Prevent Excessive Speculation Act,
from the
International Association of
Risk and Compliance Professionals (IARCP)
LEVIN-BINGAMAN-HARKIN PREVENT EXCESSIVE SPECULATION ACT
Summary of the Prevent Excessive Speculation Act
The Prevent Excessive Speculation Act would:
Authorize Speculation Limits for all Energy and Agricultural
Commodities.
Direct CFTC to impose position limits on energy and agricultural
futures contracts to prevent excessive speculation and manipulation
and to ensure sufficient market liquidity.
Authorize CFTC to permit exchanges to impose and enforce
accountability levels that are lower than CFTC-established
speculation limits.
Close
London Loophole by Regulating Offshore Traders and Increasing
Transparency of Offshore Trades.
Prohibit a foreign exchange from operating in the United States
unless it imposes comparable speculation limits and reporting
requirements as apply to U.S. exchanges.
Provide CFTC with same enforcement authority over U.S. traders on
foreign exchanges as it has over traders on U.S. exchanges,
including authority to require traders to reduce their holdings to
prevent excessive speculation or manipulation.
Require CFTC to invite non-U.S. regulators to form an international
working group to develop uniform regulatory and reporting
requirements to protect futures markets from excessive speculation
and manipulation.
Close
the Swaps Loophole and Regulate Over-the-Counter Transactions.
Authorize CFTC to impose speculation limits on OTC transactions to
protect the integrity of prices in the futures markets and cash
markets.
Require large OTC trades that affect futures prices to be reported
to CFTC. Allow one party to a transaction to authorize the other
party to file the report. Require CFTC periodic review of reporting
requirements to ensure key trades are covered.
Direct CFTC to revise bona fide hedge exemption to ensure regulation
of all speculators, and strengthen data analysis and transparency of
swap dealer and index trading.
Clarify definition of OTC transactions to exclude spot market
transactions.
Protect Both Energy and Agriculture Commodities.
Cover trades in crude oil, natural gas, gasoline, heating oil, coal,
propane, electricity, other petroleum products and sources of energy
from fossil fuels, as well as ethanol, biofuels, emission allowances
for greenhouse gases, SO2, NOX, and other air emissions.
Cover trades in agricultural commodities listed in the Commodity
Exchange Act.
Strengthen CFTC Oversight.
Authorize CFTC to hire 100 new personnel to oversee markets.
Direct CFTC to issue proposed rules within 90 days and final rules
within 180 days.
Prevent Excessive Speculation Act (Introduced in Senate)
Beginning September 25 (legislative day, September 17), 2008
SECTION 1. SHORT TITLE
Sec. 1. Short title; table of contents.
Sec. 2. Definition of energy and agricultural commodity.
SEC. 2. DEFINITIONS OF ENERGY AND AGRICULTURAL COMMODITY.
SEC. 3. SPECULATIVE LIMITS AND TRANSPARENCY OF OFF-SHORE TRADING.
SEC. 4. AUTHORITY OF COMMODITY FUTURES TRADING COMMISSION WITH
RESPECT TO CERTAIN TRADERS.
SEC. 5. WORKING GROUP OF INTERNATIONAL REGULATORS.
SEC. 6. POSITION LIMITS FOR ENERGY AND AGRICULTURAL COMMODITIES.
SEC. 7. OVER-THE-COUNTER TRANSACTIONS.
SEC. 8. INDEX TRADERS AND SWAP DEALERS.
SEC. 9. DISAGGREGATION OF INDEX FUNDS AND OTHER DATA IN ENERGY AND
AGRICULTURAL MARKETS.
SEC. 10. ADDITIONAL COMMODITY FUTURES TRADING COMMISSION EMPLOYEES
FOR IMPROVED ENFORCEMENT.
SEC. 11.
WORKING GROUP ON ENERGY MARKETS.
SEC. 12. STUDY OF REGULATORY FRAMEWORK FOR ENERGY MARKETS.
SEC. 13. COLLECTION AND ANALYSIS OF INFORMATION ON ENERGY
COMMODITIES.
SEC. 14. NATIONAL NATURAL GAS MARKET INVESTIGATION.
SEC. 15. STUDIES; REPORTS.
SEC. 16. EXPEDITED PROCEDURES..
February 13, 2009
Senate Floor Statement on S. 447, the Prevent Excessive Speculation
Act
Senator Levin
"Mr. President, over the past couple of years energy prices have
taken the American people on an unpredictable, expensive, and
damaging roller coaster ride. In early 2007, a barrel of crude oil
cost about $50. Over the course of the year, the price rose steeply,
nearly doubling by the end of the year to almost $100 per barrel.
Oil prices continued to soar through the first half of 2008, peaking
at nearly $150 per barrel in July. Then, over the next few months,
oil prices crashed back down to $35 per barrel, a drop of over $110
per barrel.
These huge price swings can’t be explained by simple changes in
supply and demand. Even taking into account the recession now
plaguing our country and the world economy, many market analysts
believe that it was a stampede of speculators into the crude oil
futures market that first drove prices far higher than justified by
global supply and demand, and now an exodus of those same
speculators has driven prices much lower than justified by supply
and demand.
Like crude oil, the natural gas, gasoline, and heating oil markets
have also seen large price changes. The prices are way up, they’re
way down, they’re unpredictable – making it impossible for many
businesses and consumers to plan for and afford energy costs and
related goods and services.
Unpredictable energy prices continue to take a tremendous toll on
millions of American consumers and businesses. Unless we act to
protect our energy markets from excessive speculation and price
manipulation, the American economy will continue to be vulnerable to
wild price swings affecting the prices of transportation, food,
manufacturing and everything in between, endangering the economic
security of our people, our businesses, and our nation.
