[Congressional Record (Bound Edition), Volume 148 (2002), Part 3]
[Senate]
[Pages 2934-2935]
[From the U.S. Government Publishing Office, www.gpo.gov]




                      ENERGY DERIVATIVES TRAINING

  Mr. ENZI. Madam President, I rise to address the issue of 
derivatives. The name itself would almost put people to sleep; the 
details of it are very complicated. It is a process that is done by 
major corporations, which is what brings it to our attention at the 
moment. Unfortunately, the proposition that is before us is an answer 
looking for a problem. It is not a solution to what has happened.
  Enron has raised many concerns regarding the state of our energy 
markets. However, as investigations into the collapse of the company 
are showing, the failure of Enron was likely due to unethical and 
possibly illegal accounting techniques used by executives at the 
company. We need to make one thing clear: The trading of energy 
derivatives had nothing to do with the collapse of Enron. In fact, 
Enron's trading platform was one of the most lucrative parts of the 
company.
  Enron is not an accounting problem; it is not a business problem. It 
is probably a fraud problem.
  During debate on the Commodities Futures and Modernization Act, we 
examined extensively the oversight and regulation of energy 
derivatives. It was done the right way. It was done with hearings, with 
committee markup, with floor debate. This has been brought directly to 
the floor. It has bypassed the other processes.
  What we concluded using the correct process was the proper amount of 
oversight for a new and emerging business. We did the debate on the 
Commodities Futures and Modernization Act, and we examined extensively 
the oversight and regulation of the energy derivatives--the way it is 
supposed to be done. What we concluded was the proper amount of 
oversight for a new and emerging business had been put into law.
  If we start to regulate an industry that is in its infancy, we run 
the risk of stifling competition and reducing the possibility of it 
reaching its full potential.
  Federal Reserve Chairman Alan Greenspan testified last week before 
the Senate Banking Committee. I want to echo a few of his comments 
regarding the regulation of energy derivatives.
  Chairman Greenspan said it was crucially important that we allow 
those types of markets to evolve amongst professionals who are most 
capable of protecting themselves far better than either we, the Fed, 
CFTC, or the OCC could conceivably do. The important issue is that 
there is a significant downside if we regulate where we do not have to 
in this area. Because one of the major--and indeed the primary--areas 
for regulation and protection of the system is counter-party 
surveillance--that the individual private parties, looking at the 
economic events of the status of the people with whom they are doing 
business. . . . We've got to allow that system to work, because if we 
step in as government regulators, we will remove a considerable amount 
of the caution that is necessary to allow those markets to evolve. And 
while it may appear sensible to go in and regulate, all of our 
experience is that there is a significant downside when you do not 
allow counter-party surveillance to function in an appropriate manner.
  I think we are glazing the eyes over here, but essentially Mr. 
Greenspan said it is too early to do anything based on the act that we 
already did.
  Selling derivatives is a way for companies that can't afford risk to 
pass it

[[Page 2935]]

on to companies that are willing. We have done that for a long time in 
the insurance business. This is another form of corporate insurance.
  There is no indication that trading of energy derivatives contributed 
in any way to the collapse of Enron. However, if, in fact, Members 
think we need to look at legislation in this area, we should examine it 
in a reasonable process--not by offering on the floor amendments to a 
newly enacted piece of legislation. I certainly appreciate and respect 
Members' attention to examining the energy markets, but we should take 
that through the committee process so Members have a chance to hear 
testimony and pose questions to experts in this area.
  It is a difficult area; it is a complicated area. Supporters of this 
amendment claim that Enron has such a large market share of this 
business that they were able to provide undue influence over the energy 
trading.
  To the contrary, during and after the collapse of Enron, there were 
no interruptions of trading. Other market participants stepped in and 
assumed volume. There were no price swings or collapses of the energy 
market. This is a perfect example of market forces working the way they 
were intended.
  The CFMA provided legal certainty for commercial parties not executed 
on futures exchanges--legal certainty, taking away some of the risk, 
selling some of the risk. This amendment could be interpreted to cover 
all transactions between commercial parties conducted either by e-mail 
or over the phone. The effect of this amendment would likely be 
decreased market liquidity because of increased legal and transactional 
uncertainties. Additionally, energy companies may be discouraged from 
using derivatives to hedge price risks. This could result in more price 
volatility in energy markets, which will hurt the very consumers the 
legislation seeks to help.
  This amendment would also require electronic trading exchanges to set 
aside capital, even if they do not participate in trading. For 
instance, the Intercontinental Exchange allows buyers and sellers of 
energy derivatives to exchange offers through an electronic program. 
This exchange is already regulated by the CFTC and gives the CFTC 
access to its trading screens. This amendment would require the 
Intercontinental Exchange to set aside capital, even though it only 
facilitates transactions and does not trade. This requirement could 
force ICE to cease operations--forcing buyers and sellers of energy 
derivatives into the over-the-counter market. This is why CFTC Chairman 
Newsome has said the CFTC does not require this new authority.
  Because of my concern for this issue, I recently wrote to the 
Chairman of the Securities and Exchange Commission to get his views 
regarding this amendment. Mr. Pitt responded:

       The Securities and Exchange Commission believes this 
     legislative change is premature at this time.

  I ask unanimous consent that this entire letter be printed in the 
Record.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

                                            United States Security


                                      and Exchange Commission,

                                   Washington, DC, March 11, 2002.
     Hon. Michael B. Enzi,
     U.S. Senate, Senate Russell Office Building, Washington, DC.
       Dear Senator Enzi: Thank you for your letter concerning 
     proposed amendment #2989 (Congressional Record, March 7, 
     2002, p. S1685), introduced by Senator Dianne Feinstein and 
     others, to S. 517, the pending Senate energy legislation. 
     This amendment would repeal key provisions enacted as part of 
     the Commodity Futures Modernization Act (P.L. 106-534) 
     applicable to over-the-counter derivatives contracts in 
     certain energy products.
       The Securities and Exchange Commission believes this 
     legislative change is premature at this time--barely more 
     than a year after the CFMA's enactment. Because of on-going 
     federal investigations, the lack of rigorous analysis about 
     the CFMA's effect on the derivatives markets as a whole, and 
     the absence of a determination about what role (if any) over-
     the-counter derivatives played in the collapse of Enron or 
     the California energy crisis of last summer, we do not 
     believe that any action should be taken until all of the 
     facts are available for evaluation.
       Thank you for giving the Commission an opportunity to 
     comment on this legislative proposal.
           Yours truly,
                                                   Harvey L. Pitt,
                                                         Chairman.

  Mr. ENZI. I ask that Members step back and, if there is a problem, 
let's address it in a responsible manner through the normal process. 
Let's begin to hold hearings on energy trading, and after we have had 
time to evaluate what we have learned, we can look forward to a 
reasonable solution. This is too early and takes away the opportunity 
to sell off risk by some other companies. I ask for you to defeat the 
amendment.
  I yield the floor.

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