CRS Enron Loophole Report at CRS-2 to 3. Johnson/Hazen Derivatives Regulation at 331 to 332. ISDA CFMA Memo at 29 to 30. Susan Ervin, "CFTC Regulation of Energy Derivatives: An Overview" ("Ervin CFTC Energy Regulation") at 10. As explained in the referenced pages of the ISDA CFMA Memo and in Ervin CFTC Energy Regulation at 9, an "eligible commercial entity" ("ECE") was defined as an ECP that was not an individual or State or local government entity that, depending on the nature of the entity, had a specified "exposure" to the underlying commodity.
Rob Garver, "In Brief: Swaps Measure Delayed as Agencies Argue"[permanent dead link], American Banker, May 12, 2000, ( In describing Rep. Ewing's plan to offer legislation concerning swaps, the article noted Senators Lugar and Gramm "had been expected to introduce similar legislation in the Senate on Thursday, but a debate between the Securities and Exchange Commission and the Commodity Futures Trading Commission over other regulatory matters in the bill has held it up.") For Senate Committee Chair Lugar's remarks, see June 21, 2000, Joint Senate Committee Hearing at 2 to 3 and at 37 ("it should have been apparent to the two of you [the CFTC and SEC Chairmen] that we are intent upon passing a bill...why the two of you are not equally arduous"). For House Subcommittee Chair Ewing's remarks, see Hearing before House Subcommittee on Risk Management, Research, and Specialty Crops, June 19, 2000, ("June 19, 2000, House Agriculture Subcommittee Hearing") at 10 (for the tight legislative calendar) and at 43 to 55 (for extended "single stock futures" questions). For Commerce Committee Chair Bliley's remarks, see Hearing before the Subcommittee on Finance and Hazardous Materials on H.R. 4541, July 12, 2000, (" July 12, 2000, House Commerce Subcommittee Hearing") at 4. For Ranking Member LaFalce's statement see Hearing before House Committee on Banking and Financial Services on H.R. 4541, July 19, 2000, ("July 19, 2000, House Banking Committee Hearing") at 14 ("it is unfortunate that we are getting this bill referral that says we have to report it out by September 6th, which means we have to report it out next week.") See also Committee Chair Leach at 91 ("my own sense is one of great frustration working within the constraints of this Act"). Rep. Leach had introduced on April 6, 2000, his own bill H.R. 4203 to implement, separate from CFTC reauthorization, portions of the PWG Report applicable to OTC derivatives. As the Thomas LOC All Congressional Action Page for H.R. 4203Archived 2016-07-04 at the Wayback Machine shows, this bill did not proceed past the Committee referral stage.
Rob Garver, "Armey Pushes for Compromise on Swaps"[permanent dead link], American Banker, September 27, 2000, ("Sen. Gramm said that he would prefer a bill in which the SEC and CFTC have no jurisdiction at all over swaps, but he has suggested a compromise under which the SEC would have the authority to intervene to protect customers from price manipulation or fraud.") According to internal Enron emails, Sen. Gramm had been blocking Senate action. Eric Lipton, "Gramm and the 'Enron Loophole'", The New York Times, November 14, 2008 ("Lipton Enron Article") (quoting an August 10, 2000, email from Chris Long to several Enron recipients "the bill is not moving quickly in the Senate due to Senator Phil Gramm's desire to see significant changes made to the legislation (not directly related to our energy language.")