Congress should act now to help tame rampant speculation and
reinvigorate supply and demand as market forces.
That is why I am re-introducing legislation today that is nearly
identical to the legislation I and others introduced near the end of
the last provides strong and workable measures to prevent excessive
speculation and price manipulation in U.S. energy and agricultural
markets. It will close the loopholes in our commodities laws that
now impede the policing of U.S. energy trades on foreign exchanges
and in the unregulated over-the-counter market.
It
will ensure that large commodity traders cannot use these markets to
hide from CFTC oversight or avoid limits on speculation. It will
strengthen disclosure, oversight, and enforcement in U.S. energy
markets, restoring the financial oversight that is crucial to
protect American consumers, American businesses, and the U.S.
economy from further energy shocks.
This legislation, which addresses commodity markets, is one
important piece of the broader reform effort needed to repair our
financial regulatory system, stop abusive practices, and put the cop
back on the beat in all of our markets.
Specifically, this particular legislation would make four
sets of changes.
First, it would require the CFTC to set
limits on the holdings of traders in all of the energy futures
contracts traded on regulated exchanges to prevent traders from
engaging in excessive speculation or price manipulation. Since we
closed the Enron loophole last year all futures contracts must be
traded in regulated markets.
Second, it would close the “London
loophole” by giving the CFTC the same authority to police traders in
the United States who trade U.S. futures contracts on a foreign
exchange and by requiring foreign exchanges that want to install
trading terminals in the United States to impose comparable limits
on speculative trading as the CFTC imposes on domestic exchanges to
prevent excessive speculation and price manipulation.
Third, it would close the “swaps
loophole” by requiring traders in the over-the-counter energy
markets to report large trades to the CFTC, and it would authorize
the CFTC to set limits on trading in the presently unregulated
over-the-counter markets to prevent excessive speculation and price
manipulation.
Finally, it would require the CFTC to
revise the standards that allow traders who use futures markets to
hedge their holdings to exceed the speculation limits that apply to
everyone else.
Background
My Permanent Subcommittee on Investigations has shown that one key
factor in price spikes of energy is increased speculation in the
energy markets. Traders are now trading millions of contracts for
future delivery of oil, creating a demand for paper contracts that
gets translated into increases in prices and increasing price
volatility.
Much of this increase in trading of futures has been due to
speculators who are not in the oil business but who are buying and
selling oil futures contracts in the hope of making a profit from
changing prices.
According to the CFTC’s data, the number of futures and options
contracts held by speculators grew from around 100,000 contracts in
2001, which was 20% of the total number of outstanding contracts, to
almost 1.2 million contracts last fall, representing almost 40% of
the outstanding futures and options contracts in oil on NYMEX.
Even these statistics understate the increase in speculation, since
the CFTC data classifies futures trading involving index funds as
commercial trading rather than speculation, and the CFTC classifies
all traders in commercial firms as commercial traders, regardless of
whether any particular trader in that firm may, in fact, be
speculating.
Basic economic theory tells us that the greater the demand there is
to buy futures contracts for the delivery of a commodity, the higher
the price will be for those futures contracts.
Not surprisingly, therefore, massive speculation that the price of
oil will increase, together with massive purchases of futures
contracts in pursuit of that belief, have, in fact, helped increase
the price of oil to a level far above the price justified by the
traditional forces of supply and demand.
In June 2006, I released a Subcommittee
report, The Role of Market Speculation in Rising Oil and Gas Prices:
A Need to Put a Cop on the Beat. This report found that the
traditional forces of supply and demand didn’t account for sustained
price increases and price volatility in the oil and gasoline
markets.
The report concluded that, in 2006, a growing number of trades of
contracts for future delivery of oil occurred without regulatory
oversight and that market speculation had contributed to rising oil
and gasoline prices, perhaps accounting for $20 out of a then-priced
$70 barrel of oil.
Oil industry executives and experts arrived at similar conclusions.
As oil prices neared $100 in late 2007, the President and CEO of
Marathon Oil said, “$100 oil isn’t justified by the physical demand
in the market. It has to be speculation on the futures market that
is fueling this.” At about the same time, Mr. Fadel Gheit, oil
analyst for Oppenheimer and Company described the oil market as “a
farce.” “The speculators have seized control and it’s basically a
free-for-all, a global gambling hall, and it won’t shut down unless
and until responsible governments step in.”
In
January of 2008, when oil first hit $100 per barrel, Mr. Tim Evans,
oil analyst for Citigroup, wrote: “[T]he larger supply and demand
fundamentals do not support a further rise and are, in fact, more
consistent with lower price levels.” At a joint hearing on the
effects of speculation my Subcommittee held in late 2007, Dr. Edward
Krapels, a financial market analyst, testified: “Of course financial
trading, speculation affects the price of oil because it affects the
price of everything we trade. ... It would be amazing if oil somehow
escaped this effect.” Dr. Krapels added that as a result of this
speculation “there is a bubble in oil prices.”
Last summer, the Presidents and CEOs of major U.S. airlines
described the disastrous effects of rampant speculation on the
airline industry. The CEOs stated: “normal market forces are being
dangerously amplified by poorly regulated market speculation.” The
CEOs wrote: “For airlines, ultra-expensive
fuel means thousands of lost jobs and severe reductions in air
service to both large and small communities.”
To rein in this rampant speculation, the first step to take is to
put a cop back on the beat in all our energy markets to prevent
excessive speculation, price manipulation, and trading abuses.
