[Congressional Record Volume 154, Number 159 (Wednesday, October 1, 2008)]
[Senate]
[Pages S10335-S10337]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. FEINSTEIN:
  S. 3671. A bill to amend the Commodity Exchange Act to require the 
Commodity Futures Trading Commission to develop and impose aggregate 
position limits on certain large over-the-counter transactions and 
classes of large over-the-counter transactions; to the Committee on 
Agriculture, Nutrition, and Forestry.
  Mrs. FEINSTEIN. Mr. President, I rise to introduce the Over-the-
Counter Swaps Speculation Limit Act, a bill to establish workable 
speculative position limits that apply to both bilateral over-the-
counter swaps transactions and on-exchange transactions.
  The Over-the-Counter Swaps Speculation Limit Act would close the 
``over-the-counter swaps loophole'' once and for all by requiring the 
Commodity Futures Trading Commission--or CFTC--to apply the position 
limit system to bilateral swaps, not just the on-exchange transactions 
that are limited today.
  Let me explain what the bill would do:
  CFTC would enforce ``aggregate'' position limits so that a trader's 
positions on and off exchange would be combined. Swaps would no longer 
be exempt from position limits.
  CFTC would be allowed to grant hedge exemptions for bone fide 
hedging. This exemption would be limited to trading that hedges against 
price risk exposure related to physical transactions in that energy 
commodity.
  Neither institutional investors hedging against inflation, nor swaps 
dealers hedging their secret dealings would qualify for a hedge 
exemption.
  The bill would give CFTC the power to issue civil fines to enforce 
position limits when unwinding a speculative position would be 
disruptive to the marketplace.
  This legislation is the missing piece to otherwise comprehensive 
anti-speculation legislation debated in the Senate in July and adopted 
by the House of Representatives in September.
  Both of the House and Senate bills included vital provisions to 
protect our markets, including provisions to close the London Loophole 
by imposing speculation position limits on trading conducted on Foreign 
Boards of Trade.
  It would grant CFTC the authority to collect data and monitor trading 
in Over-the-Counter Swaps markets, shining the bright light of 
oversight onto a previously un-watched market.
  It would improve the data collection systems at CFTC to distinguish 
between swaps dealers, institutional investors, and genuine 
speculators;
  It would assure no true speculator is exempted from speculative 
position limits; and increase CFTC's staffing levels.

[[Page S10336]]

