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Blunder Forces House to Pass CFTC-Related Farm Bill Again

May 26, 2008
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The House last Thursday passed for a second time the $300 billion farm legislation that closes the "Enron Loophole," which has allowed portions of large electronic trading platforms to circumvent the full oversight of the Commodity Futures Trading Commission (CFTC) for years.

The House was forced to pass (306-110) the farm measure a second time after it discovered that a 34-page section (Title III on trade and food aid) of the bill had been inadvertently omitted from the legislation that was was sent to the White House. Because of the oversight, President Bush vetoed a different bill than the one that Congress approved earlier this month (see NGI, May 19). The mistake came to light only after the House had voted last Wednesday (316-106) to override the president's veto of the bill (HR 2419).

While the House worked feverishly to correct the blunder, the Senate last Thursday voted 82-13 to override Bush's veto of the incomplete farm bill, essentially enacting into law 14 of the 15 titles in the measure, including those addressing the CFTC. The Senate now gets to decide whether it wants to vote on the corrected bill approved by the House or just the missing Title III. It did not take any action prior to leaving for the Memorial Day recess, which began Friday.

Congress sent the "wrong bill to the president, and now it has to do it over and pass it again. It was a real foul-up," a Capitol Hill spokesman said. The president's veto "doesn't count," he noted.

"There are no games being played here," said Majority Leader Steny Hoyer (D-MD), who added it was a simple mistake.

"The consequence of this snafu, other than a few red faces, is likely to be a short delay in enactment of at least one title of the bill and possibly all of it -- until Congress returns from its Memorial Day recess" in early June, said analyst Mark McMinimy of Stanford Group Co.

Despite the glitch, "the final outcome...is not likely to change as a veto override vote in the House [last Wednesday] before the mistake came to light left no doubt that more than enough votes exist in that chamber to enact the law over the president's objections. Senate passage of the farm bill [in mid-May] was overwhelming, so a successful veto override vote is not in doubt," McMinimy said.

The farm measure, among other things, would bring leading energy trading platforms, such as Atlanta-based IntercontinentalExchange (ICE), under the same regulation as the New York Mercantile Exchange (Nymex) and Chicago Mercantile Exchange (CME).

The bill would boost federal oversight authority to detect and prevent manipulation and 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.

Following the initial passage of the bill, ICE applauded the move, noting that it has "supported the development of legislation designed to effectively recognize and address the complexities of OTC [over-the-counter] markets." ICE said that the bill "places an appropriate level of regulation on contracts that serve a significant price discovery function and will further enhance market transparency."

In addition to ICE's OTC markets, ICE also operates regulated futures exchanges in the U.S., Canada and Europe.

For Sen. Dianne Feinstein (D-CA), the chief sponsor of the CFTC provisionsl, the victory was long in coming. She has been trying to pass legislation to heighten the CFTC oversight of electronic energy trading exchanges since 2002 (see NGI, July 15, 2002). She and her colleagues were successful this time because the tide appears to have shifted in the wake of two recent instances of alleged attempted manipulation of natural gas markets. One of these resulted in charges against failed hedge fund Amaranth Advisors LLC and another resulted in charges against Energy Transfer Partners (see NGI, July 30, 2007). In addition, "suddenly you got a major business force on our side" -- Nymex and ICE -- said Sen. Carl Levin (D-MI), one of the sponsors of the CFTC provisions.

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 and CME. 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 would review all electronic contracts to identify which are significant in determining market prices and should be regulated. 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.

The provisions were part of the CFTC Reauthorization Act of 2008, which was folded into the mammoth farm bill. In addition to Feinstein and Levin, other sponsors of the CFTC provisions included Olympia Snowe of Maine, Maria Cantwell of Washington, Susan Collins of Maine, Byron Dorgan of North Dakota, Ron Wyden of Oregon and Charles Schumer of New York.

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