An amendment sponsored by Sen. Dianne Feinstein (D-CA) to regulate the trading of over-the-counter (OTC) energy derivatives was shot down last Wednesday, marking the second defeat for the controversial proposal.
The proposal was tabled by a vote of 55 to 44 after facing a wall of opposition from Republican senators. Feinstein offered essentially the same amendment during the 107th Congress, but it was blocked by Sen. Phil Gramm (R-TX) who has since retired (see NGI, April 15, 2002).
Feinstein, however, remained undeterred last week. “Mr. President, I am absolutely determined, and I’m going to come back and back and back until this loophole” to the Commodity Futures Modernization Act of 2000 (CFMA) is closed. The loophole exempts online trading exchanges from the reporting and capital requirements that already are imposed on other established exchanges, such as the New York Mercantile Exchange. The Feinstein amendment sought to remove that exclusion for online OTC transactions.
Feinstein’s measure attempted to bring OTC energy derivatives under the regulatory umbrella of the Commodity Futures Trading Commission (CFTC). But Republicans argued that derivatives were “complex” instruments for handling risk, which few in Congress understood and, thus, should be left untouched.
“Please don’t tell me I’m not sophisticated [enough] to understand. I understand plenty,” countered Feinstein, who introduced her amendment in the wake of the Enron scandal and energy price manipulation in California. “I am very suspicious of people who want to do trading in the dark.”
Republicans offered a letter in opposition to the Feinstein proposal, signed by Federal Reserve Chairman Alan Greenspan; Treasury Secretary John Snow; William H. Donaldson, chairman of the Securities and Exchange Commission (SEC); and CFTC Chairman James T. Newsome. They called the measure “ill-advised,” and said it would result in “significant unintended consequences” in the market.
The four men argued that the CFTC had sufficient enforcement authority under current regulations, and pointed to the CFTC’s actions against Enron, Dynegy and El Paso Corp. in the past year. They further noted the SEC, Department of Justice and the Federal Energy Regulatory Commission have taken formal actions against several energy companies, holding them “fully subject” to existing laws.
The Feinstein initiative, which was endorsed by FERC Chairman Pat Wood, also sought to beef up FERC’s ability to punish companies for fraud and manipulation with increased penalties (up to $1 million in fines and five years in prison).
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