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Conferees Adopt Stepped-Up CFTC Oversight in Farm Bill

May 12, 2008
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As the White House threatened to veto the nearly $300 billion farm bill, the House-Senate conference committee last Thursday announced that it reached a final agreement on the legislation that includes a provision to close the so-called "Enron Loophole," which for years has exempted large electronic trading platforms from the oversight of the Commodity Futures Trading Commission (CFTC).

House and Senate conferees adopted the CFTC-related provision, offered by Sens. Dianne Feinstein (D-CA), Carl Levin (D-MI) and Olympia Snowe (R-ME), earlier this month. The proposal is part of the of the CFTC Reauthorization Act of 2008, which has been folded into the mammoth farm bill.

The measure would eliminate the "Enron Loophole" to the Commodity Exchange Act, which has enabled electronic energy trading platforms to skirt full CFTC oversight. It would bring leading energy trading platforms, such as the Atlanta-based IntercontinentalExchange, under the same regulation as the New York Mercantile Exchange (Nymex).

Specifically, the measure would boost federal oversight authority to detect and prevent manipulation and to limit speculation in U.S. electronic energy markets. It would increase transparency, create an audit trail, impose firm speculation limits and establish stiff financial penalties in cases of market manipulation and excessive speculation.

The final conference report on the farm bill will be forwarded to the Senate and House for a vote before being sent to the White House. The conference report is expected to be brought to the House and Senate floors this week. Agriculture Secretary Ed Schafer said last week that President Bush intends to veto the farm bill. But congressional Republicans, many of whom support the farm legislation, might be hard-pressed to uphold a presidential veto in an election year, The Washington Post reported Friday.

"This bill puts all significant energy trades on electronic platforms within the regulatory confines of the CFTC and will impose limits on the size of traders' positions to prevent excessive speculation," Feinstein said.

"It also ensures that there is an audit trail and imposes record-keeping requirements, and forces electronic exchanges to monitor trading behavior and prevent manipulation," she noted. "This is especially important given that the price of oil has hit a record high of $120 per barrel...and natural gas prices are at an average of $12/Mcf, roughly twice as high as they were 10 years ago."

Feinstein noted that this has been a long fight for her. She has been trying to pass legislation to heighten the CFTC oversight of electronic energy trading exchanges since 2002 (see NGI, Feb. 18, 2002). She and her colleagues were successful this time because the tide appears to have shifted in the wake of charges against failed hedge fund Amaranth Advisors LLC and Energy Transfer Partners for attempted manipulation of natural gas markets (see NGI, July 30, 2007). In addition, "suddenly you got a major business force on our side" -- Nymex and ICE -- Levin said last year.

Under the proposal, the CFTC would require electronic exchanges to provide strict oversight of contracts that are significant in determining commodity market prices, similar to what currently takes place on regulated markets like Nymex. It would require electronic energy exchanges to monitor trading to deter manipulation and price distortion, collect information on trading activity, supply large trader reports to the CFTC, and publish price, trading volume and other trading data on a daily basis.

The CFTC will review all electronic contracts to identify which are significant in determining market prices and should be regulated, Feinstein said. Factors to be considered include whether the contract is traded in significant volumes; whether the contract is used by traders to help determine the price of subsequent contracts; and whether the contract is equivalent to a regulated contract and used the same way by traders.

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