Rep. Bart Stupak (D-MI) has introduced legislation giving the Commodity Futures Trading Commission (CFTC) broad authority to regulate futures transactions involving energy commodities and to regulate credit default swaps, and bolstering the Federal Energy Regulatory Commission authority to issue cease-and-desist orders and to authorize retroactive refunds for natural gas shippers.
The bill (HR 2448) proposes to amend the Commodity Exchange Act (CEA) to give the CFTC authority over all energy futures transactions, including coal, crude oil, gasoline, diesel fuel, jet fuel, heating oil, propane, electricity, natural gas and "any other substance (other than an excluded commodity, a metal or an agricultural commodity) that is used as a source of energy." The bill, which has 11 co-sponsors, has been referred to the House Agriculture, Energy and Commerce and Financial Services committees for consideration.
The Stupak measure also would extend the CFTC's regulatory authority to swaps involving energy transactions; eliminate exemptions for over-the-counter (OTC) swaps involving energy commodities; and extend regulatory authority to include energy transactions on foreign boards of trade. It would bar the CFTC from exempting any affected energy transaction from regulation unless the agency provides 60 days advance notice to Congress and the Position Limit Energy Advisory Group, which the bill would establish.
Six months after enactment, the bill further would deem "null and void" any prior exemptions for energy transactions that were issued by the CFTC.
With respect to energy transactions, the CFTC will be required to fix limits on the aggregate number of positions that may be held by any person for each month across all markets that are subject to the agency's jurisdiction. And not later than 60 days from enactment, the CFTC will convene a Position Limit Energy Advisory Group consisting of seven predominantly commercial short hedgers of energy futures; seven predominantly commercial long hedgers of energy futures; and four noncommercial participants in markets for energy commodities for future delivery. And two months later, the advisory group will be required to submit to the CFTC recommendations on position limits.
Similar legislation, voted out by the House Agriculture Committee in February, requires the CFTC to study and report on the effects of potential position limits on OTC trading and aggregate limits across the OTC market, designated contract markets and derivative transaction execution facilities for both agriculture and energy commodities (see Daily GPI, Feb. 13). The bill (HR 977), authored by Committee Chairman Collin Peterson (D-MN), orders the agency to determine whether fungible OTC agreements have the potential to disrupt market liquidity and price discovery functions. If they do, the agency would be authorized to impose and enforce position limits for speculators trading the involved agreements.
Under the Stupak legislation, the CFTC will have exclusive authority to grant exemptions for bona fide hedging transactions, and positions from position limits imposed on energy transactions. It also would eliminate the swaps loophole.
Moreover, the bill would require the CFTC to issue a proposed rule defining and classifying index traders and swap dealers for the purpose of data reporting and setting routine detailed reporting requirements for any positions of such entities in contracts traded on designated contract markets, OTC markets, derivative transaction execution facilities, foreign boards of trade and electronic trading facilities with respect to significant price discovery markets. The proposed rule would be issued no later than 120 days after enactment of the bill.
The measure further requires the CFTC to disaggregate and publicly report the number and total value of positions of index funds -- and other passive long-only and short-only investors -- in all regulated markets, as well as data on speculative positions relative to their bona fide hedgers.
This language is similar to the House agriculture panel bill, which requires the CFTC to disaggregate and make public weekly the number of positions and total notional value of index funds and other passive, long-only and short-only positions in all markets, as well as data on speculative positions relative to bona fide physical hedgers in those markets, and the identities of traders who hold position in indexes in excess of position limits (see Daily GPI, Feb. 13).
Except where provided under the CEA, the Stupak bill would require derivatives transactions, agreements or contracts to be settled and cleared through a derivatives clearing organization registered with the CFTC. The CFTC would have the authority to make exemptions in certain cases.
The legislation would make it unlawful for any person to enter into a credit default swap (CDS) transaction unless the person: 1) owns a credit instrument that is insured by the CDS; 2) would experience financial loss if an event that is subject to the CDS occurs with respect to the credit instrument; 3) or meets the minimum capital adequacy standards as may be established by the CFTC, in consultation with the Board of Governors of the Federal Reserve System, or meets more stringent minimum capital adequacy standards that may be established by any state in which the swap is originated or entered into, or in which possession of the contract involved takes place.
The Stupak measure goes a step further on the CDS issue than the Peterson bill, which did not "outlaw" CDS transactions, but it did give the CFTC the authority to suspend CDS trading temporarily, with the consent of the president. CDS transactions are a form of insurance against the default of debt securities, which contributed significantly to the turmoil in the credit markets (see Daily GPI, Dec. 9, 2008).
With respect to FERC, the measure would amend the Natural Gas Policy Act of 1978 (NGPA) to give the Commission the authority to order a potential violator to cease and desist from "committing or causing such violations and any future violation" of agency rules or regulations. The cease-and-desist order would be issued only after notice and opportunity for a hearing is given to the alleged violator, unless the Commission determines that notice and hearing prior to entry would be impracticable or contrary to the public interest. FERC would be required to set a hearing day between 30 and 60 days after serving notice.
The Commission could issue a temporary order to "prevent dissipation or conversion of assets, significant harm to energy consumers, or substantial harm to the public interest, frustration of the Commission's ability to conduct the proceedings, or frustration of the Commission's ability to redress said violations at the conclusion of the proceedings."
The alleged violators could ask FERC to have the temporary order "set aside, limited or suspended," or they could petition a district court to take such action.
The Senate Energy and Natural Resources Committee has proposed the same language in its energy bill (see Daily GPI, March 24). To shield gas and electricity customers from "significant harm," it would give FERC the authority to issue an order requiring a company to cease and desist from violations or threatened violations of the Natural Gas Act, NGPA or the Federal Power Act. Cease-and-desist orders would generally be issued only after a hearing, but the proposal would allow FERC to serve a temporary order without a hearing.
The Stupak bill also seeks to amend the Natural Gas Act, giving FERC the authority to order retroactive refunds for gas consumers. In cases where a Section 5 complaint has been filed, the Commission could make refunds effective from the date the complaint has been filed at the agency. In cases that are initiated by FERC, the refund effective date could be as early as when FERC publishes its intention to initiate a proceeding in the Federal Register. In both instances, the latest a refund date would be effective is 150 days from when a complaint has been filed or FERC has initiated its own proceeding.
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