The October 19, 2000, House consideration of H.R. 4541 is found at Congressional Record, H10416-10449, December 19, 2000. The preceding House discussion of the necessary "rule suspension" is at Congressional Record, H10411-H10415, October 19, 2000. Representative Charles Stenholm (D-TX) complained (at H10440) about the "bizarre twist" in which after the "bipartisan" development of draft bills in Committees, "the leadership intervened and decided to substitute partisan negotiations in place of the bipartisan discussions that were already under way and that were under way and that were yielding productive results." He went on to complement the leaders of the House Committees involved, particularly citing Rep. Ewing as "a true consensus builder." Rep. Edward Markey (D-MA) complained (at H10445) about "the process that has brought this bill to the floor and some of its provisions." Rep. John Dingell (D-MI) elaborated (at H10445-6) that following "one bipartisan meeting, which from all counts was constructive, Democratic staff were booted out of the negotiations on this bill, at the direction of the Republican leadership." Only when "2 weeks ago, the Committee on Agriculture majority staff started circulating drafts of legislation for Democratic review and comment" did a bill develop "which is worth moving to the next stage", although he concluded it would "not be possible to support this bill if it is not significantly improved at the next stage of the process." In "Extended Remarks" at Congressional Record, E1878-80, Rep. Markey expanded on his Floor statements and noted the presence of Sen. Gramm in the House negotiations as inappropriate (see E1878, noting Democrats were barred from negotiations "after just a few bipartisan staff meeting" and that "the chairman of the Senate Banking Committee was invited into those negotiations—despite the fact that this bill comes within the Agriculture Committee's jurisdiction over in the Senate and the Senate has not even passed a CEA bill"). For contemporary accounts of the "negotiations" see Rob Garver, "Armey Pushes for Compromise on Swaps"[permanent dead link], American Banker, September 27, 2000 ("In a sign that Republicans are serious about passing a bill to revise the laws governing derivatives transactions, Majority Leader Richard K. Armey met Tuesday with representatives of the three House committees-each pushing different versions of the same bill-and urged them to hammer out a deal...Of the three, the Banking Committee version, sponsored by Chairman Jim Leach is most popular with the financial services industry...Rep. Leach's bill is also the most likely to satisfy several requirements laid out by Senate Banking Committee Chairman Phil Gramm...He wants the Securities and Exchange Commission to explicitly be barred from regulating swaps as well."); Rob Garver, "In Brief: Armey Says Swaps Talks Making Progress"[permanent dead link], American Banker, September 29, 2000 ("Lawmakers and administration officials remained locked in complex negotiations Thursday over a bill that would assure the legal enforceability of swaps contracts...One of the three versions of the bill that cleared House committees protected swaps from CFTC regulations, but Senate Banking Committee Chairman Phil Gramm has said that, in order to pass the Senate, SEC regulation of swaps will have to be explicitly banned as well."); Michele Heller, "Bank Bills May Ride Piggyback"[permanent dead link], American Banker, October 11, 2000 ("lobbyists representing financial services firms that offer swap contracts are not happy with a Republican compromise proposal on legislation that would revise the laws governing derivatives transactions. Staff members of the House and Senate Banking and Agriculture committees and the House Commerce Committee sent the Treasury Department and congressional Democrats a 247-page draft written over the weekend.") In this context Enron emails indicate they it was seeking to influence Sen. Gramm to stop blocking the legislation. Lipton Enron Article (citing an October 13, 2000, email from Chris Long to Tori Wells of Enron and others: "Senator Gramm continues to raise objections unrelated to legal certainty for our business. There are two issues (which we understand have primarily been advanced by Senator Gramm, one on bank products and one on SEC jurisdiction)."
Dean Anason, "In Brief: Bottleneck Seen on Swaps Exemption Bill"[permanent dead link], American Banker, October 16, 2000, (referring to a statement issued the previous Friday, October 13, the article stated "Senate Agriculture Committee Chairman Richard G. Lugar said prospects are grim for a compromise on legislation that would protect swap contracts from federal regulation." Sen. Lugar added "failure to pass the Commodity Futures Modernization Act of 2000 will cause grave repercussions throughout the financial markets.") For similar expectations of a CFTC Commissioner critical of the CFMA see "Remarks of Commissioner Thomas J. Erickson" before the Silver User's Association on October 18, 2000 ("I think it is important to understand how these bills might work – despite the fact that they probably will not be passed in this session – because I believe they represent the current thinking of many legislators.") For the Administration's statement of support, see Statement of Administration Policy: H.R. 4541 - Commodity Futures Modernization Act of 2000, October 19, 2000, ("The Administration strongly supports the version of H.R. 4541, the Commodity Futures Modernization Act of 2000, that the Administration understands will be considered on the House floor.") The text of the statement was also introduced into the Congressional Record by Rep. Stenholm at Congressional Record page H10441.
