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March 10, 2003 at 07:00 PM
WASHINGTON (HedgeWorld.com)–Sen. Dianne Feinstein (D-Calif.) formally launched another effort to regulate the trading of energy derivatives.
Ms. Feinstein is the sponsor of S. 509, the Energy Market Oversight Act, introduced March 4 and immediately referred to the Agriculture Committee. The bill, cosponsored by Peter Fitzgerald (R-Ill.), Tom Harkin (D-Iowa), Richard Lugar (R-Ind.), Maria Cantwell (D-Wash.), Ron Wyden (D-Ore.) and Patrick Leahy (D-Vt.), would increase notice, reporting, bookkeeping and other transparency requirements for online and bilateral energy and metals trading and would prohibit wash sales, a practice the sponsors consider abusive. It would also require that energy companies maintain sufficient capital to cover trades, commensurate with risk.
This duplicates a bill Ms. Feinstein introduced in the last Congress, (Previous HedgeWorld Story). “It was the subject of a hearing in the Agriculture Committee,” her March 4 statement said, “… but time ran out before the legislation could be approved.”
In the same statement, the senator described the goals of the bill in terms of agency mandates. It “would restore the Commodity Futures Trading Commission’s … authority over online and bilateral energy trades and give the Federal Energy Regulatory Commission … the powers it has requested to adequately investigate and punish possible instances of fraud and manipulation.”
Buffett Weighs In
In what could prove to be a fortuitous bit of timing for Sen. Feinstein’s bill, Warren Buffett has released the 2002 Annual Report for his investment vehicle, Berkshire Hathaway Inc., Omaha, Neb., inclusive of his customary letter. He is often outspoken in these letters, and this year it was on the topic of derivatives that he expressed himself with his usual forcefulness. He said that he and his partner, Charles Munger, regard derivatives as “time bombs, both for the parties that deal in them and the economic system.”
He expressed three distinct qualms about derivatives. First, he observed that since derivatives need not be collateralized or guaranteed, their value depends upon the credit worthiness of the counterparties, he said. Second, over-the-counter derivatives need not correspond to any real market that can provide a reality check on valuation, so mark-to-market becomes mark-to-myth, in Mr. Buffett’s phrasing. Third, these instruments “can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counter-parties.”
