Rural Utilities Service Broadband Loan Program
RURAL UTILITIES SERVICE BROADBAND LOAN PROGRAM
Mr. COCHRAN. Mr. President, thank you very much. I thank the chairman very much for yielding me this time.
Mr. President, the Feinstein amendment suggests a significant change in the regulatory regime that exists today for energy markets.
My understanding of the Senator's amendment is that it would, for the first time, require regulation of off-exchange energy derivatives. These complex instruments, used to transfer risk among sophisticated traders, are vital tools in today's energy trading environment.
The Commodity Futures Trading Commission exempted off-exchange energy derivatives from regulation in 1993. The Congress codified this exemption, largely without change, as part of the Commodity Futures Modernization Act of 2000. The Congress considered regulating off-exchange energy derivatives when it debated the modernization act but chose not to do so because of the disruption new burdensome regulation would cause to these sophisticated traders.
Senators should remember that the distinguished Senator from California initially offered an amendment similar to the one before us today during last year's Senate debate on the Energy bill. On April 10, 2002, the Senate voted 48 to 50 not to invoke cloture on this initial version of the Feinstein amendment. Senator Feinstein tried again with a new version of her amendment in June of this year, again during debate on the Energy bill. On June 11, 2003, the Senate tabled this amendment by a vote of 55 to 44. It should be noted that the second version of her amendment received four fewer votes than the first version. Now we have before us a third version of the Feinstein amendment.
Senators may remember from the debate last summer on the second version of the Feinstein amendment that I read into the RECORD a June 11, 2003, letter from the President's Working Group on Financial Markets. In that letter, Alan Greenspan, Chairman of the Federal Reserve; John Snow, Secretary of the Treasury; William Donaldson, Chairman of the Securities and Exchange Commission; and James Newsome, Chairman of the Commodity Futures Trading Commission, all expressed opposition to the Feinstein amendment.
The letter warned that the Feinstein amendment would have significant unintended consequences for this important risk management market. It also pointed out that the Commodity Futures Trading Commission has brought formal legal actions against Enron, Dynegy, and El Paso for market manipulation, wash-or round-trip-trades, false reporting of prices, and operation of illegal markets.
The Securities and Exchange Commission, the Federal Energy Regulatory Commission, and the Department of Justice have also initiated formal actions in the energy sector. Some of these actions have already resulted in substantial monetary penalties and other sanctions and make clear that wrongdoers in the energy markets are fully subject to the existing enforcement authority of Federal regulators.
To my knowledge, the President's working group has not changed its position on this latest version of the proposal of the Senator from California.
Finally, the Feinstein amendment may create regulatory uncertainty for off-exchange energy derivatives from multiple Federal agencies. On one hand, the amendment before us requires the Commodity Futures Trading Commission to regulate off-exchange energy market derivative transactions. However, the amendment also contains a provision that appears to preserve the Federal Energy Regulatory Commission's authority in this market. At a minimum, the amendment appears to muddy the regulatory water with respect to this market.
Remember, the CFTC has antifraud authority. It has brought legal actions against Enron, El Paso, Dynergy, and others regarding energy market problems. It has recovered millions of dollars in fines from these companies. It has numerous ongoing investigations in this area. And more charges are possible. The Senator from California has said that her amendment is needed to prevent wash trades. The CFTC has wash trade authority. It has specific authority under section 4 of the CEA. The CFTC has brought several wash trade actions in the last several years, and its authority to do so has been upheld recently by two U.S. appeals courts. Just this year, the Commodity Futures Trading Commission has recovered tens of millions of dollars from merchant energy traders for wash trades and false trades.
It has also been suggested by the Senator that because exempt commercial markets such as the InterContinentalExchange are exempt from regulation under the Commodity Exchange Act that they have no regulatory oversight. These markets are subject to many regulatory requirements. They are required by statute to have an electronic audit trail. They are required by statute to keep records for 5 years. They are subject to antifraud and antimanipulation authority under the CFTC's jurisdiction.
They are subject to special call examinations by the commission as well.
