[Congressional Record Volume 154, Number 153 (Thursday, September 25, 2008)]
[Senate]
[Pages S9494-S9496]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN (for himself, Mr. Bingaman, and Mr. Harkin):
  S. 3577. A bill to amend the Commodity Exchange Act to prevent 
excessive price speculation with respect to energy and agricultural 
commodities, and for other purposes; to the Committee on Agriculture, 
Nutrition, and Forestry.
  Mr. LEVIN. Mr. President, energy prices are on a roller coaster, 
taking American consumers and the American economy on an unpredictable, 
expensive, and damaging ride. Just over a year ago, a barrel of crude 
oil sold for $70 a barrel. In less than a year, the price doubled to 
nearly $147. Last week, that same barrel of oil cost $91, a price drop 
of $56 over a few months. Just in the past week crude oil prices have 
jumped from about $96 per barrel to $130 per barrel and then back to 
$106 per barrel. No one knows whether, by the end of the year, the 
price of oil will stay around $100, drop lower, or climb back up. The 
huge price spikes we experienced can't be explained by changes in 
supply and demand; about half the trading in oil futures results from 
speculation as to whether oil prices will rise or fall by traders 
without any interest in actually using the oil they are buying and 
selling.
  The natural gas, gasoline, and heating oil markets have also seen 
huge price swings. The prices are up, they are down, they are 
unpredictable--making it impossible for many businesses and consumers 
to afford even basic goods and services.
  The sky-high oil and gasoline prices in effect for the last year are 
taking a tremendous toll on millions of American consumers and 
businesses. Speculation--not supply and demand--is keeping prices high, 
and our economy is forced to respond to erratic price changes. Unless 
we act to protect our energy markets from excessive speculation and 
price manipulation, the American economy will continue to be vulnerable 
to wild price swings affecting the prices of transportation, food, 
manufacturing and everything in between, endangering the economic 
security of our people, our businesses, and our Nation.
  Congress should act now to help tame rampant speculation and 
reinvigorate supply and demand as market forces.
  Today, I am introducing legislation, along with Senators Bingaman and 
Harkin, that represents our collective effort to enact the strongest 
and most workable measures to prevent excessive speculation and price 
manipulation in U.S. energy markets. It will close the loopholes in 
our commodities laws that now impede the policing of U.S. energy trades 
on foreign exchanges and in the unregulated over-the-counter market. It 
will ensure that large commodity traders cannot use these markets to 
hide from CFTC oversight or avoid limits on speculation. The bill will 
strengthen disclosure, oversight, and enforcement in U.S. energy 
markets, restoring the financial oversight that is crucial to protect 
American consumers, American businesses, and the U.S. economy from 
further energy shocks.

  More specifically, this legislation would make four sets of changes.
  It will require the CFTC to set limits on the holdings of traders in 
all of the energy futures contracts traded on regulated exchanges to 
prevent traders from engaging in excessive speculation or price 
manipulation. Since we closed the Enron loophole this year all futures 
contracts must be traded in regulated markets.
  It would close the ``London loophole'' by giving the CFTC the same 
authority to police traders in the United States who trade U.S. futures 
contracts on a foreign exchange and by requiring foreign exchanges that 
want to install trading terminals in the U.S. to impose comparable 
limits on speculative trading as the CFTC imposes on domestic exchanges 
to prevent excessive speculation and price manipulation.

[[Page S9495]]

