The House Agriculture Committee Thursday approved by voice vote legislation that would give the Commodity Futures Trading Commission (CFTC) the authority to carry out criminal prosecution of fraud and manipulation of commodity futures markets, but only in cases where the Department of Justice decides not to take action (see Daily GPI, Feb. 12). The CFTC’s existing authority is limited to investigation and prosecution of administrative and civil violations of the Commodity Exchange Act (CEA).

“Currently the Department of Justice has the sole power to initiate criminal proceedings against an alleged violator [of the CEA]. About one-third of these criminal activities are not being prosecuted,” said Committee Chairman Collin Peterson (D-MN), chief author of the “Derivatives Markets Transparency and Accountability Act of 2009.”

“This bill brings long overdue transparency and managed risk to the over-the-counter [OTC] credit derivatives market by using the clearing model that has served the futures market well for decades,” he said.

Under the bill (HR 977), clearing of OTC transactions can occur through a CFTC-regulated facility or through a clearinghouse regulated by the Securities and Exchange Commission. But the measure prohibits the Federal Reserve from regulating clearing of OTC transactions. As an alternative to clearing, OTC transactions may be reported to the CFTC as long as reporting parties demonstrate financial integrity and abide by net capital regulations established by the CFTC.

The measure does not “outlaw” credit default swaps (CDS), but it does 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).

The bill nearly mirrors legislation that Peterson introduced last year in an attempt to tame speculation in the energy markets. That measure (HR 6604) was approved by the House in July, but never cleared the Senate. A companion bill has been introduced in the Senate by Sen. Tom Harkin (D-IA), chairman of the Senate Agriculture Committee. It seeks to bring all OTC financial transactions, which currently are traded without federal oversight, onto regulated exchanges.

Like its predecessor, the new House agriculture panel bill also would require international exchanges that host U.S.-based commodities to share trading data with the CFTC and adopt speculative position limits similar to those impose by regulated exchanges in the United States.

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.

It calls on the CFTC to set trading limits for all physically deliverable commodities in order to prevent excessive speculation, and it would subject OTC transactions for all commodities to reporting and recordkeeping requirements. Traders would be required to keep records for five years.

Moreover, it proposes that the CFTC hire new full-time employees to carry out its enforcement activities, which would require an increase in the agency’s annual budget. The CFTC told Congress last year that it needed $157 million or more annually to carry out its regulatory duties (see Daily GPI, June 5, 2008).

The legislation also 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 agriculture and energy commodities. And it 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.

Peterson’s proposal also would require the Government Accountability Office to study and report on the international regulatory regime for energy commodity futures and derivatives trading.

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