Limits on Speculation in Futures Markets
With respect to the commodity futures markets, the legislation we
are introducing today requires the CFTC to establish limits on the
amount of futures contracts any trader can hold. Currently, the CFTC
allows the futures exchanges themselves to set these limits. This
bill would require the CFTC to set those limits to prevent excessive
speculation and price manipulation. It would preserve, however, the
exchanges’ obligation and ability to police their traders to ensure
they remain below these limits.
This legislation would also require the CFTC to conduct a rulemaking
to review and revise the criteria for allowing traders who are using
the futures market to hedge their risks in a commodity to acquire
holdings in excess of the limits on holdings for speculators.
Closing the Enron Loophole
Another step is to give the CFTC authority to prevent excessive
speculation in the over-the-counter markets. In 2007, my
Subcommittee issued a report on the effects of speculation in the
energy markets entitled, Excessive Speculation in the Natural Gas
Market. This investigation showed that speculation by a single hedge
fund named Amaranth distorted natural gas prices during the summer
of 2006 and drove up prices for average consumers. The report
demonstrated how Amaranth had shifted its speculative activity to
unregulated markets, under the “Enron loophole,” to avoid the
restrictions and oversight in the regulated markets, and how
Amaranth’s trading in the unregulated markets contributed to price
increases.
Following this investigation, I introduced a bill, S. 2058, to close
the Enron loophole and regulate the un-regulated electronic energy
markets. Working with Senators Feinstein and Snowe, and with the
members of the Agriculture Committee in a bipartisan effort, we
included an amendment to close the Enron loophole in the farm bill,
which Congress passed last year.
Closing the Swaps Loophole
The legislation to close the Enron loophole placed over-the-counter
(OTC) electronic exchanges under CFTC regulation. However, this
legislation did not address the separate issue of trading in the
rest of the OTC market, which includes bilateral trades through
voice brokers, swap dealers, and direct party-to-party negotiations.
In
order to ensure there is a cop on the beat in all of the energy
commodity markets, we need to address the rest of the OTC market as
well.
A large portion of this OTC market consists of the trading of swaps
relating to the price of a commodity. Generally, commodity swaps are
contracts between two parties where one party pays a fixed price to
another party in return for some type of payment at a future time
depending on the price of a commodity.
Because some of these swap instruments look very much like futures
contracts – except that they do not call for the actual delivery of
the commodity – there is concern that the price of these swaps that
are traded in the unregulated OTC market could affect the price of
the very similar futures contracts traded on the regulated futures
markets.
We
don’t yet know for sure that this is the case, or that it is not,
because we don’t have any access to comprehensive data or reporting
on the trading of these swaps in the OTC market.
The legislation introduced today includes provisions to give the
CFTC oversight authority to stop excessive speculation in the
over-the-counter market. These provisions represent a practical,
workable approach that will enable the CFTC to obtain key
information about the OTC market to enable it to prevent excessive
speculation and price manipulation.
Under these provisions, the CFTC will have the authority to ensure
that traders cannot avoid the CFTC reporting requirements by trading
swaps in the unregulated OTC market instead of regulated exchanges.
It will enable the CFTC to act, such as by requiring reductions in
holdings of futures contracts or swaps, against traders with large
positions in order to prevent excessive speculation or price
manipulation regardless of whether the trader’s position is on an
exchange or in the OTC market.
This bill also gives the CFTC the authority to establish position
limits in the over-the-counter market for energy and agricultural
commodities in order to prevent excessive speculation and price
manipulation. The CFTC needs this authority to ensure that large
traders are not using the over-the-counter markets to evade the
position limits in the futures markets.
Closing the London Loophole
The “London loophole” allowed crude oil traders in the U.S. to avoid
the position limits that apply to trading on U.S. futures exchanges
by directing their trades onto the ICE Futures Exchange in London.
In the last Congress, after I and others introduced legislation to
close the London loophole that is similar to the legislation we are
now introducing, the CFTC imposed more stringent requirements upon
the ICE Futures Exchange’s operations in the United States—for the
first time requiring the London exchange to impose and enforce
comparable position limits in order to be allowed to keep its
trading terminals in the United States.
This is the very action our legislation called for. However, the
current CFTC position limits apply only to the nearest futures
contract. Our legislation will ensure that foreign exchanges with
trading terminals in the U.S. will apply position limits to other
futures contracts once the CFTC establishes those limits for U.S.
exchanges.
Although the CFTC has taken these important steps that will go a
long way towards closing the London loophole, Congress should still
pass this legislation to make sure the London loophole stays closed.
The legislation would put the conditions the CFTC has imposed upon
the London exchange into statute, and ensure that the CFTC has clear
authority to take action against any U.S. trader who is manipulating
the price of a commodity or excessively speculating through the
London exchange, including requiring that trader to reduce
positions.
The legislation also provides authorization for the CFTC to hire an
additional 100 employees to oversee the commodity markets it
regulates. The CFTC has been understaffed and underfunded for years.
This authorization is a necessary first step to reinvigorate the
agency’s oversight and enforcement capabilities.
Conclusion
In summary, the legislation I am introducing today will give the
CFTC ability to police all of our energy commodity markets to
prevent excessive speculation and price manipulation. This
legislation is necessary to close the loopholes in current law that
permit speculators in commodity markets to avoid trading limits
designed to prevent the type of excessive speculation that has been
contributing to high energy and other commodity prices. I hope my
colleagues will support this legislation.
