Federal regulators' oversight of over-the-counter (OTC) energy futures would deepen significantly under a sweeping financial regulatory reform plan unveiled by President Obama last Wednesday.
It calls for Congress to amend the Commodity Exchange Act (CEA) and securities laws so that the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) would "have clear, unimpeded authority to police and prevent fraud, market manipulation and other market abuses involving all OTC derivatives."
To ensure the transparency of OTC derivatives, Congress was further urged to amend the CEA and securities laws to require the clearing of all standardized OTC derivatives through regulated central counterparties, as well as to authorize the CFTC and the SEC to impose record keeping and reporting requirements (including audit trail) on all OTC derivatives.
During hearings earlier this month, a call for mandatory clearing -- or pushing OTC market futures products onto an exchange, particularly nonstandardized products -- was one of the main points of dispute among congressmen, financial industry witnesses and critics (see NGI, June 8). CFTC Commissioner Bart Chilton said he "heartily commend[ed]" Obama's proposal, but was concerned "that 'by a thousand tiny cuts' this important reform will languish in committees and backroom debates."
Obama's reform package also supports giving the CFTC the authority to set position limits on OTC derivatives that "perform or affect a significant price discovery function with respect to regulated markets." It requires hedge fund advisors to register with the SEC as well.
Atlanta-based IntercontinentalExchange (ICE), a leading global futures exchange and OTC market for energy and other commodities, declined to comment on the administration's reform proposals, with a spokeswoman saying there "is not a significant level of detail for us to react." ICE will wait to see what emerges from Congress, she said.
CME Group, the world's largest derivatives exchange, backed the proposed reforms. "We support many of the concepts and believe this is a significant step towards restoring confidence in the integrity of financial markets," it said.
The White House outlined the reforms in an 85-page white paper, which was released last Wednesday. Obama's reform package will be sent to Congress, which has been working on many of the same issues.
"I was pleased that the proposal begins to get a handle on the free-wheeling derivatives markets that many economists name as a key player in causing the recent economic downturn," said Senate Agriculture Committee Chairman Tom Harkin (D-IA). "I introduced legislation earlier this year to bring these types of financial transactions onto regulated exchanges in order to add openness, transparency and integrity in futures trading. I believe all -- not some -- derivatives need to be fully regulated."
"I look forward to working with leaders in Congress" on the reform proposals, Obama said to members of Congress and industry leaders who attended the briefing in Washington, DC.
The Natural Gas Supply Association (NGSA) last week warned Senate and House leaders that OTC regulatory proposals could hurt producers and the gas market. "Under many of these OTC regulatory proposals, instead of using our physical assets to establish credit, natural gas producers would have to redirect capital to meet exchange collateral requirements that could have otherwise been used for exploration and production or technological advances," said NGSA President R. Skip Horvath in a letter to congressional leaders.
"Raising capital requirements just to participate in the market will reduce the number of market participants, lower liquidity and thereby increasing price volatility in the physical market," he said.
The Obama administration also called for "greater coordination and harmonization" between the two agencies on jurisdictional issues. Both the CFTC and the SEC were directed to send a report to Congress by Sept. 30 that identifies all existing conflicts in agency statutes and regulations, and to explain why the differences are essential.
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