Pressure from within and outside the Senate grew last week to either defeat or bury a controversial amendment to the omnibus energy bill (S. 517) that seeks to regulate the trading of over-the-counter (OTC) energy and metals derivative transactions.

A vote on the amendment, if it comes to that, is “likely to be very, very close,” said Donald Santa Jr., a former FERC commissioner and now partner in the law firm of Troutman Sanders, at the Natural Gas Roundtable last Thursday. Senate sentiment, especially among Republicans, has shifted against “moving so quickly on so complicated an issue.”

In addition to Republican opposition, other notable foes are Federal Reserve Chairman Alan Greenspan, who is concerned about the amendment’s “unintended consequences” on the overall economy; Treasury Secretary Paul O’Neill; Securities and Exchange Commission Chairman Harvey Pitt; and Commodity Futures Trading Commission (CFTC) Chairman James Newsome. In addition, the U.S. Chamber of Commerce is worried about the “harmful effect” of the proposal on markets beyond energy and metals.

Republican detractors blocked the Democrat-favored measure from coming up for a vote last week. But Sen. Dianne Feinstein (D-CA), the amendment’s sponsor, remains hopeful that the Senate will vote on it when it resumes deliberations on April 9, after the Easter recess, her office said.

Feinstein contends the largely unregulated energy derivatives market was to blame for high natural gas and electricity prices in California in 2000 and 2001. However, Santa said her claim still was being investigated by FERC and other agencies, and that “the book is far from closed on whether such a causal connection exists.”

Sen. Phil Gramm (R-TX) last Tuesday led a Republican charge against the Feinstein initiative, which — if adopted — would bring trading of energy/metals derivatives under the regulatory oversight of the Commodity Futures Trading Commission (CFTC). He contends that many of the protections being sought by Feinstein and other western Democrats already are available under current law.

“…[E]verything that the proponents of this amendment claim that they’re for is part of current law,” Gramm said, referring to the 2000 re-authorization of the Commodity Futures Trading Commission Act. That bill “provided specific anti-fraud authority for the CFTC in exactly the areas that the senator from California calls for,” as well as authorizes the CFTC to intervene in the case of price manipulation, Gramm noted. “The plain truth is that there is extensive recordkeeping currently required [of traders] under law.”

Opponents favor a lot of what Feinstein has proposed in her amendment, Gramm said, but they are concerned about potential broad consequences on the entire derivatives market and on the economy as a whole.

Negotiations between Feinstein and Gramm to broker a compromise fell apart after nearly a week of talks. Feinstein last week offered a modified amendment addressing Gramm’s concern that the initiative would regulate all derivatives, a Feinstein spokesman said. But other changes sought by Gramm were rejected because they would have “gutted” the proposal, he noted.

Feinstein contends her measure would eliminate a “giant loophole” created by the Commodity Futures Modernization Act (CFMA) of 2000, which she said exempted energy/metals derivatives from CFTC oversight. But Gramm said Feinstein’s claim that the 2000 bill excluded these derivatives from regulation was “totally false, totally inaccurate.”

These “very complicated, tailored instruments” have never been regulated, according to Gramm.

The $75 trillion derivatives industry “is the envy of the world,” he said, and should be left alone by the Senate. If anything, he suggested that the Senate post a “little sign up” on derivatives trades that says, “Danger. High Voltage. Don’t be fooling around in here if you don’t know what you’re doing.”

Feinstein’s modified amendment would strengthen CFTC oversight in the energy derivatives market, subjecting on-line trading exchanges — such as those operated by Enron and Dynegy — to the reporting and capital requirements that already are imposed on other established exchanges, such as the New York Mercantile Exchange, the Chicago Board of Trade and the Chicago Mercantile Exchange.

Feinstein noted that 90% of all energy trades represent “purely financial transactions,” and are not currently regulated by either the Federal Energy Regulatory Commission or the CFTC.

On the House side, Rep. Peter DeFazio (D-CA) offered legislation last week seeking to combine the SEC and the CFTC to regulate the trading of all OTC derivatives, including energy derivatives. The House bill (H.R. 4038) is considerably broader than the measure pending in the Senate, which is limited to energy and metals derivatives.

The bill would merge the two commissions into a single, independent regulatory body — the Securities and Derivatives Oversight Commission (SDOC), which would assume regulation of OTC derivatives in addition to the current functions of the CFTC and SEC.

Under DeFazio’s bill, which was offered as a stand-alone measure, derivatives’ dealers would be required to register with the SDOC and report to federal regulators on their market activities. They also would be required to maintain adequate capital to run their operations, and collateral on their transactions.

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