevents the CFTC from conducting oversight in 
certain enforcement activities and obtaining information about trading 
in the unregulated over-the-counter market. It will ensure that large 
energy and other commodity traders cannot use the over-the-counter 
market to hide from the CFTC, escape reporting requirements, or avoid 
CFTC enforcement authorities to require traders to reduce their 
holdings of futures contracts in order to prevent manipulation or 
excessive speculation.
  This legislation is based on the work of the Permanent Subcommittee 
on Investigations, which I chair, regarding effect of speculation on 
rising energy prices. In 2006, the PSI study, called ``The Role of 
Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop 
Back on the Beat,'' found the following:
  First, over the past few years, speculators have dramatically 
increased their activities in U.S. energy commodity markets. Second, 
speculation has contributed to rising U.S. energy prices.
  The 2006 report estimated that this increased speculation, 
particularly through commodity index funds, had contributed about $20 
to the price of a barrel of oil which was then about $70, or roughly 25 
to 30 percent of the price. The 2006 PSI report also found that CFTC 
access to daily reports of large trades of energy commodities is 
essential to its ability to detect and deter price manipulation. It 
recommended that Congress require reports of large trades on over-the-
counter electronic exchanges. The 2006 report also recommended that 
Congress eliminate the Enron loophole to put the cop back on the beat 
in the over-the-counter electronic markets. Since the 2006 PSI report, 
the amount of speculation has increased significantly and so have 
energy prices. In 2006, there was about $60 billion invested in 
commodity index funds. Today there is over $200 billion. Since 2000, 
there has been nearly a 1200-percent increase in the amount of 
speculative trading compared to only a 200-percent increase in the 
commercial trading world. Even this understates the increase in 
speculation, since the CFTC data classifies futures trading involving 
index funds as commercial trading rather than speculation. A large 
amount of speculative trading is taking place in the unregulated over-
the-counter market. Many market experts believe this huge increase in 
speculation in recent years has boosted oil prices.
  Last fall, as oil prices were nearing $100 a barrel--$40 a barrel 
lower than they are today--the president and CEO of Marathon Oil said:

       $100 oil isn't justified by the physical demand in the 
     market. It has to be speculation on the futures market that 
     is fueling this.

  Mr. Fadel Gheit, an oil analyst for Oppenheimer and Company, 
describes the oil market as ``a farce.''

       The speculators have seized control and it's basically a 
     free-for-all, a global gambling hall, and it won't shut down 
     unless and until responsible governments step in.

  In January of this year, as oil hit $100 a barrel, Tim Evans, oil 
analyst for Citigroup, wrote:

       The larger supply and demand fundamentals do not support a 
     further rise and are, in fact, more consistent with lower 
     price levels.

  That is when oil was at $100 a barrel.
  At the joint hearing of my PSI Subcommittee and Senator Dorgan's 
Energy Subcommittee last December, Dr. Edward Krapels, a financial 
market analyst, testified:

       Of course financial trading, speculation affects the price 
     of oil because it affects the price of everything we trade . 
     . . It would be amazing if oil somehow escaped this effect.

  He said that as a result of this speculation:

       There is a bubble in oil prices.

  There is some concern that some large traders may be avoiding the 
limits on holdings and accountability levels that apply to trading on 
the futures exchanges by trading in the unregulated over-the-counter 
market. In the absence of data or reporting on the activity in the 
over-the-counter market, it is difficult to estimate specifically the 
specific impact of this large amount of unregulated trading on 
commodity prices. Moreover, even if we were to get better information 
about unregulated over-the-counter trades, the CFTC has no authority to 
take action to prevent price manipulation or excessive speculation 
resulting from this unregulated trading.
  The need to control this speculation is urgent. Only yesterday the 
presidents and CEOs of major U.S. airlines warned about the disastrous 
effects of rampant speculation on the airline industry. The CEOs 
stated:

       Normal market forces are being dangerously amplified by 
     poorly regulated market speculation.

  They further stated:

       Twenty years ago, 21 percent of oil contracts were 
     purchased by speculators who trade oil on paper with no 
     intention of ever taking delivery. Today, oil speculators 
     purchase 66 percent of all oil futures contracts, and that 
     reflects just the transactions that are known.

  So it has gone up from 21 percent purchased by speculators on these 
oil contracts, these futures, to 66 percent during this period, and 
that, again, excludes some of the transactions.
  The CEOs wrote that:

       For airlines, ultra-expensive fuel means thousands of lost 
     jobs and severe reductions in air service to both large and 
     small communities.

  Earlier this year, Congress included legislation on the farm bill 
that closed the Enron loophole. This legislation closed one of the 
major regulatory gaps identified in the 2006 PSI report and then again 
in the 2007 PSI report on how a single hedge fund named Amaranth 
distorted natural gas prices through, in part, using the over-the-
counter electronic exchanges that were not regulated under the Enron 
loophole.
  The legislation to close the Enron loophole placed over-the- counter 
electronic exchanges under CFTC regulation. However, that legislation 
did not address the separate issue of trading in the rest of the over-
the-counter market, which includes bilateral trades through voice 
brokers, swap dealers, and direct party-to-party negotiations. The 
legislation we are introducing today builds on that previous 
legislation and addresses the rest of the over-the-counter market.
  Additionally, I have already introduced legislation with Senators 
Feinstein, Durbin, Dorgan, and Bingaman, S. 3129, to close the ``London 
loophole.'' This loophole has allowed crude oil dealers in the United 
States to avoid the position limits--limits on their holdings--that 
apply to trading on U.S. futures exchanges by simply directing their 
trades onto the ICE Futures Exchange in London. The legislation we have 
introduced has been incorporated into legislation introduced by Senator 
Durbin, S. 3130, which also would give the CFTC more resources and 
enable them to better obtain information about index trading and the 
swaps market.
  After these two bills were introduced, the CFTC imposed more 
stringent requirements upon the ICE Future Exchange's operations in the 
United