I ask unanimous consent that the full text of my remarks, a copy of
the bill, and a summary of the bill be inserted into the
Congressional Record. "
July 11, 2008
Senate Floor Speech on the Introduction of the Over-the-Counter
Speculation Act, S. 3255
Senator Levin
"Mr. President, today I am introducing, along with Senator
Feinstein, the Over-the-Counter Speculation Act. This legislation
will provide the Commodity Futures Trading Commission, CFTC, with
the ability to detect and prevent price manipulation and excessive
speculation.
In the currently
unregulated over-the-counter commodity markets, this legislation
will close a major loophole in our commodities laws that prevents
the CFTC from conducting oversight in certain enforcement activities
and obtaining information about trading in the unregulated
over-the-counter market.
It will ensure that
large energy and other commodity traders cannot use the
over-the-counter market to hide from the CFTC, escape reporting
requirements, or avoid CFTC enforcement authorities to require
traders to reduce their holdings of futures contracts in order to
prevent manipulation or excessive speculation.
This legislation is based on the work of the Permanent Subcommittee
on Investigations, which I chair, regarding effect of speculation on
rising energy prices. In 2006, the PSI study, called The Role of
Market Speculation in Rising Oil and Gas Prices: A Need to Put the
Cop Back on the Beat, found the following:
First, over the past few years, speculators have dramatically
increased their activities in U.S. energy commodity markets. Second,
speculation has contributed to rising U.S. energy prices.
The 2006 report estimated that this increased speculation,
particularly through commodity index funds, had contributed about
$20 to the price of a barrel of oil which was then about $70, or
roughly 25 to 30 percent of the price.
The 2006 PSI report
also found that CFTC access to daily reports of large trades of
energy commodities is essential to its ability to detect and deter
price manipulation. It recommended that Congress require reports of
large trades on over-the-counter electronic exchanges.
The 2006 report also
recommended that Congress eliminate the Enron loophole to put the
cop back on the beat in the over-the-counter electronic markets.
Since the 2006 PSI report, the amount of speculation has increased
significantly and so have energy prices. In 2006, there was about
$60 billion invested in commodity index funds.
Today there is over $200 billion. Since 2000, there has been
nearly a 1200-percent increase in the amount of speculative trading
compared to only a 200-percent increase in the commercial trading
world.
Even this understates
the increase in speculation, since the CFTC data classifies futures
trading involving index funds as commercial trading rather than
speculation. A large amount of speculative trading is taking place
in the unregulated over-the-counter market. Many market experts
believe this huge increase in speculation in recent years has
boosted oil prices.
Last fall, as oil prices were nearing $100 a barrel--$40 a barrel
lower than they are today--the president and CEO of Marathon Oil
said:
$100 oil isn't justified by the physical demand in the market. It
has to be speculation on the futures market that is fueling this.
Mr. Fadel Gheit, an oil analyst for Oppenheimer and Company,
describes the oil market as "a farce."
The speculators have seized control and it's basically a
free-for-all, a global gambling hall, and it won't shut down unless
and until responsible governments step in.
In January of this year, as oil hit $100 a barrel, Tim Evans, oil
analyst for Citigroup, wrote:
The larger supply and demand fundamentals do not support a further
rise and are, in fact, more consistent with lower price levels.
That is when oil was at $100 a barrel.
At the joint hearing of my PSI Subcommittee and Senator Dorgan's
Energy Subcommittee last December, Dr. Edward Krapels, a financial
market analyst, testified:
Of course financial trading, speculation affects the price of oil
because it affects the price of everything we trade ..... It would
be amazing if oil somehow escaped this effect.
He said that as a result of this speculation:
There is a bubble in oil prices.
There is some concern that some large traders may be avoiding the
limits on holdings and accountability levels that apply to trading
on the futures exchanges by trading in the unregulated
over-the-counter market. In the absence of data or reporting on the
activity in the over-the-counter market, it is difficult to estimate
specifically the specific impact of this large amount of unregulated
trading on commodity prices.
Moreover, even if we
were to get better information about unregulated over-the-counter
trades, the CFTC has no authority to take action to prevent price
manipulation or excessive speculation resulting from this
unregulated trading.
The need to control this speculation is urgent. Only yesterday the
presidents and CEOs of major U.S. airlines warned about the
disastrous effects of rampant speculation on the airline industry.
The CEOs stated:
Normal market forces are being dangerously amplified by poorly
regulated market speculation.
They further stated:
Twenty years ago, 21 percent of oil contracts were purchased by
speculators who trade oil on paper with no intention of ever taking
delivery. Today, oil speculators purchase 66 percent of all oil
futures contracts, and that reflects just the transactions that are
known.
So it has gone up from 21 percent purchased by speculators on these
oil contracts, these futures, to 66 percent during this period, and
that, again, excludes some of the transactions.
The CEOs wrote that:
For airlines, ultra-expensive fuel means thousands of lost jobs and
severe reductions in air service to both large and small
communities.
Earlier this year, Congress included legislation on the farm bill
that closed the Enron loophole. This legislation closed one of the
major regulatory gaps identified in the 2006 PSI report and then
again in the 2007 PSI report on how a single hedge fund named
Amaranth distorted natural gas prices through, in part, using the
over-the-counter electronic exchanges that were not regulated under
the Enron loophole.
The legislation to close the Enron loophole placed over-the- counter
electronic exchanges under CFTC regulation. However, that
legislation did not address the separate issue of trading in the
rest of the over-the-counter market, which includes bilateral trades
through voice brokers, swap dealers, and direct party-to-party
negotiations. The legislation we are introducing today builds on
that previous legislation and addresses the rest of the
over-the-counter market.