This amendment would impose large trader reporting on exempt commercial markets. Large trader reporting works on retail futures exchanges with standardized contracts but wouldn't work on exempt commercial markets which do not have the same type of standardization. Large trader reporting on exempt commercial markets could actually lead to misleading information being provided to the public. Large trader reporting is used for market surveillance in retail futures markets.
The Commodity Futures Trading Commission's statutory authority for exempt commercial markets is after-the-fact antifraud and antimanipulation enforcement and is, therefore, inconsistent with a large trader reporting scheme.
For these reasons, which I think are very compelling, the Senate should reject this amendment.
I ask unanimous consent to print in the RECORD the text of a letter that went out to all Senators signed by myself, Senator PETE DOMENICI, Senator MIKE CRAPO, and Senator ZELL MILLER on this subject, along with enclosures which are letters addressed to Senators CRAPO and MILLER from the Department of the Treasury, Board of Governors of the Federal Reserve System, signed by John W. Snow, Alan Greenspan, William Donaldson, and James E. Newsome, along with a Department of the Treasury letter, dated September 18, 2002, to these same two Senators, Mr. Crapo and Mr. Miller.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
OPPOSE FEINSTEIN DERIVATIVES AMENDMENT TO AGRICULTURE APPROPRIATIONS BILL
DEAR COLLEAGUE: We are writing to express our opposition to the Feinstein Derivatives Amendment to the Agriculture Appropriations bill. This amendment has been defeated twice before on a motion to invoke cloture in April 2002 (48-50) and most recently on a motion to table in June 2003 (55-44).
The amendment before us today is an up or down vote. The amendment would significantly modify portions of the Commodity Futures Modernization Act of 2000 (CFMA) and re-introduce legal uncertainties into derivatives markets. It is our understanding that the amendment's goal is to provide additional regulatory oversight to the over-the-counter (OTC) energy derivatives markets in light of the California energy crisis and Enron's bankruptcy; however to date, there is no evidence that derivatives caused either crisis.
Attached please find copies of two letters from the President's Working Group. The 2002 letter discusses reasons why the derivatives amendment is not warranted and urges Congress "to be aware of the potential unintended consequences of current legislative proposals." The 2003 letter discusses all the civil, criminal and enforcement actions taken by the various federal agencies against the wrongdoers in the energy markets since Enron and specifically highlights the CFTC's actions.
Finally, the Energy Policy Act of 2003 will address many of the provisions in Senator Feinstein's proposed legislation, including increased protection against fraud and manipulation, which addresses the Enron-On-Line problem, a ban on roundtrip trading, and increased penalties for violations of the Federal Power Act and Natural Gas Act. Any attempt to undermine the Energy bill by adding similar provisions to the Agriculture Appropriations legislation is unnecessary and we strongly oppose this effort.
Sincerely,
Thad Cochran.
Mike Crapo.
Pete Domenici.
Zell Miller.
Attachments.
DEPARTMENT OF THE TREASURY, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, U.S. SECURITIES AND EXCHANGE COMMISSION, COMMODITY FUTURES TRADING COMMISSION,
June 11, 2003.
Hon. MICHAEL D. CRAPO,
U.S. Senate, Russell Senate Office Building, Washington, DC.
Hon. ZELL B. MILLER,
U.S. Senate, Dirksen Senate Office Building, Washington, DC.
DEAR SENATORS CRAPO AND MILLER: Thank you for your letter of June 10, 2003, requesting the views of the President's Working Group on Financial Markets (PWG) on proposed Senate Amendment #876 to S. 14, the pending energy bill. As this amendment is similar to a proposed amendment on which you sought the views of the PWG last year, we reassert the positions expressed in the PWG's response dated September 18, 2002, a copy of which is enclosed. The proposed amendment could have significant unintended consequences for an extremely important risk management market-serving businesses, financial institutions, and investors throughout the U.S. economy. For that reason, we believe that adoption of this amendment is ill-advised.
