[Congressional Record Volume 142, Number 117 (Friday, August 2, 1996)]
[Senate]
[Pages S9620-S9621]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]
ADDITIONAL STATEMENTS
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LEGISLATION TO AMEND THE COMMODITY EXCHANGE ACT
Mr. LUGAR. Mr. President, today Senator Leahy and I announced
that we will propose legislation to amend the Commodity Exchange Act,
which establishes the ground rules for commodity futures trading in the
United States. Our decision to proceed with legislation follows a
public hearing on June 5 and extensive discussions with industry and
federal regulators.
I commend Senator Leahy for his bipartisan cooperation in this as in
so many other matters. In order that our colleagues and the general
public may understand the legislation we plan to introduce, I ask that
a statement issued earlier today by the two of us be printed in the
Record. I further ask that a letter signed by the two of us and
addressed to Acting CFTC Commissioner Tull also be printed in the
Record.
The material follows:
Reforming and Updating the Commodity Exchange Act: Outline of Planned
Legislation
The Commodity Exchange Act has benefited the American
economy. It has helped encourage a dynamic, world-class
futures trading industry that allows farmers, ranchers and
other business operators to manage risk, provides investment
opportunities and offers protection to consumers of its
services. From time to time, Congress has re-examined the Act
to bring it up to date with changing markets. Such an update
is now opportune.
On June 5, the Committee on Agriculture, Nutrition, and
Forestry heard testimony on the need to update the Commodity
Exchange Act. Since then, committee staff have consulted
extensively with federal agencies and private industry,
seeking to explore the implications of legislative proposals
by various groups.
As a result of this thorough process, we have decided to
introduce legislation to amend the Commodity Exchange Act.
Because it is late in the legislative session, it is unlikely
the bill we introduce will become law this year. We intend it
to spark discussion, with the aim of completing work on
revisions to the Act in 1997.
In considering possible legislation, we have been ably
advised by CFTC staff. While the CFTC is unconvinced that new
legislation is needed, commission officials have cooperated
with our staff whenever they have been asked. We want to
thank them publicly for this assistance.
In addition, commission staff have been receptive to
addressing some issues through administrative action.
Although some reforms we propose are beyond the scope of the
commission's current statutory authorities, others could be
resolved without legislation. We encourage the CFTC to work
toward this end.
There is a public interest in a strong, competitive U.S.
futures industry because of its critical role in price
discovery and business risk management. This public interest
implies, and requires, a degree of regulation. In recent
years, U.S. futures exchanges have also faced increasing
competition from foreign exchanges and from over-the-counter
derivative products.
U.S. exchanges face some regulatory costs that are not
borne by their competitors. The Act, and the Commodity
Futures Trading Commission's actions to implement its
requirements, must strike an appropriate balance between
prudent regulation and the need for a cost-competitive
industry.
We will introduce legislation in September. The reason for
delaying introduction is a provision of the Act called the
``Treasury amendment.'' The amendment excludes certain
transactions from the CFTC's jurisdiction and has been the
subject of varying interpretations since it was first
enacted. Many firms and associations have requested that
Congress clarify the Treasury amendment, and we agree that
clarification is in order.
The CFTC and the Treasury Department have been working to
arrive at a common interpretation of the Treasury amendment.
We believe it is wise to give them, and other relevant
agencies, a chance to complete these discussions before
making a legislative proposal. Therefore, we are writing to
Secretary Rubin and Acting Chairman Tull to encourage their
agencies to complete their discussions and advise us of their
progress. If these conclusions suggest a need to modify the
Treasury amendment, we will strongly consider incorporating
those modifications into the bill we introduce.
In order for our colleagues to have an opportunity to
examine the legislation before this session of Congress ends,
we will need to introduce the bill in the first week Congress
returns from the August recess, that is the week ending
September 6. Therefore, we would like to receive the
Administration's counsel before the Labor Day holiday.
