October 1, 2002

Renewed Effort to Re-Regulate OTC Trades Concerns

NEW YORK (HedgeWorld.com)--The International Swaps and Derivatives Association announced that it is prepared again to fight efforts to expand regulatory oversight of energy derivatives transactions, efforts that may now be revived in Congress, at the behest of Senators Tom Harkin (D-Iowa) and Richard Lugar (R-Ind.).

The Harkin/Lugar bill, which would be introduced as an amendment to a bill introduced by Senator Dianne Feinstein (D-Calif.) in July, would subject participants in the energy derivatives markets to the disclosure of proprietary trading information and new capital requirements.

This is an "unnecessary and flawed legislative approach," said Robert G. Pickel, chief executive and executive director of ISDA, Monday.

Mr. Pickel also praised a letter issued Sept. 18, addressing the Harkin/Lugar proposal, signed by the Secretary of the Treasury and the heads of the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. The four regulators warned that the proposed re-regulation of energy derivatives could increase the vulnerability of the U.S. economy to future stresses.

"This letter signed by the chief financial regulators ... recognizes the positive contributions of [over the counter] derivatives to the economy and presents a clear and convincing case against the adoption of this unnecessary and flawed legislative approach," Mr. Pickel said.

History of the Feinstein Bill

The drive to regulate energy derivatives received considerable impetus last December with the bankruptcy of Enron. Sen. Feinstein charged that the bankruptcy had "uncovered many gaping holes in our regulatory structure," and in February she introduced a bill to repeal exemptions and exclusions for bilateral derivatives in energy commodities, making them once again (as they were before the passage of the Commodity Futures Modernization Act of 2000) subject to direct oversight by the CFTC.

In a March 5 letter to the Senate leadership, the ISDA, in conjunction with the American Bankers Association and six other industry groups, wrote that CFMA was "the result of careful consideration over many years by four committees of the Congress," that it represented important gains, and that the Feinstein proposal would reverse those gains.

Sen. Feinstein introduced her proposal as an amendment to an omnibus energy bill, and on April 10, the Senate voted 48-50 on a motion to close debate on this amendment. A cloture requires 60 votes, so indefinite debate loomed, and the vote also disclosed that the bill didn't have the support of a simple majority. The Senator withdrew her amendment from consideration.

In July, she tried again, introducing S. 2724, also sponsored by Peter Fitzgerald (R-Ill.), Tom Harkin (D - Iowa), Richard Lugar (R - Ind.) and Maria Cantwell (D- Wash.). When introducing S. 2724, Sen. Feinstein claimed that the unregulated trading of energy futures was "a major factor in forcing electricity and natural gas prices to skyrocket during the energy crisis in the West."

That bill has languished, and the new Harkin/Lugar initiative is an effort to resuscitate it.

The four key regulators, in their letter to Congress Sept. 18, praised the OTC markets in energy derivatives as a healthy influence that "arbitrages away inefficiencies that exist in all financial and commodities markets." If dealers have to divulge promptly the proprietary details and pricing of these instruments, the incentive to allocate capital to find and develop markets for highly complex instruments will be lessened. Furthermore, public disclosure of pricing data "would not improve the overall price discovery process and may lead to confusion as to the appropriate pricing for other transactions, as terms and conditions can vary by contract."

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