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Senate Bill TargetsTax Breaks for Noncommercial Speculators

As the Commodity Futures Trading Commission moves to crack down on excessive speculation in energy markets by imposing position limits, one U.S. senator is eyeing changes in the tax code to cut trading volume, while another will propose a bill to require the reporting of over-the-counter (OTC) derivative trades -- including energy transactions -- to a central trade repository, making it easier for regulators to keep closer tabs on the market.

Sen. Ron Wyden (D-OR) last Thursday introduced legislation that would end the favorable tax treatment for noncommercial speculators, such as hedge funds and swap dealers, in oil and natural gas markets, and would tax all profits at the same rate as ordinary income for tax-paying investors. It would amend the Internal Revenue Code of 1986 to provide the same tax treatment for both commercial and noncommercial investors in oil and natural gas and related commodities.

"The tax code has helped fuel an explosion of speculators who are driving up gas prices for everybody," said Wyden, who sits on both the Senate Energy and Natural Resource Committee and Finance Committee. The legislation "will take away the unfair tax breaks for speculators like hedge funds and help drive away those looking to make a fast buck by gaming the market."

The measure proposes taxing the trading gains and losses of tax-paying noncommercial energy commodity investors in the same way that commercial participants -- buyers and sellers of physical oil and gas commodities -- are taxed: as if they were ordinary gains and losses. Gains made on oil and natural gas investments would no longer be eligible for lower capital gains rates.

It also would end the tax breaks that favor tax-exempt energy commodity investors, such as pension funds or endowments, over commercial traders. Tax-exempt organizations and funds currently pay no tax at all on their commodity investments.

The legislation would require gains from any kind of oil and natural gas trading to be defined as "unrelated business taxable income" and taxed at the same rate as taxable income would be taxed.

Also aiming at market oversight, Sen. Charles Schumer (D-NY) last week said he was drafting legislation for a central trade repository that would collect information gathered by clearinghouses, as well as trade information for uncleared OTC derivatives transactions, providing regulators a tool to monitor systemic risk. In addition, aggregate trade information would be made publicly available on a periodic basis to provide greater market clarity.

"Creating one central warehouse to collect information about all derivative trades would allow us to monitor the effect of these markets on systemic risk. President Obama has called for regulating this sector by moving standardized derivatives to clearinghouses. Consolidating the information gathered by these clearinghouses will bring crucial transparency to the OTC derivatives market," Schumer said.

Schumer's state is home to major clearinghouse Depository Trust & Clearing Corp. It provides clearing, settlement and information services for a variety of financial instruments, including OTC derivatives.

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