[[Page S6608]]

States, and for the first time the London exchange imposed comparable 
position limits in order to be allowed to keep its trading terminals in 
the United States. This is the very action our legislation called for.
  However, although the CFTC took those important steps that will go a 
long way toward closing the London loophole, Congress still needs to 
pass the legislation to make sure the London loophole is closed. The 
legislation would put the conditions the CFTC has imposed upon the 
London exchange into statute, and ensure that the CFTC has clear 
authority to take action against any U.S. trader who is manipulating 
the price of a commodity or excessively speculating through the London 
exchange, including requiring traders to reduce positions.
  There are additional steps that need to be taken to address the issue 
of ensuring that increasing speculation in our commodity markets is not 
driving up commodity prices.
  The legislation we are introducing today is a practical, workable 
approach that will enable the CFTC to obtain key information about the 
over-the-counter market to enable it to prevent manipulation and 
excessive speculation. It will provide the CFTC with the authority to 
take action in the over-the-counter market to prevent excessive 
speculation and price manipulation, such as by requiring large traders 
to reduce their holdings of futures contracts. It enables the CFTC to 
obtain information on large trades in the over-the-counter market so it 
can determine whether any trader or class of traders has excessive 
holdings that may affect market prices, and whether such positions 
should be reduced.
  This legislation will ensure that large traders cannot avoid the CFTC 
reporting requirements by using the unregulated over-the-counter market 
instead of the regulated exchanges. It will ensure that the CFTC can 
take appropriate action, such as by requiring reductions in holdings of 
futures contracts against traders with large positions in order to 
prevent price manipulation or excessive speculation, regardless of 
whether the trader's position is on an exchange or in the over-the-
counter market.
  The approach in this bill is practical and workable. I thank Senator 
Feinstein for her important support of this legislation.
  Mr. President, I ask unanimous consent, that a summary of the bill be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

        The Levin-Feinstein ``Over-the-Counter Speculation Act''


                                Summary

       The Levin-Feinstein ``Over-the-Counter Speculation Act'' 
     would give the Commodity Futures Trading Commission (CFTC) 
     authority to direct a trader to reduce its positions in the 
     OTC market to prevent price manipulation and excessive 
     speculation in CFTC-regulated markets. To provide the CFTC 
     with information necessary to prevent price manipulation and 
     excessive speculation in these markets, it also would extend 
     the large trader reporting requirement in the Commodity 
     Exchange Act (CEA)--which currently applies only to trading 
     on the regulated futures exchanges--to trading in the 
     unregulated over-the-counter (OTC) market.
       Under current law, the CFTC's market oversight and 
     surveillance does not extend to the OTC market, and the 
     CFTC's authority over traders in this market only applies if 
     the trader has a position on one of the CFTC-regulated 
     markets. This bill would extend the CFTC's market oversight 
     and surveillance to large trades in the OTC market, 
     regardless of whether the trader also has a position on a 
     futures exchange, and provide the CFTC with the necessary 
     authority to take action in the OTC market to prevent price 
     manipulation or excessive speculation.


                               Background

       As a result of various exclusions and exemptions in the CEA 
     and CFTC regulations, commodity trading in the over-the-
     counter markets is largely unregulated, although trading in 
     these markets may have a direct and substantial effect upon 
     the prices of contracts for future delivery of those same 
     commodities on futures exchanges regulated by the CFTC. 
     According to some estimates, trading of swaps and other 
     instruments in the OTC market exceeds by several multiples 
     the trading of futures contracts in the regulated futures 
     markets.
       There is substantial concern excessive speculation in the 
     OTC market may be contributing to the extraordinary commodity 
     price increases of the past several months. There is also 
     concern that some large traders may be avoiding the position 
     limits and accountability levels that apply to trading on the 
     futures exchanges by trading in the unregulated OTC market. 
     In the absence of data or reporting on the activity in the 
     OTC market, however, it is difficult to evaluate the specific 
     effect of this large amount of unregulated trading on 
     commodity prices. Moreover, even if the data were to show 
     that large trading in the OTC market is affecting prices, or 
     that traders are using the OTC market to avoid position 
     limits in the regulated markets, the CFTC has limited 
     authority to take action to prevent any price distortions 
     that may result from such trading.


                          Explanation of Bill

       CFTC Oversight Authority. The bill provides the CFTC with 
     authority to require large traders in the OTC market to 
     reduce holdings, or suspend trading, in order to prevent 
     price manipulation or excessive speculation.
       Reporting of Large Over-the-Counter Trades. The bill 
     requires the CFTC to promulgate regulations requiring the 
     reporting of large OTC transactions in order to detect and 
     prevent potential price manipulation or excessive 
     speculations.
       Recordkeeping for Large Over-the-Counter Trades. The bill 
     requires the CFTC to promulgate regulations requiring the 
     keeping of trading records by persons required to report 
     large OTC transactions.

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