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Managing America: Energy

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Week Ending August 1, 2008

H.R.6604 To amend the Commodity Exchange Act to bring greater transparency and accountability to commodity markets, and for other purposes.

Directions to the Commodity Futures Trading Commission are the subject of this bill that begins with a definition of energy commodity as coal; crude oil, gasoline, diesel fuel, jet fuel, heating oil, and propane; electricity; natural gas; and any other substance that is used as a source of energy, as the Commission, in its discretion, deems appropriate.

Similar to the recently passed S 3268, the bill addresses disparities between foreign trade board handling of energy futures and the regulations in the US trading market.

In general, the CFTC “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 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 or agricultural commodity that settles against any price (including the daily or final settlement price) of 1 or more contracts listed for trading on a registered entity, unless” the foreign board of trade makes public daily trading information regarding the agreement, contract, or transaction that is comparable to the daily trading information for the one or more contracts against which the agreement, contract or transaction traded settles; and adopts position limits. The foreign board must also have the authority to require or direct market participants to limit, reduce or liquidate any position the foreign board of trade determines is necessary to prevent or reduce the threat of price manipulation, excessive speculation, price distortion or disruption of delivery or the cash settlement process. The foreign board must also agree to promptly notify the CFTC of any change regarding the information made public, the position limits it will adopt and enforce, and the position reductions required to prevent manipulation, excessive speculation and other anomalies. The foreign boards must provide information regarding large trader positions and aggregate positions.

The CFTC must disaggregate and make public each week the number of positions and total value of index funds and other passive long-only and short-only positions in all energy and agricultural markets, and data on speculative positions relative to bona fide physical hedgers.

The CFTC must issue a proposed rule defining and classifying index and swap dealers for data reporting purposes and set routine detailed reporting requirements for those entities.

Trading limits to prevent excessive speculation

The CFTC must, within 60 days, by rule, regulation or order 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 those contracts or commodities. Advisory groups will be established to oversee and make recommendations.

A bona fide hedging transaction of position is one that represents a substitute for transactions to be made or positions to be taken at a later time in a physical marketing channel, is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise and arises from the potential change in the value of assets that a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing or merchandizing. The liability the person owns or anticipates incurring or services the person provides or anticipates providing or purchasing must also be appropriate.

The Commodity Exchange Act, the Commodity Futures Trading Commission shall review, as appropriate, all regulations, rules, exemptions, exclusions, guidance, no action letters, orders, other actions taken by or on behalf of the Commission, and any action taken pursuant to the Commodity Exchange Act by an exchange, self-regulatory organization, or any other registered entity, that are currently in effect, to ensure that such prior actions are in compliance with the provisions of this Act.

The CFTC shall conduct a study to determine the efficacy, practicality, and consequences of establishing position limits for agreements, contracts, or transactions conducted in reliance on … the Commodity Exchange Act and of any exemption issued by the Commission by rule, regulation or order, as a means to deter and prevent price manipulation or any other disruption to market integrity or to diminish, eliminate, or prevent excessive speculation as described in the Act for physical-based commodities; and to determine the efficacy, practicality, and consequences of establishing aggregate position limits for similar agreements, contracts, or transactions for physical-based commodities traded on designated contract markets; on derivatives transaction execution facilities.” Public hearings are ordered.

The GAO must study the effects of speculators on agricultural and energy futures markets and agriculture and energy prices. The study shall include the effect of increased amounts of capital in agriculture and energy futures markets, the impact of the roll-over of positions by index fund traders and swap dealers on agriculture and energy future markets and prices and the extent to which each factor and speculators affect the prices of agriculture and energy commodities and risk management functions and contribute to economically efficient price discovery.

Over-the-counter markets are equally addressed in this bill.

Sponsor:  Rep. Collin Peterson (MN-7^th)

Vote: Failed in the House July 30, 2008 276 to 151 RC 540 (Required 2/3rds to pass). Passed House 283 to 183 September 18, 2008 RC 608. The Minority motion to recommit the bill failed 196 to 211 RC 607.

Cost to the taxpayers:

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