Even before House passage of H.R. 4541, press reports and statements by Republicans in the Congressional Record indicated Republican unhappiness with the "compromise" reached on H.R. 4541. Dean Anason, "In Brief: Swaps Bill Getting Slim Odds in Senate"[permanent dead link], American Banker, October 19, 2000; "In Brief: House Backs Swaps Bill; Senate in Doubt", American Banker, October 23, 2000; Michelle Heller, "In Brief: Bank Legislation Faces Election Deadline"[permanent dead link], American Banker, November 1, 2000; William Roberts (Bloomberg News) and Michele Heller, "Congress Likely to Get Election Timeout", American Banker, November 2, 2000; "Legislative Update"[permanent dead link], American Banker, November 9, 2000. While the October 2000 Congressional Record statements of Democrats referenced in note 54 above showed unhappiness with the "process" by which they were excluded from negotiations, with late input leading to an acceptable bill, October 19, 2000, Congressional Record statements by Republican Representatives (in the discussion at H10416-10449 cited and linked in note 54 above) expressed unhappiness the bill did not contain broader "protections." Rep. Jim Leach (at H10444 and again in "extended remarks" at Congressional Record E1877-8, October 23, 2000 expressed the wish "more could have been done" but said "progressive strides had been made." Representative Richard A. Baker (R-LA) (at H10448) bemoaned the "compromise" that had stripped the bill of "protections for swaps" He went on to announce he expected to work with Sen. Gramm "because it is evident these problems will not be solved on the House side." Although Representative Patrick J. Toomey (R-PA) stated that it was "a good bill" he said it was not a "perfect bill" and that he hoped "the other body will eliminate the remaining legal uncertainty that will still shadow the use of these transactions by retail customers. I hope that they will allow greater flexibility in the electronic trading of the over-the-counter derivatives." In the "rule suspension" discussion at H10411-15 (cited and linked in note 54 above) a "bipartisan" discontent was expressed by Representatives Sue Wilkins Myrick (R-NC) (at H10411) and Melvin Watt (D-NC) (at H10414-15) who criticized the removal of provisions in the House Banking Committee version of the bill that they thought better "protected" electronic trading platforms. This had special significance for the North Carolina based D&I Holdings (as explained by Rep. Watt at H10414). At this time, Enron emails continued to report Sen. Gramm was the obstacle to H.R. 4541 being enacted into law. Lipton Enron Article (quoting an October 25, 2000, email from Kenneth M. Raisler to Tom Briggs of Enron, "explaining how Senator Gramm is holding up the legislation" and an October 27, 2000, email also from Mr. Raisler to Enron executives describing how "Senator Gramm is activiely engaged and his issues are being aggressively negotiated" after Gramm had "been contacted by a number of people including members of our Energy Group and Alan Greenspan urging passage of the bill.") See also the October 20, 2000, email from Cynthia Sandherr of Enron to Mark Palmer of EnronArchived February 7, 2009, at the Wayback Machine ("The last deal which needs to be cut is with Senator Gramm (he is the only obstacle to enactment in the Senate.)...it is other issues which do not directly affect Enron which are being negotiated.")
Rob Garver, "Legislators Racing to Get Pro-Bank Swaps Bill Passed"[permanent dead link], American Banker, December 11, 2000; Miriam Eljas, "In Brief: Treasury Engaged in Talks on Swaps Bill"[permanent dead link], American Banker, December 12, 2000; "Legislative Update"[permanent dead link], American Banker, December 14, 2000, ("Attempts to jump-start negotiations between the administration and congressional Republicans on the Commodity Futures Modernization Act appear to be failing...Democrats charge that under that plan [i.e. the Republican Senate plan to bar the CFTC from regulating "bank products"] futures exchanges could escape Futures Commission oversight by merging with a bank. The Treasury Department, the lead for the Clinton Administration on this issue, countered late Monday with draft legislation of its own. A Senate Banking Committee spokeswoman described the Treasury offer as a step backwards.") In the Enron email, however, a December 11, 2000, email from Allison Navin to Mark Haedicke of Enron and othersArchived February 7, 2009, at the Wayback Machine enclosed a December 9, 2000, Congressional Quarterly report that the "commodity laws rewrite" was "alive" after representatives of the "big commodity exchanges" met with "the Senator who has been blocking the bill" with the Senator identified as Sen. Gramm). Lipton Enron Article (which describes December 12, 2000, emails from Stacy Cary of ISDA showing "Mr. Gramm is being pressured to give in and sign off on the legislation, but he is still pushing for certain changes" and from Chris Long showing "Mr. Gramm was able to persuade the players to accept some modest amendments to the legislation, including a change that will further protect swaps from regulation, as he had long sought-a change that would benefit Enron." It is unclear what Mr. Long means in his email when he describes his "understanding from Treasury that the swap exemption is expanded slightly to say that if you are trading on a facility (MTF) and you are trading on principle-to-principle [sic] basis among eligible contract participants you are no longer subject anti-fraud and anti-manipulation as contained in Sec. 107 of the House passed legislation." As described in note 57 above and note 74 below, Section 107 of H.R. 4541 contained the same Section 2(h)(1) "bilateral swaps" exemption as Section 106 of H.R. 5660. Both applied the CEA's anti-fraud and anti-manipulation provisions to "eligible contract participants", but not the anti-fraud provisions to "principal to principal" transactions between "eligible commercial entities." Perhaps (1) an intervening draft of the legislation would have changed the Section 2(h)(1) provision from that in H.R. 4541, (2) the provision was further changed back to that in H.R. 4541 after Mr. Long's conversation, or (3) Mr. Long misunderstood what the Treasury Department told him.