We would also point out that, since we wrote that letter last year, various federal agencies have initiated actions against wrongdoing in the energy markets. As you note, the CFTC has brought formal actions against Enron, Dynegy, and El Paso for market manipulation, wash (or roundtrip) trades, false reporting of prices, and operation of illegal markets. The Securities and Exchange Commission, the Federal Energy Regulatory Commission, and the Department of Justice have also initiated formal actions in the energy sector. Some of these actions have already resulted in substantial monetary penalties and other sanctions. These initial actions alone make clear that wrongdoers in the energy markets are fully subject to the existing enforcement authority of federal regulators.
The Commodity Futures Modernization Act of 2000 brought important legal certainty to the risk management marketplace. Businesses, financial institutions, and investors throughout the economy rely upon derivatives to protect themselves from market volatility triggered by unexpected economic events. This ability to manage risks makes the economy more resilient and its importance cannot be underestimated. In our judgment, the ability of private counterparty surveillance to effectively regulate these markets can be undermined by inappropriate extensions of government regulation.
Yours truly,
JOHN W. SNOW,
Secretary, Department of the Treasury.
ALAN GREENSPAN,
Chairman, Board of Governors of the Federal Reserve System.
WILLIAM H. DONALDSON,
Chairman, U.S. Securities and Exchange Commission.
JAMES E. NEWSOME,
Chairman, Commodity Futures Trading Commission.
DEPARTMENT OF THE TREASURY, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, U.S. SECURITIES AND EXCHANGE COMMISSION, COMMODITY FUTURES TRADING COMMISSION,
September 18, 2002.
Hon. MICHAEL D. CRAPO,
U.S. Senate, Russell Senate Office Building, Washington, DC.
Hon. ZELL B. MILLER,
U.S. Senate, Dirksen Senate Office Building, Washington, DC.
DEAR SENATORS CRAPO AND MILLER: In response to your letter of September 13, we write to express our serious concerns about the legislative proposal to expand regulation of the over-the-counter (OTC) derivatives markets that has recently been proposed by Senators Harkin and Lugar.
We believe that the OTC derivatives markets in question have been a major contributor to our economy's ability to respond to the stresses and challenges of the last two years. This proposal would limit this contribution, thereby increasing the vulnerability of our economy to potential future stresses.
The proposal would subject market participants to disclosure of proprietary trading information and new capital requirements.
We do not believe a public policy case exists to justify this governmental intervention. The OTC markets trade a wide variety of instruments. Many of these are idiosyncratic in nature. These customized markets generally do not serve a significant price discovery function for non-participants, nor do they permit retail investors to participate. Public disclosure of pricing data for customized OTC transactions would not improve the overall price discovery process and may lead to confusion as to the appropriate pricing for other transactions, as terms and conditions can vary by contract. The rationale for imposing capital requirements is unclear to us, and the proposal's capital requirements also could duplicate or conflict with existing regulatory capital requirements.
The trading of these instruments arbitrages away inefficiencies that exist in all financial and commodities markets. If dealers had to divulge promptly the proprietary details and pricing of these instruments, the incentive to allocate capital to developing and finding markets for these highly complex instruments would be lessened. The result would be that the inefficiencies in other markets that derivatives have arbitraged away would reappear.
It is also unclear who would benefit from the proposed disclosures and regulations other than whoever simply copied existing products and instruments for their own short-term advantage. Weakening the protection of proprietary intellectual property rights in the market arena would undercut a complex of highly innovative markets that is among this nation's most valuable assets.
While the derivatives markets may seem far removed from the interests and concerns of consumers, the efficiency gains that these markets have fostered are enormously important to consumers and to our economy. We urge Congress to protect these markets' contributions to the economy, and to be aware of the potential unintended consequences of current legislative proposals.
Yours truly,
PAUL H. O'NEILL,
Secretary, Department of the Treasury.
ALAN GREENSPAN,
Chairman, Board of Governors of the Federal Reserve System.
HARVEY L. PITT,
Chairman, U.S. Securities and Exchange Commission.
JAMES E. NEWSOME,
Chairman, Commodity Futures Trading Commission.