[Congressional Record (Bound Edition), Volume 146 (2000), Part 18]
[Senate]
[Pages 27309-27310]
[From the U.S. Government Publishing Office, www.gpo.gov]



            THE COMMODITY FUTURES MODERNIZATION ACT OF 2000

 Mr. SARBANES. Mr. President, I ask to print in the Record a 
letter from the President's Working Group on Financial Markets strongly 
supporting the Commodity Futures Modernization Act of 2000.
  The act provides certainty for over-the-counter swaps and authorizes 
a new financial product, the ``security future,'' to be traded under a 
regulatory scheme that protects investors against fraud, market 
manipulation and insider trading.
  The act contains three principal components. It would provide legal 
certainty that specified types of swaps which are traded over-the-
counter are not regulated as futures. The Report of the President's 
Working Group on Over-the-Counter Derivatives Markets and the Commodity 
Exchange Act, issued in November 1999, strongly recommended that 
Congress enact legislation to provide OTC swaps with legal certainty in 
order to ``reduce systemic risk in the U.S. financial markets and 
enhance the competitiveness of the U.S. financial sector.''
  In addition the act would authorize trading in futures on single 
stocks and narrow-based stock indices. These are new investment 
products which, until now, have been prohibited from trading by the 
Shad-Johnson Accord, which this act would repeal. By authorizing 
securities futures, the act would allow financial markets to increase 
the number of products they trade and give investors additional 
investment options. The Securities and Exchange Commission and the 
Commodity Futures Trading Commission negotiated the proposed regulatory 
regimen over securities futures, which is designed to protect investors 
against fraud, insider trading and market manipulation. The regulatory 
regimen will call for joint regulation by both the SEC and CFTC of 
these markets and the intermediaries that trade in them. Imposing 
strong investor protections is absolutely necessary if we are to allow 
trading in these new investment products.
  The act also contains regulatory relief provisions for the futures 
markets that would codify recent CFTC regulations.
  I would like to highlight certain important aspects of titles III and 
IV of the act.
  Title III addresses the SEC's authority over security-based swap 
agreements. It carefully carves out products traditionally viewed as 
securities in exclusions from the definition of swap agreements. It is 
important to note that title III does not eliminate the SEC's existing 
authority to regulate products that are securities.
  Title III applies anti-fraud and anti-manipulation provisions of the 
Federal securities laws to securities-based swap

[[Page 27310]]

agreements, including those entered into by banks. Title III amends 
section 10(b) of the Securities Exchange Act of 1934 and its anti-fraud 
protections to apply to ``any securities-based swap agreement.'' In 
extending these protections, the act makes explicit that rules 
promulgated under section 10(b) to address fraud, manipulation, or 
insider trading apply to securities-based swap agreements. Thus, 
current and future anti-fraud rules will apply to swap agreements to 
the same extent as they do to securities. This will enhance protection 
for investors and for the financial markets, and will permit the SEC to 
respond as necessary to developments in these markets.
  Title III states that existing judicial precedent relating to various 
securities statutes and rules is applicable to securities-based swaps 
to the same extent as it is to securities. Thus, for example, cases 
interpreting these statutory provisions which establish theories of 
liability and private rights of actions would apply directly to 
securities-based swaps.
  Title IV, Legal Certainty for Bank Products Act of 2000, clarifies 
the current law, under which the CFTC does not regulate traditional 
banking products. Such products include deposit accounts, CDs, banker's 
acceptances, letters of credit, loans, credit card accounts, and loan 
participations. When a question arises, title IV provides a mechanism 
for determining whether a product is an ``identified,'' or traditional, 
banking product. To qualify as an identified banking product, section 
403 requires two conditions to be met: (1) that the product cannot have 
been either prohibited by the Commodity Exchange Act or regulated by 
the CFTC on or before December 5, 2000, and (2) that the bank has 
obtained a certification from its regulator that the bank product was 
commonly offered by any bank prior to December 5, 2000. The latter test 
requires that the product was actively bought, sold, purchased, or 
offered by or to multiple customers and is not just a transaction 
customized for a single client or handful of clients.
  Section 405 excludes a hybrid product from the Commodity Exchange Act 
if under a ``predominance test'' it is primarily an identified banking 
product and not a contract, agreement or transaction appropriately 
regulated by the CFTC. The act dictates how to resolve disputes about 
the application of this test.
  The bill's definition of ``security future'' does not include 
products excluded under title IV and other sections of the Commodity 
Exchange Act, e.g., certain swaps, identified banking products, etc. 
Thus, the new grants of authority of this act to the SEC would not 
extend to these products. However, these exclusions do not limit the 
definition of ``security'' or the SEC's jurisdiction under existing 
statutes. For example, the SEC has, and will continue to have, 
jurisdiction over all over-the counter options.
  The act will have a significant impact on the futures markets as well 
as on the securities markets and investors. The United States 
investment markets are the envy of the world. This act is intended to 
strengthen those markets as it provides legal certainly for over-the-
counter swaps, authorizes the trading of futures on single stocks and 
narrow-based stock indices, and gives regulatory relief for the futures 
markets.
  The letter from the President's Working Group on Financial Markets 
follows:

                                                December 15, 2000.
     Hon. Paul S. Sarbanes,
     Ranking Member, Committee on Banking, Housing, and Urban 
         Affairs, U.S. Senate, Washington, DC.
       Dear Senator Sarbanes: The Members of the President's 
     Working Group on Financial Markets strongly support the 
     Commodities Futures Modernization Act. This important 
     legislation will allow the United States to maintain its 
     competitive position in the over-the-counter derivative 
     markets by providing legal certainty and promoting 
     innovation, transparency and efficiency in our financial 
     markets while maintaining appropriate protections for 
     transactions in non-financial commodities and for small 
     investors.
           Sincerely,
     Lawrence H. Summers,
       Secretary, Department of the Treasury.
     Alan Greenspan,
       Chairman, Board of Governors of the Federal Reserve.
     Arthur Levitt,
       Chairman, Securities and Exchange Commission.
     William J. Rainer,
       Chairman, Commodity Futures Trading Commission.

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