  Reacting to congressional pressure, the CFTC took many of the steps 
through administrative action that our bills in Congress would have 
required.
  CFTC largely closed the London Loophole and began monitoring London 
trading of American crude oil.
  CFTC began collecting detailed data on OTC swaps trading, especially 
by swaps dealers and institutional index traders, and it began 
monitoring these markets.
  CFTC reclassified a major swaps dealer as a speculator and proposed a 
rulemaking to revise its system for granting speculative limit 
exemptions.
  This is true progress, but the swaps loophole--exempting voice 
brokered bilateral swaps from the speculative position limit system--
remains in place. Traders are able to hold positions far above 
speculative position limits simply by executing their trades through a 
voice broker.
  Until this summer, the Federal Government knew very little about OTC 
swaps, which have been exempt from CFTC oversight since 1993. But 
thanks to CFTC's increased oversight this summer, published in its 
September 2008 ``Staff Report on Commodity Swap Dealers and Index 
Traders,'' we know that traders do in fact use these swaps markets to 
hold positions above the speculative position limits on regulated 
exchanges.
  The CFTC report found that on a single day in June there were:
  ``18 noncommercial traders (speculators) in 13 markets who appeared 
to have an aggregate position . . . that would have been above the 
speculative limit or an exchange accountability level if all the 
positions were on-exchange.''
  CFTC discovered that a few traders held positions that would have 
``significantly exceeded'' an aggregate position limit.
  What is the purpose of speculative position limits if traders know 
they can buy the equivalent product in unlimited quantities from a 
voice broker?
  The Over-the-Counter Swaps Speculation Limit Act puts an end to this 
flawed system by instructing CFTC to establish a system of aggregate 
position limits. As the staff report demonstrated, CFTC knows how to 
calculate such limits.
  I believe this legislation avoids the pitfalls of previous efforts in 
the 110th Congress to limit speculative positions in swaps.
  It is simple, granting CFTC the broad mandate to impose aggregate 
position limits across positions held on registered entities, foreign 
boards of trade, and OTC markets that impact the price discovery 
function of a regulated market. It grants the regulator proper 
discretion to determine which contracts are functionally equivalent and 
what the limits should be.
  It applies speculative position limits only to swaps that impact the 
price discovery function on regulated markets. By focusing CFTC efforts 
only on the major, standardized swaps contracts, the bill maintains 
legal certainty for unique financing agreements and other private 
bilateral transactions.
  The bill also prevents speculators from migrating to less regulated 
contracts. CFTC will only be allowed to exempt contracts from position 
limits after it determines that the contract is not functioning as a 
haven from regulation. CFTC must impose speculative position limits on 
any contract that: is highly standardized; settles on the price of a 
contracted traded in a regulated marketplace; has its prices widely 
published and referenced; or traded in significant volumes.
  Finally, the legislation addresses CFTC staff concerns that enforcing 
position limits on bilateral swaps contracts would be too cumbersome. 
In recent briefings, CFTC staff argued that the primary reason CFTC was 
not calling for speculative position limits on swaps is that position 
limits on swaps would force parties to void existing contracts, which 
harms the counterparty as much as the trader who is over their limit.
  Regulators should not force a trader to break a contract if such 
action would punish the counterparties as well as the speculator. To 
address this, this legislation gives CFTC the power to enforce position 
limits with fines instead of forcing a trader to unwind a position.
  Over the past 6 months, OTC swaps markets have been exposed, and it 
has become increasingly apparent that speculative position limits are 
both appropriate and feasible in order to protect regulated markets 
from manipulation and excessive speculation.
  The regulated and unregulated energy markets are fully integrated. 
With traders moving back and forth freely, it is no longer reasonable 
to believe that bad behavior in swaps can be isolated.
  A manipulated swaps market would likely impact the price discovery 
function of a futures market, and in turn affect consumer prices.
  If we want fair play in the energy markets, we cannot continue to 
instruct the CFTC to swallow its whistle when it sees violations at the 
Swaps' end of the court.
  We need to allow CFTC to call foul when it sees excessive 
speculation, whether on an exchange or in a voice brokered swaps 
market.
  The Over-the-Counter Swaps Speculation Limit Act would give the CFTC 
back its whistle. It would allow the Commission to use the speculative 
position limit system in existence since the 1930s--to reel in 
excessive speculation in American energy markets.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 3671

       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 ``Over-the-Counter Swaps 
     Speculation Limit Act''.

     SEC. 2. AGGREGATE POSITION LIMITS.

       Section 2 of the Commodity Exchange Act (7 U.S.C. 2) is 
     amended by adding at the end the following:
       ``(j) Aggregate Position Limits.--
       ``(1) Definition of bona fide hedging transaction.--In this 
     subsection:
       ``(A) In general.--The term `bona fide hedging transaction' 
     means a transaction that--
       ``(i) is a substitute for a transaction to be made or a 
     position to be taken at a later time in a physical marketing 
     channel;
       ``(ii) is economically appropriate for the reduction of 
     risks in the conduct and management of a commercial 
     enterprise; and
       ``(iii) arises from a potential change in the value of--

       ``(I) assets that a person owns, produces, manufactures, 
     possesses, or merchandises (or anticipates owning, producing, 
     manufacturing, possessing, or merchandising);
       ``(II) liabilities that a person incurs or anticipates 
     incurring; or
       ``(III) services that a person provides or purchases (or 
     anticipates providing or purchasing).