Additionally, I have already introduced legislation with Senators
FEINSTEIN, DURBIN, DORGAN, and BINGAMAN, S. 3129, to close the
"London loophole." This loophole has allowed crude oil dealers in
the United States to avoid the position limits--limits on their
holdings--that apply to trading on U.S. futures exchanges by simply
directing their trades onto the ICE Futures Exchange in London.
The legislation we
have introduced has been incorporated into legislation introduced by
Senator Durbin, S. 3130, which also would give the CFTC more
resources and enable them to better obtain information about index
trading and the swaps market.
After these two bills were introduced, the CFTC imposed more
stringent requirements upon the ICE Future Exchange's operations in
the United States, and for the first time the London exchange
imposed comparable position limits in order to be allowed to keep
its trading terminals in the United States. This is the very action
our legislation called for.
However, although the CFTC took those important steps that will go a
long way toward closing the London loophole, Congress still needs to
pass the legislation to make sure the London loophole is closed.
The legislation would
put the conditions the CFTC has imposed upon the London exchange
into statute, and ensure that the CFTC has clear authority to take
action against any U.S. trader who is manipulating the price of a
commodity or excessively speculating through the London exchange,
including requiring traders to reduce positions.
There are additional steps that need to be taken to address the
issue of ensuring that increasing speculation in our commodity
markets is not driving up commodity prices.
The legislation we are introducing today is a practical, workable
approach that will enable the CFTC to obtain key information about
the over-the-counter market to enable it to prevent manipulation and
excessive speculation. It will provide the CFTC with the authority
to take action in the over-the-counter market to prevent excessive
speculation and price manipulation, such as by requiring large
traders to reduce their holdings of futures contracts.
It enables the CFTC to
obtain information on large trades in the over-the-counter market so
it can determine whether any trader or class of traders has
excessive holdings that may affect market prices, and whether such
positions should be reduced.
This legislation will ensure that large traders cannot avoid the
CFTC reporting requirements by using the unregulated
over-the-counter market instead of the regulated exchanges. It will
ensure that the CFTC can take appropriate action, such as by
requiring reductions in holdings of futures contracts against
traders with large positions in order to prevent price manipulation
or excessive speculation, regardless of whether the trader's
position is on an exchange or in the over-the-counter market.
The approach in this bill is practical and workable. I thank Senator
Feinstein for her important support of this legislation.
Mr. President, I ask unanimous consent, that a summary of the bill
be printed in the Record"
There being no objection, the material was
ordered to be printed in the RECORD, as follows:
The Levin-Feinstein "Over-the-Counter Speculation Act"
SUMMARY
The Levin-Feinstein "Over-the-Counter Speculation Act" would give
the Commodity Futures Trading Commission (CFTC) authority to direct
a trader to reduce its positions in the OTC market to prevent price
manipulation and excessive speculation in CFTC-regulated markets.
To provide the CFTC
with information necessary to prevent price manipulation and
excessive speculation in these markets, it also would extend the
large trader reporting requirement in the Commodity Exchange Act (CEA)--which
currently applies only to trading on the regulated futures
exchanges--to trading in the unregulated over-the-counter (OTC)
market.
Under current law, the CFTC's market oversight and surveillance does
not extend to the OTC market, and the CFTC's authority over traders
in this market only applies if the trader has a position on one of
the CFTC-regulated markets.
This bill would extend
the CFTC's market oversight and surveillance to large trades in the
OTC market, regardless of whether the trader also has a position on
a futures exchange, and provide the CFTC with the necessary
authority to take action in the OTC market to prevent price
manipulation or excessive speculation.
BACKGROUND
As a result of various exclusions and exemptions in the CEA and CFTC
regulations, commodity trading in the over-the-counter markets is
largely unregulated, although trading in these markets may have a
direct and substantial effect upon the prices of contracts for
future delivery of those same commodities on futures exchanges
regulated by the CFTC. According to some estimates, trading of swaps
and other instruments in the OTC market exceeds by several multiples
the trading of futures contracts in the regulated futures markets.
There is substantial concern excessive speculation in the OTC market
may be contributing to the extraordinary commodity price increases
of the past several months. There is also concern that some large
traders may be avoiding the position limits and accountability
levels that apply to trading on the futures exchanges by trading in
the unregulated OTC market. In the absence of data or reporting on
the activity in the OTC market, however, it is difficult to evaluate
the specific effect of this large amount of unregulated trading on
commodity prices. Moreover, even if the data were to show that large
trading in the OTC market is affecting prices, or that traders are
using the OTC market to avoid position limits in the regulated
markets, the CFTC has limited authority to take action to prevent
any price distortions that may result from such trading.
EXPLANATION OF BILL
CFTC Oversight Authority. The bill provides the CFTC with authority
to require large traders in the OTC market to reduce holdings, or
suspend trading, in order to prevent price manipulation or excessive
speculation.
Reporting of Large Over-the-Counter Trades. The bill requires the
CFTC to promulgate regulations requiring the reporting of large OTC
transactions in order to detect and prevent potential price
manipulation or excessive speculations.
Recordkeeping for Large Over-the-Counter Trades. The bill requires
the CFTC to promulgate regulations requiring the keeping of trading
records by persons required to report large OTC transactions.
Prevent Excessive Speculation Act
SEC. 2. DEFINITIONS OF ENERGY AND AGRICULTURAL COMMODITY.
