As the White House threatens to veto the multi-billion-dollar farm bill, the House-Senate conference committee is nearing approval of the legislation that includes a provision to close the so-called “Enron Loophole,” which has for years exempted large electronic trading platforms from the oversight of the Commodity Futures Trading Commission (CFTC).

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

The measure would eliminate the “Enron Loophole” to the Commodity Exchange Act, which has allowed electronic energy trading platforms to avoid the full oversight of the CFTC. It would bring the Atlanta-based IntercontinentalExchange trading platform and others 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 overall farm bill conference report still needs to be finalized. Staff for the Senate and House agriculture committees and conferees are continuing to work through the remaining few issues, as well as seek official budget scoring from the Congressional Budget Office, according to Senate Agriculture Chairman Tom Harkin (D-IA). The completed legislation will have to be approved by both the Senate and House before being sent to the White House.

“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 Daily GPI, July 11, 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 Daily GPI, July 26, 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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