It is premature to propose a specific change to the
Treasury amendment. However, we can say that we do not intend
for the CFTC to become involved in markets where it does not
now have any significant role. An example is the ``when-
issued'' market in Treasury securities.
We invite public comment during August on the legislative
proposals we will outline in this statement. The bill we
introduce in September will be a discussion document. It
might subsequently be scaled back, but it also might be
expanded to make additional changes to the Act. It will be
neither an opening gambit nor a least common denominator. It
will represent our best judgment of how the Act should
prudently be changed, but our minds remain open to other
approaches.
The committee's work on the Commodity Exchange Act has been
bipartisan and collegial. Like the 1996 farm bill, the
landmark food safety legislation now on the President's desk,
and other important laws originated by the committee, this
legislative effort is one on which we will work together.
A summary of planned legislative provisions follows.
[[Page S9621]]
Considerations required in regulatory actions.--For each
significant regulation it imposes (not including enforcement,
emergency and similar actions), the CFTC will be directed to
take into account both the anticipated costs and the
anticipated benefits of the action it contemplates, and to
explain publicly its evaluation of the various costs and
benefits. In weighing costs and benefits, CFTC will consider
whether the proposed action, taken as a whole, will promote
customer protection, market integrity and efficiency, fair
competition and sound risk management. The provision will
apply to actions commenced after the date of enactment,
and will require an evaluation, not a cost-benefit
analysis in the strict, quantitative sense.
Audit trail.--The bill will clarify the intent of Congress
that the audit trail statute does not mandate the development
or adoption of any particular technology, but establishes a
performance standard. This clarification will be consistent
with 1995 Senate testimony by then-Chairman Mary Schapiro.
Contract designation.--The legislation will end the
requirement that proposed futures contracts be pre-approved
by the CFTC before trading can commence. Instead, the bill
will provide that exchanges must submit information about
contracts they intend to trade to the CFTC, which will have a
reasonable but limited period to examine the proposed
contract terms. The CFTC will analyze the information with a
presumption in favor of allowing the contract to trade.
However, within the examination period, the CFTC may require
additional information, or delay the start of trading for a
limited time, if it finds reason to believe the contract is
susceptible to manipulation, violates the Act or is contrary
to the public interest. Ultimately, the CFTC would have the
ability to prevent a contract from trading, but only after
instituting proceedings to disallow the exchange from
commencing trading. Comments are invited on the appropriate
length for the periods specified above.
Similar procedures would apply to other proposed exchange rules.
Committee report language will direct the CFTC to report, on an ongoing
basis, its evaluation of how well exchange governing bodies meet the
statutory requirement for meaningful representation of a diversity of
interests.
Disciplinary actions and penalties.--The bill will state
the sense of Congress that, in deploying enforcement
resources, the CFTC should avoid unnecessary duplication of
effort in areas where self-regulatory organizations also have
enforcement duties, while ensuring a CFTC presence and role
sufficient to safeguard market integrity and customer
interests. The CFTC will be directed to report to Congress on
its enforcement program. The report is to include an analysis
of the CFTC's performance in preventing, deterring and
disciplining violations of the CEA that involve fraud against
individual investors through ``bucket shops'' and similar
abuses. The report will be due a year after enactment, and
may follow one or more commission round tables on the
subject.
Exemptive authority.--The bill will direct the CFTC to re-
evaluate its Part 36 Rules (which allow exchanges to set up
less-regulated professionals-only markets in certain limited
circumstances) in light of the need to provide equitable
competitive conditions among various participants in
derivative product markets. Any revisions to the rules would
remain within the CFTC's discretion. The bill will also state
the sense of Congress that any revisions should ensure the
financial integrity of markets and customer protection. The
CFTC will be encouraged to convene a round table meeting or
meetings to receive public input on possible improvements in
Part 36 Rules.