(a) Definition of Energy Commodity- Section 1a of the Commodity
Exchange Act (7 U.S.C. 1a) is amended--
(1) by redesignating paragraphs (13) through (34) as paragraphs (14)
through (35), respectively; and
(2) by inserting after paragraph (12) the following:
`(13) ENERGY COMMODITY- The term `energy
commodity' means--
`(A) crude oil;
`(B) natural gas;
`(C) coal;
`(D) gasoline, heating oil, diesel fuel, and any other source of
energy derived from coal, crude oil, or natural gas;
`(E) electricity;
`(F) ethanol and any other fuel derived from a renewable biomass;
`(G) any commodity that results from the management of air
emissions, including but not limited to greenhouse gases, sulfur
dioxide, and nitrogen oxides; and
`(H) any other substance that is used as a source of energy, as the
Commission, in its discretion, deems appropriate.'.
(b) Definition of Agricultural Commodity- Section 1a of the
Commodity Exchange Act (7 U.S.C. 1a) is amended--
(1) by redesignating paragraphs (1) through (35) as paragraphs (2)
through (36), respectively; and
(2) by inserting a new paragraph (1) as follows:
`(1) AGRICULTURAL COMMODITY- The term `agricultural commodity' means
any commodity specifically described in paragraph (5).'.
(c) Conforming Amendments-
(1) Section 2(c)(2)(B)(i)(II)(cc) of the Commodity Exchange Act (7
U.S.C. 2(c)(2)(B)(i)(II)(cc)) is amended--
(A) in subitem (AA), by striking `section 1a(20)' and inserting
`section 1a(21)'; and
(B) in subitem (BB), by striking `section 1a(20)' and inserting
`section 1a(21)'.
(2) Section 13106(b)(1) of the Food, Conservation, and Energy Act of
2008 is amended by striking `section 1a(32)' and inserting `section
1a'.
(3) Section 402 of the Legal Certainty for Bank Products Act of 2000
(7 U.S.C. 27) is amended--
(A) in subsection (a)(7), by striking `section 1a(20)' and inserting
`section 1a'; and
(B) in subsection (d)--
(i) in paragraph (1)(B), by striking `section 1a(33)' and inserting
`section 1a'; and
(ii) in paragraph (2)(D), by striking `section 1a(13)' and inserting
`section 1a'.
SEC. 3. SPECULATIVE LIMITS AND TRANSPARENCY OF OFF-SHORE TRADING.
Section 4 of the Commodity Exchange Act (7 U.S.C. 6) is amended by
adding at the end the following:
`(e) Foreign Boards of Trade-
`(1) IN GENERAL- The Commission may not permit a foreign board of
trade to provide to the members of the foreign board of trade or
other participants located in the United States, or otherwise
subject to the jurisdiction of the Commission, direct access to the
electronic trading and order matching system of the foreign board of
trade with respect to an agreement, contract, or transaction in an
energy commodity that settles against any price (including the daily
or final settlement price) of one or more contracts listed for
trading on a registered entity, unless--
`(A) the foreign board of trade--
`(i) makes public daily trading information regarding the agreement,
contract, or transaction that is comparable to the daily trading
information published by the registered entity for the one or more
contracts against which the agreement, contract or transaction
traded on the foreign board of trade settles; and
`(ii) promptly notifies the Commission of any change regarding--
`(I) the information that the foreign board of trade will make
publicly available;
`(II) the position limits and position accountability provisions
that the foreign board of trade will adopt and enforce;
`(III) the position reductions required to prevent manipulation; and
`(IV) any other area of interest expressed by the Commission to the
foreign board of trade; and
`(B) the foreign board of trade (or the foreign futures authority
that oversees the foreign board of trade)--
`(i) adopts position limits or position accountability provisions
for the agreement, contract, or transaction that are comparable to
the position limits or position accountability provisions adopted by
the registered entity for the one or more contracts against which
the agreement, contract or transaction traded on foreign board of
trade settles;
`(ii) has the authority to require or direct market participants to
limit, reduce, or liquidate any position the foreign board of trade
(or the foreign futures authority that oversees the foreign board of
trade) determines to be necessary to prevent or reduce the threat of
price manipulation, excessive speculation, price distortion, or
disruption of delivery or the cash settlement process; and
`(iii) provides information to the Commission that is comparable to
the information that the Commission determines to be necessary to
publish the commitments of traders report of the Commission for the
one or more contracts against which the agreement, contract or
transaction traded on the foreign board of trade settles.
`(2) EXISTING FOREIGN BOARDS OF TRADE-
Paragraph (1) shall not be effective with respect to any agreement,
contract, or transaction in an energy commodity executed on a
foreign board of trade to which the Commission had granted direct
access permission prior to the date of enactment of this subsection
until the date that is 180 days after the date of enactment of this
subsection.
`(3) EXISTING CONTRACTS- No contract of sale of a commodity for
future delivery traded or executed on or through the facilities of a
board of trade, exchange or market located outside the United States
for purposes of subsection (a) shall be void, voidable or
unenforceable and no party to such contract shall be entitled to
rescind or recover any payments made with respect to such contract
based upon the failure of the foreign board of trade to comply with
any provision of this Act.'.
SEC. 4. AUTHORITY OF COMMODITY FUTURES TRADING COMMISSION WITH
RESPECT TO CERTAIN TRADERS.
(a) In General-
(1) RESTRICTION OF FUTURES TRADING TO CONTRACT MARKETS OR
DERIVATIVES TRANSACTION EXECUTION FACILITIES- Section 4(b) of the
Commodity Exchange Act (7 U.S.C. 6(b)) is amended by inserting after
the first sentence the following: `The Commission may adopt rules
and regulations requiring the maintenance of books and records by
any person that is located within the United States (including the
territories and possessions of the United States) or that enters
trades directly into the trade matching system of a foreign board of
trade from the United States (including the territories and
possessions of the United States).'
