WASHINGTON -- Measures against speculation in the oil and agricultural commodity markets that many farm leaders called for last year finally are on their way to becoming law.
The House Agriculture Committee Oct. 21 passed a bill that includes provisions directing the Commodity Futures Trading Commission to impose limits on the amounts of positions investors can hold on contracts for future delivery of physical commodities such as oil, wheat and cotton.
The measure would be passed as part of the giant financial services reform bill that Congress and the Obama administration are working on to clean up the financial services industry in the wake of the 2008 financial crisis.
During the runup in oil and agricultural commodity prices last year, companies such as airlines, utilities and country elevators that use those markets for risk management and price discovery said index funds and other institutional investors had poured so much money into those markets that they became unusable.
Bill requirements
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The bill requires the CFTC to establish the limits within 270 days after the date of enactment of the bill. The measure says the commission shall set limits 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. The purpose is to prevent excessive speculation and deter and prevent manipulation, squeezes and corners.
The anti-speculation measures were approved by the committee when it considered a measure to regulate over-the-counter derivatives, the insurancelike contracts used by businesses to manage risk that were a major factor in the 2008 financial crisis.
The position limits issue led members to offer two amendments.
Rep. Debbie Halvorson, D-Ill., and Bob Goodlatte, R-Va., offered an amendment to require the CFTC to develop its aggregated position limits for all economically equivalent contracts on all trading venues concurrently and to impose such limits simultaneously, with the intention of mitigating regulatory arbitrage and loss of trading on U.S. exchanges. Peterson supported the amendment, and it passed on a voice vote.
Rep. Betsy Markey, D-Colo., Goodlatte and Rep. Michael Conaway, R-Texas, merged their amendments to require the CFTC to conduct a study on the impact of imposing position limits on traders within 12 months of their imposition, to require the House Agriculture Committee to hold a hearing on the findings and afterward to conduct biennial reports on the growth or decline of the derivatives markets in the United States and abroad. The biennial reports are supposed to include an assessment of the causes of such growth or decline, the effectiveness of regulatory regimes in managing systemic risk and a comparison of the costs of compliance.
Derivatives
Most of the committee's attention was on the subject of derivatives. Committee aides said the bill's many technical provisions tightened up the bill the House Financial Services Committee passed, but it did not contain a proposed provision to require that all standardized derivatives contracts involving big banks go through clearinghouses.
House Agriculture Committee Chairman Collin Peterson, D-Minn., told reporters after the committee meeting that he would prefer that the House vote separately on the derivatives bill as soon as possible rather than have it merged into a larger bill to intensify regulation of the financial services industry.
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"The public wants us to move on this," Peterson said.
Technically, the agriculture committee amended the finances services-passed bill with a substitute Peterson measure. House Financial Services Committee Chairman Barney Frank, D-Mass., would not object to a separate floor vote on the derivatives bill, Peterson said. But Peterson added that he thinks the House leadership and the Obama administration expect to put all the financial services bills in one package.
The unanimous bipartisan vote was remarkable compared with the Financial Services Committee markup in which only one Republican voted for the bill. House Agriculture Committee ranking member Frank Lucas, R-Kan., who also sits on financial services and voted against the bill in that committee, said he supported Peterson because he abandoned plans to require almost all derivatives, be cleared. Lucas said it's "quite rational" to think that the derivatives bill could get a strong majority vote on the House floor but that the minority would reserve its right to dissent if the bill is merged with others and changed.
The bill attempts to address the problems that have occurred after Congress exempted the growing over-the-counter derivatives market from regulation in the 2000 Commodity Futures Modernization Act. During the 2008 financial crisis, the American International Group could not fulfill the derivatives contracts and required a massive government bailout.
The bill requires registration and transparency in the derivatives market and requires that the institutions issuing the derivatives back them with capital. Peterson, whose committee has jurisdiction over the futures industry, generally took a tougher approach than Frank, whose committee oversees the banking and securities industry.
Big banks
Frank recently toughened his bill, but he did not include a proposal that Peterson had made at the request of the Obama administration to require that all standardized derivatives contracts involving "Tier One" banks such as Goldman Sachs and J.P. Morgan go through a clearinghouse. On Oct. 21, Peterson said he had decided to leave that out because the end users of derivatives such as manufacturers and airlines said it would make their use of derivatives prohibitively expensive.
Commodity Futures Trading Commission Chairman Gary Gensler said in a speech Oct. 21 in Chicago that swaps should be taken off the books of large, complex financial institutions to reduce systemic risk. But Peterson said he does not consider the issue of systemic risk to come under the jurisdiction of his committee and questioned whether government can address systemic risk.
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"I am not a big believer in doing something about systemic risk," he said.
Gensler argued that end users would benefit from all standardized over-the-counter trades going through exchanges or trade-execution houses because it would reveal pricing information, but Peterson said the end users did not think they would save money.
Peterson noted that the big banks still would have to back up the derivatives with capital and said he thinks his bill addresses Gensler's concerns. Gensler could not be reached for comment by press time.
The Consumer Federation of America said in a news release Oct. 21 that leaving out the clearinghouse mandate would "fatally weaken the bill."
"While Chairman Peterson deserves credit for trying to pass a stronger bill, apparently there 'just aren't the votes' in Congress to fix the problems that brought the global economy to the brink of collapse," CFA Director of Investor Protection Barbara Roper said in the release.
Amending
Committee members offered a series of amendments, but withdrew most of them after Peterson promised to consult with them as the bill moves forward.
The committee did pass four amendments by voice vote including Peterson's manager's amendment and rejected two amendments by roll call votes.
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An amendment offered by Rep. Tim Walz, D-Minn., and approved by voice vote made a technical correction to Peterson's mark to require that all swaps not accepted for clearing be reported to a swap repository or the CFTC.
Conaway also offered a sense of the committee amendment calling for the committee to post a marked up bill within 24 hours of the completion of a mark up and to forbid any further changes to the bill after a markup except for technical changes. Peterson said the measure was impractical and it failed with a vote of 22 to 24. Three Democrats joined all Republicans in voting for the measure.
Rep. Jerry Moran, R-Kan., offered an amendment that he said was intended to stop the CFTC from moving away from a "principles-based" regulatory system toward the rules-based system that the Securities and Exchange Commission uses.
But Peterson said Gensler opposed the amendment and that he did not see a reason to pass it. The committee voted 18 to 27 along party lines to reject it.