  It will close the ``swaps loophole'' by requiring traders in the 
over-the-counter energy markets to report large trades to the CFTC, and 
it would authorize the CFTC to set limits on trading in the presently 
unregulated over-the-counter markets to prevent excessive speculation 
and price manipulation.
  It will require the CFTC to revise the standards that allow traders 
who use futures markets to hedge their holdings to exceed the 
speculation limits that apply to everyone else.
  My Permanent Subcommittee on Investigations' investigations have 
shown that one key factor in price spikes of energy is increased 
speculation in the energy markets. Traders are trading contracts for 
future delivery of oil in record amounts, creating a demand for paper 
contracts that gets translated into increases in prices and increasing 
price volatility.
  Much of this increase in trading of futures has been due to 
speculation. Speculators in the oil market do not intend to use oil; 
instead they buy and sell contracts for crude oil in the hope of making 
a profit from changing prices. According to the CFTC's data, the number 
of futures and options contracts held by speculators has gone from 
around 100,000 contracts in 2001, which was 20 percent of the total 
number of outstanding contracts, to almost 1.2 million contracts, which 
represents almost 40 percent of the outstanding futures and options 
contracts in oil on NYMEX Even this understates the increase in 
speculation, since the CFTC data classifies futures trading involving 
index funds as commercial trading rather than speculation, and the CFTC 
classifies all traders in commercial firms as commercial traders, 
regardless of whether any particular trader in that firm may in fact be 
speculating.
  There is now, as a result, 12 times as many speculative holdings as 
there was in 2001, while holdings of nonspeculative or commercial 
futures and options is up but three times. The greater the demand there 
is to buy futures contracts for the delivery of a commodity, the higher 
the price will be for those futures contracts.
  Not surprisingly, therefore, this massive speculation that the price 
of oil will increase, together with the increase in the amount of 
purchases of futures contracts, in fact, helped increase the price of 
oil to a level far above the price that is justified by the traditional 
forces of supply and demand.
  In June 2006, I released a subcommittee report, ``The Role of Market 
Speculation in Rising Oil and Gas Prices: A Need to Put a Cop on the 
Beat.'' This report found that the traditional forces of supply and 
demand didn't account for sustained price increases and price 
volatility in the oil and gasoline markets. The report concluded that, 
in 2006, a growing number of trades of contracts for future delivery of 
oil occurred without regulatory oversight and that market speculation 
had contributed to rising oil and gasoline prices, perhaps accounting 
for $20 out of a then-priced $70 barrel of oil.
  Oil industry executives and experts have arrived at a similar 
conclusion. Late last year, 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, 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, when oil first hit $100 per barrel, Mr. 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.'' At the joint hearing on the 
effects of speculation we held 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.'' Dr. Krapels added that as a result of this speculation 
``there is a bubble in oil prices.''
  The need to control speculation is urgent. The presidents and CEOs of 
major U.S. airlines recently 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.'' The CEOs wrote, ``For airlines, ultra-expensive 
fuel means thousands of lost jobs and severe reductions in air service 
to both large and small communities.''
  As to reining in speculation, the first step to take is to put a cop 
back on the beat in all our energy markets to prevent excessive 
speculation, price manipulation, and trading abuses.
  With respect to the futures markets, the legislation we are 
introducing today requires the CFTC to establish limits on the amount 
of futures contracts any trader can hold. Currently, the CFTC allows 
the futures exchanges themselves to set these limits. This bill would 
require the CFTC to set these limits to prevent excessive speculation 
and price manipulation. It would preserve, however, the exchanges' 
obligation and ability to police their traders to ensure they remain 
below these limits.
  This legislation would also require the CFTC to conduct a rulemaking 
to review and revise the criteria for allowing traders who are using 
the futures market to hedge their risks in a commodity to acquire 
holdings in excess of the limits on holdings for speculators.
  Another step is to give the CFTC authority to prevent excessive 
speculation in the over-the-counter markets. In 2007, my Subcommittee 
issued a report on the effects of speculation in the energy markets, 
entitled ``Excessive Speculation in the Natural Gas Market.'' This 
investigation showed that speculation by a hedge fund named Amaranth 
distorted natural gas prices during the summer of 2006 and drove up 
prices for average consumers. The report demonstrated how Amaranth had 
shifted its speculative activity to unregulated markets, under the 
``Enron loophole,'' to avoid the restrictions and oversight in the 
regulated markets, and how Amaranth's trading in the unregulated 
markets contributed to price increases.
  Following this investigation, I introduced a bill, S. 2058, to close 
the Enron loophole and regulate the unregulated electronic energy 
markets. Working with Senators Feinstein and Snowe, and with the 
members of the Agriculture Committee in a bipartisan effort, we 
included an amendment to close the Enron loophole in the farm bill, 
which Congress passed this past spring, overriding a veto by President 
Bush.
  The legislation to close the Enron loophole placed over-the-counter--
OTC--electronic exchanges under CFTC regulation. However, this 
legislation did not address the separate issue of trading in the rest 
of the OTC market, which includes bilateral trades through voice 
brokers, swap dealers, and direct party-to-party negotiations. In order 
to ensure there is a cop on the beat in all of the energy commodity 
markets, we need to address the rest of the OTC market as well.
  Previously, I introduced legislation, S. 3255, along with Senator 
Feinstein, the Over-the-Counter Speculation Act, to address the rest of 
the OTC market not covered by the farm bill. A large portion of this 
OTC market consists of the trading of swaps relating to the price of a 
commodity. Generally, commodity swaps are contracts between two parties 
where one party pays a fixed price to another party in return for some 
type of payment at a future time depending on the price of a commodity. 
Because some of these swap instruments look very much like futures 
contracts--except that they do not call for the actual delivery of the 
commodity--there is concern that the price of these swaps that are 
traded in the unregulated OTC market could affect the price of the very 
similar futures contracts that are traded on the regulated futures 
markets. We don't yet know for sure that this is the case, or that it 
is not, because we don't have any access to comprehensive data or 
reporting on the trading of these swaps in the OTC market.
  The legislation introduced today includes these same provisions to 
give the CFTC oversight authority to stop excessive speculation in the 
over-the-counter market. These provisions represent a practical, 
workable approach that will enable the CFTC to obtain key information 
about the OTC market to enable it to prevent excessive speculation and 
price manipulation. These