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Before the FTPA exemptions were issued, the elements required by the CFTC policy statement were (1) individually negotiated (not "standardized") terms, (2) no "offset" or other termination except as privately agreed, (3) credit exposure between the parties (i.e., no intervening "clearing facility" or full margin requirement guaranteeing against defaults), (4) contracting only in connection with a line of business (including "financial intermediation" for banks and other dealers) or financing such a business, and (5) no marketing to the public. CFTC. "Policy Statement Concerning Swap Transactions", 54 Federal Register 30694 (July 21, 1989). GAO CEA Issues Report at 12 to 13. PWG Report at 10. Markham CF Law Treatise at page 27-23. Johnson/Hazen Derivatives Regulation Treatise at 43. The exemptions under the FTPA required that the transaction (1) be between "eligible swap participants" (defined as businesses, government entities, investment pools, and high-net-worth individuals), (2) not be standardized in material economic terms, (3) subject each party to the credit risk of the other, (4) and not be traded on a "multilateral transaction execution facility" on which multiple parties could offer and accept transactions. CFTC, "Exemption for Certain Swap Agreements", 58 Federal Register 5587 (January 22, 1993). GAO CEA Issues Report at 14 to 16. PWG Report at 10 to 12. Markham CF Law Treatise at pages 27-25 to 26. Johnson/Hazen Derivatives Regulation Treatise at 43 to 44 and 47 to 49 (which notes, at 44, that the swaps exemption retained for qualifying swaps that might still be "futures" the "antifraud and antimanipulation provisions" of the CEA). GAO 1999 CFTC Reauthorization Report at 10 to 11. The FTPA exemption, therefore, more broadly permitted "speculators" in the swaps market and tailored the exemption to the financial "sophistication" of the parties and the absence of both exchange style "netting" of exposures and public availability of offers. For the role of "speculators" in OTC derivatives markets, see Mark Jickling and Lynn J. Cunningham, "Speculation and Energy Prices: Legislative Responses", RL 34555, CRS Report for CongressArchived 2009-02-12 at the Wayback Machine, updated August 6, 2008. The requirements for "hybrid instruments" under the 1990 "statutory interpretation" and the 1993 exemption were similar. Both required that the instrument be a security or bank deposit, the commodity dependent value of the instrument be limited, the instrument not be marketed as a commodity option or futures contract, and the instrument not be subject to settlement through a delivery instrument specified by a regulated exchange. While there were further requirements for each, the 1993 exemption moved towards criteria later included in the CFMA in requiring that the instrument be regulated by the SEC or banking regulators and that the issuer receive full payment at the time of sale and not receive future payments from the holder. CFTC, "Statutory Interpretation Concerning Certain Hybrid Instruments", 55 Federal Register 13582 (April 11, 1990) (for the hybrid instrument statutory interpretation). CFTC, "Regulation of Hybrid Instruments", 58 Federal Register 5580 (January 22, 1993) (for the hybrid instrument exemption). PWG Report at 28. Johnson/Hazen Derivatives Regulation at 59 to 60. The 1990 "forward transaction" statutory interpretation and 1993 exemption were similar in requiring that the transaction be between "commercial" parties able to make or take delivery of the energy product, that the agreement be subject to individual negotiation between the two parties, and that the contract create binding obligations to make and take delivery, with no automatic right to make cash settlement. CFTC, "Statutory Interpretation Concerning Forward Transactions", 55 Federal Register 39188 (September 25, 1990). CFTC, "Exemption for Certain Contracts