(2) COMMISSION AUTHORITY OVER TRADERS- Section 4 of the Commodity
Exchange Act (7 U.S.C. 6) is amended by adding at the end the
following:
`(e) The Commission shall have authority under this Act to require
or direct a person located in the United States, or otherwise
subject to the jurisdiction of the Commission, to limit, reduce, or
liquidate any position on a foreign board of trade to prevent or
reduce the threat of price manipulation, excessive speculation,
price distortion, or disruption of delivery or the cash settlement
process with respect to any contract listed for trading on a
registered entity.
`(f) Consultation- Before taking any action under subsection (e),
the Commission shall consult with the appropriate--
`(1) foreign board of trade; and
`(2) foreign futures authority.'.
(3) VIOLATIONS- Section 9(a) of the Commodity Exchange Act (7 U.S.C.
13(a)) is amended by inserting `(including any person trading on a
foreign board of trade)' after `Any person' each place it appears.
(4) EFFECT- No amendment made by this subsection limits any of the
otherwise applicable authorities of the Commodity Futures Trading
Commission.
SEC. 5. WORKING GROUP OF INTERNATIONAL
REGULATORS.
Section 4a of the Commodity Exchange Act (7 U.S.C. 6a) (as amended
by section 4(a)(2)(B)) is amended by adding at the end the
following:
`(g) Working Group of International Regulators- Not later than 90
days after the date of enactment of this subsection, the Commission
shall invite regulators of foreign boards of trade to participate in
a working group of international regulators to develop uniform
international reporting and regulatory standards to ensure the
protection of the energy and agricultural futures markets from
excessive speculation, manipulation, and other trading practices
that may pose systemic risks to energy and agricultural futures
markets, countries, and consumers.'.
SEC. 6. POSITION LIMITS FOR ENERGY AND AGRICULTURAL COMMODITIES.
Section 4a of the Commodity Exchange Act (7 U.S.C. 6a) is amended--
(1) in subsection (a)--
(A) by inserting `(1)' after `(a)'; and
(B) by adding after and below the end the following:
`(2) In accordance with the standards set forth in paragraph (1) of
this subsection and consistent with the good faith exception cited
in subsection (b)(2), with respect to energy and agricultural
commodities, the Commission, within 90 days after the date of the
enactment of this paragraph, shall issue a proposed rule, and within
180 days after issuance of such proposed rule shall adopt a final
rule, after notice and an opportunity for public comment, to
establish limits on the amount of positions that may be held by any
person with respect to contracts of sale for future delivery or with
respect to options on such contracts or commodities traded on or
subject to the rules of a contract market or derivatives transaction
execution facility, or on an electronic trading facility with
respect to a significant price discovery contract.
`(3) In establishing the limits required in paragraph (2), the
Commission shall set limits--
`(A) on the number of positions that may be held by any person for
the spot month, each other month, and the aggregate number of
positions that may be held by any person for all months;
`(B) to the maximum extent practicable, in its discretion--
`(i) to diminish, eliminate, or prevent excessive speculation;
`(ii) to deter and prevent market manipulation, squeezes, and
corners;
`(iii) to ensure sufficient market liquidity; and
`(iv) to ensure that the price discovery function of the underlying
cash market is not distorted or disrupted.
`(4) In addition to the position limits for energy and agricultural
commodities that the Commission establishes under paragraph (2), the
Commission may require or permit a contract market, derivatives
transaction execution facility, or electronic trading facility with
respect to a significant price discovery contract, to establish and
enforce position accountability, as the Commission determines may be
necessary and appropriate to accomplish the objectives set forth in
paragraph (3)(B), provided that the number of positions that may be
authorized under position accountability may not exceed the position
limits established under paragraph (2).
`(5) Nothing in this section shall require the Commission to revise
any position limit for an agricultural commodity that is in effect
on the date of enactment of this Act.'.
SEC. 7. OVER-THE-COUNTER TRANSACTIONS.
Section 2 of the Commodity Exchange Act (7 U.S.C. 2) is amended by
adding at the end the following:
`(j) Over-the-Counter Transactions-
`(1) DEFINITIONS- In this subsection:
`(A) COVERED PERSON- The term `covered person' means a person that
enters into an over-the-counter transaction that is required to be
reported under paragraph (3)(C).
`(B) OVER-THE-COUNTER TRANSACTION- The term `over-the-counter
transaction' means a contract, agreement, or transaction in an
energy or agricultural commodity that is--
`(i) entered into only between persons that are eligible contract
participants at the time the persons enter into the agreement,
contract, or transaction;
`(ii) not entered into on a trading facility; and
`(iii) not a sale of any cash commodity for delivery.
`(2) AUTHORITY IN MAJOR MARKET DISTURBANCES-
`(A) IN GENERAL- In the case of a major market disturbance, as
determined by the Commission, the Commission may require any trader
subject to the reporting requirements described in paragraph (3) to
take such action as the Commission considers to be necessary to
maintain or restore orderly trading in any contract listed for
trading on a registered entity, including--
`(i) the liquidation of any futures contract; and
`(ii) the fixing of any limit that may apply to a market position
involving any over-the-counter transaction acquired in good faith
before the date of the determination of the Commission.
`(B) MAJOR MARKET DISTURBANCE- The term `major market disturbance'
means any disturbance in a commodity market that disrupts the
liquidity and price discovery function of that market from
accurately reflecting the forces of supply and demand for a
commodity, including--
`(i) a threatened or actual market manipulation or corner;
`(ii) excessive speculation; and
`(iii) any action of the United States or a foreign government that
affects a commodity.