       ``(B) Exclusion.--The term `bona fide hedging transaction' 
     does not include a transaction entered into on a designated 
     contract market for the purpose of offsetting a financial 
     risk arising from an over-the-counter commodity derivative.
       ``(2) Aggregate position limits.--
       ``(A) Development; imposition.--Notwithstanding any other 
     provision of this Act, in accordance with subparagraph (B), 
     to reduce the potential threat of market manipulation, 
     excessive speculation, or congestion in any contract listed 
     for trading on a registered entity or a contract that the 
     Commission has determined to provide a price discovery role, 
     the Commission shall impose aggregate position limits on 
     positions held on registered entities, foreign boards of 
     trade, and each large over-the-counter transaction or class 
     of large over-the-counter transactions that the Commission 
     determines to be appropriate to assist the Commission in 
     protecting the price discovery function of contracts under 
     the jurisdiction of the Commission.
       ``(B) Requirements for development and imposition of 
     aggregate position limits.--
       ``(i) Evaluation system.--In developing aggregate position 
     limits under subparagraph (A), the Commission shall establish 
     a system for evaluating the degree to which--

       ``(I) each large over-the-counter transaction and class of 
     large over-the-counter transactions are equivalent to 
     positions in contracts on registered entities; and
       ``(II) contracts on registered entities are equivalent to 
     contracts on other registered entities.

       ``(ii) Maximum level of aggregate position limits.--In 
     developing aggregate position limits under subparagraph (A), 
     the Commission shall set the aggregate position limits at the 
     minimum level practicable to ensure sufficient market 
     liquidity for the conduct of bona fide hedging transactions.
       ``(C) Consideration of factors for determination.--
       ``(i) In general.--In making a determination under 
     subparagraph (A) with respect to the imposition of aggregate 
     position limits on appropriate large over-the-counter 
     transactions and classes of large over-the-counter 
     transactions, the Commission may determine not to impose 
     aggregate position limits

[[Page S10337]]

     on any large over-the-counter transaction or class of large 
     over-the-counter transactions if the Commission determines 
     that the large over-the-counter transaction or class of large 
     over-the-counter transactions does not meet any of the 
     factors described in clause (ii).
       ``(ii) Factors.--The factors described in clause (i) 
     include--

       ``(I) whether a standardized agreement is used to execute 
     the large over-the-counter transaction or class of large 
     over-the-counter transactions;
       ``(II) whether the large over-the-counter transaction or 
     class of large over-the-counter transactions settles against 
     any price (including the daily or final settlement price) of 
     1 or more contracts listed for trading on a registered 
     entity;
       ``(III) whether the price of the large over-the-counter 
     transaction or class of large over-the-counter transactions 
     is reported to a third party, published, or otherwise 
     disseminated;
       ``(IV) whether the price of the large over-the-counter 
     transaction or class of large over-the-counter transactions 
     is referenced in any other transaction;
       ``(V) whether there is a significant volume of the large 
     over-the-counter transaction or class of large over-the-
     counter transactions; and
       ``(VI) any other factor that the Commission determines to 
     be appropriate.

       ``(D) Exemption for bona fide hedging transactions.--The 
     Commission may exempt any large over-the-counter transaction 
     or class of large over-the-counter transactions from any 
     aggregate position limit developed and imposed by the 
     Commission under subparagraph (A) if the Commission 
     determines that the large over-the-counter transaction or 
     class of large over-the-counter transactions is a bona fide 
     hedging transaction.
       ``(E) Net sum of positions.--The aggregate position limits 
     developed and imposed by the Commission under subparagraph 
     (A) shall apply to the net sum of the like positions held by 
     a person on or in--
       ``(i) registered entities;
       ``(ii) foreign boards of trade; and
       ``(iii) over-the-counter commodity derivatives.
       ``(F) Enforcement.--
       ``(i) In general.--Subject to clause (ii), in enforcing 
     each aggregate position limit developed and imposed by the 
     Commission under subparagraph (A), the Commission may order a 
     person to reduce any position of the person.
       ``(ii) Maintenance of position; civil penalty.--

       ``(I) Maintenance of position.--If the Commission 
     determines that the reduction of a position of a person under 
     clause (i) would be disruptive to the price discovery 
     function, the Commission may allow the person to maintain the 
     position.
       ``(II) Civil penalty.--The Commission shall impose on the 
     person described in subclause (I) a civil penalty in an 
     amount not greater than--

       ``(aa) $1,000,000 for each violation committed by the 
     person; or
       ``(bb) with respect to each violation committed by the 
     person, the market value of the position in excess of the 
     appropriate aggregate position limit.
       ``(iii) Effect of violation.--A violation of an aggregate 
     position limit developed and imposed by the Commission under 
     subparagraph (A) shall be determined to be a violation of 
     this Act.''.
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