A draft bill currently making the rounds in the Senate would give federal regulators the power to select a “registered futures association” to uncover and investigate abuses of rules for trading of over-the-counter (OTC) energy derivatives, and would significantly raise civil and criminal penalties for violators.

The proposal, offered by Sen. Tom Harkin (D-IA), seeks to amend Sen. Dianne Feinstein’s (D-CA) stand-alone legislation, which would bring OTC energy and metals derivatives traded over private electronic exchanges under the oversight umbrella of the Commodity Futures Trading Commission (CFTC). Both Harkin, chairman of the Senate Agriculture Committee, and Sen. Richard Lugar (R-IN), the panel’s ranking minority member, have signed on as co-sponsors to the Feinstein measure.

The Feinstein bill, which currently is awaiting mark-up in the Agriculture Committee, has elicited considerable controversy over the past months, with opponents blocking it from being folded into the Senate’s omnibus energy bill in April. But the Harkin proposal, which his office said was in the “very, very preliminary stage,” may cause an even greater fury in the chamber. It would subject manipulators of derivatives markets to harsher scrutiny and penalties.

The Harkin amendment would give the CFTC the authority to “designate a registered futures association to establish and enforce trading and participation rules for persons or facilities engaging in an agreement, contract or transaction” that involves exempt commodities, such as energy and metals derivatives. The CFTC retains only limited jurisdiction over so-called exempt commodities under existing law. The Harkin bill would bolster the CFTC’s powers to establish rules and regulation to “deter abuses” in the exempt derivatives market, as well as to “investigate and enforce” penalties against violators.

The chairman’s proposal, called the “Futures and Swaps Transactions Act,” also would raise civil penalties to a maximum of $1 million for each violation or triple the monetary gain of violators in the case of manipulation or attempted manipulation of the price of a commodity.

Registered entities, directors, officers, agents or employees involved in price manipulation would be guilty of a felony under Harkin’s measure. Violators could face fines of up to $1 million for each infraction or imprisonment of up to 10 years, or both, together with the costs of prosecution, for manipulating or attempting to manipulate the price of a commodity in interstate commerce, according to the draft.

The Feinstein bill seeks to repeal the Commodity Futures Modernization Act of 2000 (CFMA), which she says exempts from CFTC oversight energy/metals derivatives traded over private electronic exchanges. Specifically, her measure would give the CFTC the authority to investigate allegations of fraud and manipulation in all energy and metals derivatives markets; subject all electronic trading platforms (except those executing financial derivatives’ transactions) to registration, transparency, disclosure and reporting requirements; require all electronic trading exchanges to maintain sufficient capital to carry out their operations; and would require the Federal Energy Regulatory Commission and the CFTC to meet quarterly to discuss the energy derivatives markets.

Critics observe that the CFMA has created a gap in the oversight of exempt commodities, including energy and metals. While the law expects the CFTC to fully prosecute manipulators of exempt commodities in regulated exchanges, such as the New York Mercantile Exchange, it “turns a blind eye” to manipulation of these very same commodities if they are traded over private trading platforms. Feinstein is seeking to close that gap through her legislation.

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