Swaps exemption.--The statute will be amended to enhance
the legal certainty of contracts involving swaps and similar
products. Products meeting the requirements of the CFTC's
1993 swaps exemption will be exempt from the Act's provisions
to the same extent as at present. The provision will not
diminish the CFTC's authority to grant additional
exemptions. In addition, the bill will end the current
prohibition on granting an exemption from CEA regulation
to any transactions subject to the Shad-Johnson accord
(which establishes CFTC and SEC jurisdiction on such
products as stock index futures). Instead, the bill will
allow the CFTC to exempt such products, but only with the
concurrence of the Securities and Exchange Commission.
Comments are invited on additional or alternative means of
enhancing the legal certainty of contracts while assuring
market integrity.
Definition of a hedge.--The statute will be amended to
clarify that a hedge may be established to reduce risks other
than price risks. The bill will make clear that the change
does not affect the ability of exchanges and the CFTC to
establish speculative limits, require reporting of large
trader positions and otherwise discharge their
responsibilities.
Delivery by Federally licensed warehouses.--The bill will
repeal an outdated provision that allows any federally
licensed warehouse to deliver grain against a futures
contract, even if it is not a designated delivery point. The
current statute could allow market manipulation in some
circumstances.
Delivery points for foreign futures contracts.--The CFTC
will be directed to commence negotiations with appropriate
foreign agencies which regulate exchanges that have
established delivery points in the U.S., with the goal of
securing adequate assurance (through improvements in the
foreign regulatory scheme or other means) that the presence
of U.S. delivery points for foreign exchange contracts does
not create the potential for market manipulation or other
disruptions of U.S. markets. The CFTC will also be granted
additional powers, if necessary, to obtain needed information
on such delivery points. Comments are invited on the
appropriate scope of additional authorities, if any, required
by the CFTC to ensure that U.S. markets are not subject to
manipulation.
Delegation of authority.--The bill will state the sense of
Congress that the CFTC should review its authorities with a
view to delegating additional duties to the National Futures
Association or other self-regulatory bodies, requiring a
report one year after enactment on the results of the review.
Report language will state that among the duties the CFTC may
consider delegating are the review of disclosure documents
and reparations procedures. The statute will further state
the sense of Congress that in making any additional
delegations, the CFTC should establish a procedure of spot
checks, random audits or other means of ensuring adequate
performance, and may also make the delegation on a pilot
basis.
Treasury amendment.--The bill's provisions to modify the
Treasury amendment (an exemption from CEA regulation for the
interbank currency markets and some other markets) will be
drafted following review of suggestions received by the
Administration.
Technical changes.--The bill may also include technical
changes to the Act such as those suggested by the National
Futures Association in its June 5 testimony.
U.S. Senate, Committee on Agriculture, Nutrition, and
Forestry,
Washington, DC, August 1, 1996.
Hon. John Tull,
Acting Chairman, Commodity Futures Trading Commission,
Washington, DC.
Dear Mr. Chairman: We were heartened to learn that the
Commodity Futures Trading Commission and the Treasury
Department have been discussing the so-called ``Treasury
amendment'' to the Commodity Exchange Act, with a view toward
arriving at a common interpretation of the provision. At a
hearing our committee held June 5, the Treasury amendment was
cited by several witnesses as a provision of the Act that
needed review and clarification.
We intend to introduce legislation that will make a number
of changes to the Act, and believe it is appropriate to
address the Treasury amendment in that bill. It would be
highly desirable to have the benefit of the Treasury and the
CFTC's joint advice in this regard.
In order for our colleagues to have adequate opportunity to
review the bill this fall, we intend to introduce it in the
first week Congress returns from its August recess, that is
the week ending September 6, 1996. We would appreciate
hearing from relevant federal agencies their views on the
Treasury amendment before the Labor Day holiday, if possible.
However, we are confident you share our strong hope that
agencies will resolve any differences by that time and arrive
at a common understanding, so that the statute's provisions
and scope can be made clear.
Thank you for your assistance in this matter. A similar
letter has been sent to Secretary Rubin.
Sincerely yours,
Patrick J. Leahy,
Ranking Democratic Member.
Richard G. Lugar,
Chairman.
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