[[Page S9496]]

provisions are also included in the legislation introduced by the 
majority leader and others, S. 3268, to stop excessive speculation.
  Under these provisions, the CFTC will have the authority to ensure 
that traders cannot avoid the CFTC reporting requirements by trading 
swaps in the unregulated OTC market instead of regulated exchanges. It 
will enable the CFTC to act, such as by requiring reductions in 
holdings of futures contracts or swaps, against traders with large 
positions in order to prevent excessive speculation or price 
manipulation regardless of whether the trader's position is on an 
exchange or in the OTC market.
  The bill we are introducing today, unlike S. 3255, gives the CFTC the 
authority to establish position limits in the over-the-counter market 
for energy and agricultural commodities in order to prevent excessive 
speculation and price manipulation. The CFTC needs this authority to 
ensure that large traders are not using the over-the-counter markets to 
evade the position limits in the futures markets.
  Earlier this year I introduced legislation with Senators Feinstein, 
Durbin, Dorgan and Bingaman, S.3129, to close the London loophole. This 
loophole has allowed crude oil traders in the U.S. to avoid the 
position limits that apply to trading on U.S. futures exchanges by 
directing their trades onto the ICE Futures Exchange in London. The 
legislation we introduced also was incorporated into the legislation to 
stop prevent excessive speculation introduced by the majority leader, 
S. 3268. These provisions are now included in the legislation we are 
introducing today.
  After this legislation was first introduced, the CFTC imposed more 
stringent requirements upon the ICE Futures Exchange's operations in 
the United States--for the first time requiring the London exchange to 
impose and enforce 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, the current CFTC position 
limits apply only to the nearest futures contract. Our legislation will 
ensure that foreign exchanges with trading terminals in the U.S. will 
apply position limits to other futures contracts once the CFTC 
establishes those limits for U.S. exchanges.
  Although the CFTC has taken these important steps that will go a long 
way towards closing the London loophole, Congress should still pass 
this legislation to make sure the London loophole stays 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 that trader to reduce positions.
  The legislation we are introducing today also includes a number of 
provisions in the majority leader's bill, S. 3248, that require a 
variety of studies, investigations, and reports designed to improve the 
transparency and regulation of the energy markets. It also provides 
authorization for the CFTC to hire an additional 100 employees to 
oversee the commodity markets it regulates.
  On September 11, the CFTC issued a ``Staff Report on Commodity Swap 
Dealers and Index Traders with Commission Recommendations.'' The 
legislation we have introduced embodies several of the CFTC's 
recommendations to improve the transparency and regulation of swap 
dealers and commodity index traders. These recommendations include: 
develop and regularly publish reports on the activity of swap dealers 
and commodity index traders; more accurately assess the type of trading 
activity in the CFTC's weekly reports on commercial and noncommercial 
trading; review whether to eliminate the bona fide hedge exemption for 
swap dealers and create new limited risk management exemption; provide 
additional staff and resources for the CFTC.
  Our legislation also is consistent with CFTC Commissioner Chilton's 
dissenting views on the CFTC's recommendations. In his dissent, 
Commissioner Chilton requested that Congress provide: ``specific 
statutory authorities to allow the Commission to obtain data regarding 
over-the-counter transactions that may impact exchange-traded markets; 
``specific statutory authorities to allow the Commission to address 
market disturbances or violations of the Commodity Exchange Act, based 
on the data received regarding over-the-counter transactions;'' and 
authorization and appropriation for 100 additional employees.
  Our bill provides the CFTC with the statutory authorities requested 
by Commissioner Chilton and authorizes the requested employees.
  In summary, the legislation we are introducing today will give the 
CFTC ability to police all of our energy commodity markets to prevent 
excessive speculation and price manipulation. This legislation is 
necessary to close all of the loopholes in current law that permit 
speculators to avoid trading limits designed to prevent the type of 
excessive speculation that has been contributing to high energy prices. 
We hope our colleagues will support this legislation.
  Mr. President, I ask unanimous consent that a bill summary be printed 
in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