`(C) The term `market disturbance' shall be interpreted in a manner
consistent with section 8a(9).
`(D) JUDICIAL REVIEW- Any action taken by the Commission under
subparagraph (A) shall be subject to judicial review carried out in
accordance with section 8a(9).
`(3) REPORTING; RECORDKEEPING-
`(A) IN GENERAL- The Commission shall require each covered person to
submit to the Commission a report--
`(i) at such time and in such manner as the Commission determines to
be appropriate; and
`(ii) containing the information required under subparagraph (B) to
assist the Commission in detecting and preventing potential price
manipulation of, or excessive speculation in, any contract listed
for trading on a registered entity.
`(B) CONTENTS OF REPORT- A report required under subparagraph (A)
shall contain--
`(i) information describing large trading positions of the covered
person obtained through one or more over-the-counter transactions
that involve--
`(I) substantial quantities of a commodity in the cash market; or
`(II) substantial positions, investments, or trades in agreements or
contracts relating to the commodity; and
`(ii) any other information relating to over-the-counter
transactions required to be reported under subparagraph (C) carried
out by the covered person that the Commission determines to be
necessary to accomplish the purposes described in subparagraph (A).
`(C) OVER-THE-COUNTER TRANSACTIONS TO BE REPORTED-
`(i) IN GENERAL- The Commission shall identify each large
over-the-counter transaction or class of large over-the-counter
transactions the reporting of which the Commission determines to be
appropriate to assist the Commission in detecting and preventing
potential price manipulation of, or excessive speculation in, any
contract listed for trading on a registered entity.
`(ii) MANDATORY FACTORS FOR DETERMINATIONS-
`(I) IN GENERAL- In carrying out a determination under clause (i),
the Commission shall consider the extent to which each factor
described in subclause (II) applies.
`(II) FACTORS- The factors required for carrying out a determination
under clause (i) include whether--
`(aa) a standardized agreement is used to execute the
over-the-counter transaction;
`(bb) the over-the-counter transaction settles against any price
(including the daily or final settlement price) of one or more
contracts listed for trading on a registered entity;
`(cc) the price of the over-the-counter transaction is reported to a
third party, published, or otherwise disseminated;
`(dd) the price of the over-the-counter transaction is referenced in
any other transaction;
`(ee) there is a significant volume of the over-the-counter
transaction or class of over-the-counter transactions; and
`(ff) there is any other factor that the Commission determines to be
appropriate.
`(iii) PERIODIC REVIEW- The Commission shall periodically conduct a
review, but not less than once every 2 years, to determine whether
to initiate a rulemaking to include any additional transactions or
classes of transactions or to exclude any transactions or classes of
transactions from the reporting requirements of this paragraph.
`(D) ALTERNATE REPORTING- The Commission may permit any report
required to be reported under paragraph (A) by--
`(i) a member of a derivatives clearing organization; or
`(ii) only one of the persons entering into the transaction,
provided that each person entering into the transaction or
transactions has notified the Commission, in the manner specified by
the Commission, that one of the persons to the transaction or
transactions has assumed, on behalf of the other person to the
transaction, the legal obligations for such other person to submit
reports under this section, including liabilities for failure to
file such reports in accordance with the Commission's regulations.
Any notification provided under this paragraph shall be effective in
imposing such legal obligations and liabilities upon such person.
`(E) RECORDKEEPING- The Commission, by rule, shall require each
covered person--
`(i) in accordance with section 4i, to maintain such records as
directed by the Commission for a period of 5 years, or longer, if
directed by the Commission; and
`(ii) to provide such records upon request to the Commission or the
Department of Justice.
`(4) POSITION LIMITS FOR OVER-THE-COUNTER TRANSACTIONS- Upon review
of the information reported to the Commission under paragraph (3),
or following a major market disturbance as determined by the
Commission under paragraph (2), the Commission may establish, after
due notice and opportunity for hearing, by rule, regulation, or
order, such limits on the amount of trading in over-the-counter
transactions as the Commission determines are necessary and
appropriate to accomplish one or more of the following objectives
with respect to any contract listed for trading on a registered
entity--
`(A) diminish, eliminate, or prevent excessive speculation;
`(B) deter and prevent market manipulation, squeezes, and corners;
`(C) ensure sufficient market liquidity; and
`(D) ensure that the price discovery function of the underlying cash
market is not distorted or disrupted.
`(5) PROTECTION OF PROPRIETARY INFORMATION- In carrying out this
subsection, the Commission may not--
`(A) require the publication of any proprietary information;
`(B) prohibit the commercial sale or licensing of any proprietary
information; and
`(C) except as provided in section 8, publicly disclose any
information relating to any market position, business transaction,
trade secret, or name of any customer of a covered person.
`(6) APPLICABILITY- Notwithstanding subsections (g) and (h), and any
exemption issued by the Commission for any energy or agricultural
commodity, each over-the-counter transaction shall be subject to
this subsection.
`(7) SAVINGS CLAUSE- Nothing in this subsection modifies or alters--
`(A) the guidance of the Commission; or
`(B) any applicable requirements with respect the disclosure of
proprietary information.
`(8) BONA FIDE HEDGING TRANSACTION REVIEW-
`(A) IN GENERAL- The Commission shall review and revise the
definition of bona fide hedging transaction in subsection (c) of
Section 4a of the Commodity Exchange Act (7 U.S.C 2(h)(2)(A)) as the
Commission determines is necessary and appropriate to ensure that
the commodity markets effectively perform their risk management and
price discovery functions.'.
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