   The Levin-Bingaman-Harkin Prevent Excessive Speculation Act Bill 
                        Summary, Sept. 24, 2008

       The Levin-Bingaman-Harkin Prevent Excessive Speculation Act 
     would:
       Authorize Speculation Limits for all Energy and 
     Agricultural Commodities.
       Direct CFTC to impose position limits on energy and 
     agricultural futures contracts to prevent excessive 
     speculation and manipulation and to ensure sufficient market 
     liquidity. Similar to provisions in House-passed bill, H.R. 
     6604.
        Authorize CFTC to permit exchanges to impose and enforce 
     accountability levels that are lower than CFTC-established 
     speculation limits.
       Close London Loophole by Regulating Offshore Traders and 
     Increasing Transparency of Offshore Trades.
       Prohibit a foreign exchange from operating in the United 
     States unless it imposes comparable speculation limits and 
     reporting requirements as apply to U.S. exchanges. Similar to 
     Sec. 3 in S. 3268, with technical changes.
       Provide CFTC with same enforcement authority over U.S. 
     traders on foreign exchanges as it has over traders on U.S. 
     exchanges, including authority to require traders to reduce 
     their holdings to prevent excessive speculation or 
     manipulation. Similar to Sec. 4 in S. 3268.
       Require CFTC to invite non-U.S. regulators to form an 
     international working group to develop uniform regulatory and 
     reporting requirements to protect futures markets from 
     excessive speculation and manipulation. Similar to Sec. 5 in 
     S. 3268.
       Close the Swaps Loophole and Regulate Over-the-Counter 
     Transactions.
       Authorize CFTC to impose speculation limits on OTC 
     transactions to protect the integrity of prices in the 
     futures markets and cash markets.
       Require large OTC trades that affect futures prices to be 
     reported to CFTC. Allow one party to a transaction to 
     authorize the other party to file the report. Require CFTC 
     periodic review of reporting requirements to ensure key 
     trades are covered.
       Direct CFTC to revise bona fide hedge exemption to ensure 
     regulation of all speculators, and strengthen data analysis 
     and transparency of swap dealer and index trading.
       Clarify definition of OTC transactions to exclude spot 
     market transactions.
       Protect Both Energy and Agriculture Commodities.
       Cover trades in crude oil, natural gas, gasoline, heating 
     oil, coal, propane, electricity, other petroleum products and 
     sources of energy from fossil fuels, as well as ethanol, 
     biofuels, emission allowances for greenhouse gases, 
     SO2, NOx, and other air emissions.
       Cover trades in agricultural commodities listed in the 
     Commodity Exchange Act.
       Strengthen CFTC Oversight.
       Authorize CFTC to hire 100 new personnel to oversee 
     markets.
       Direct CFTC to issue proposed rules within 90 days and 
     final rules within 180 days.
       Authorize Reports and Studies.
       Require various investigations, studies, and reports. Same 
     as Sec. Sec. 8-15 in S. 3268.
                                 ______