Involving Energy Products", 58 Federal Register 21286 (April 20, 1993) (issued April 13, 1993, with Acting Chairman Albrecht and Commissioner Dial concurring, and Commissioner Bair dissenting, as noted at 58 Federal Register 21294). GAO 1999 CFTC Reauthorization Report at 38 to 39. Johnson/Hazen Derivatives Regulation at 68 to 69. For the controversy that arose from the 1993 order's exemption of energy contracts from the CEA's fraud provisions, see the April 28, 1993, Hearing before the Subcommittee on Environment, Credit, and Rural Development of the House Committee on Agriculture ("1993 House Hearing"). For an influential account of the 1993 House Hearing and of the entire 1992-3 exemption process, which describes former CFTC Chair Wendy Gramm as having cast the deciding vote on the energy contracts exemption and as being the target of criticism by Representative Glenn English (D-OK) at the April 28, 1993, hearing, even though the account also notes she resigned from the CFTC on January 20, 1993, well before the 2-1 vote on the exemption order was taken and the hearing was held, see Public Citizen, "Blind Faith: How Deregulation and Enron's Influence over Government Looted Billions from Americans" ("Blind Faith") at 9 to 12. The statement of Rep. English quoted at 12 of Blind Faith is at 45 to 46 at the end of the testimony in the 1993 House Hearing. For the influence of Blind Faith on accounts of the CFMA see note 70 below.
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Thomas LOC Summary and Status Page for H.R. 4541Archived 2008-11-27 at the Wayback Machine and Thomas LOC Committee Page for H.R. 4541. Aside from implementing and expanding on the PWG Report's recommendations, H.R. 4541 and S. 2697 would "reauthorize" the CFTC. Under the CEA as amended in 1974 to create the CFTC, the Commission was only "authorized" for five years. Since 1974, the "reauthorization" of the CFTC has served as the occasion for "reconsideration" of the provisions of the CEA, most dramatically in 1999 to 2000 with the CFMA. Such "reauthorization" has not always occurred on a timely basis, so that the CFTC has continued in existence on an interim basis, when (as on September 30, 2000) its "authorization" has expired. Markham CF Law Treatise at pages 28-13 to 28-20. For a description of each "reauthorization" see GAO 1999 CFTC Reauthorization Report at 55 to 60.
Alison Veshkin, "House Passes Rules for Wall Street Over Objections", Bloomberg, December 11, 2009. Roll Call 968 on House enactment of H.R. 4173. The OTC derivatives legislation is in various amendments to H.R. 4173 contained in House Report 111-370. The largest portion of OTC derivatives legislation, including the repeals of CFMA provisions noted above, is in Amendment 3 offered by Representative Colin Peterson (D-MN) as the Derivative Markets Transparency and Accountability Act, Title III to H.R. 4173, which begins at page 103 of House Report 111-370. This amendment was adopted by voice vote on December 10, 2009, as noted on pages H14708-14709 of the House consideration of H.R. 4173 contained in Congressional Record, H14496-H14728, December 10, 2009. Pages H14682-H14705 repeat the text of Amendment 3 and pages H14705-14709 contain the House discussion of Amendment 3. House Agriculture News Release "House Passes Peterson-Frank Amendment to Strengthen Regulation of Over-the-Counter Derivatives"Archived 2010-01-06 at the Wayback Machine, December 10, 2009. For a description of pending Senate legislation to regulate over-the-counter derivatives, as part of broader financial regulation reform, see page 6 of "Summary: Restoring American Financial Stability: Committee Print"Archived 2009-12-02 at the Wayback Machine, issued by Senator Christopher Dodd (D-CT), as Chairman of the Senate Banking Committee.
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CRS Derivatives Regulation Report at CRS-8. PWG Report at 15 to 21. For Rep. Leach's views see July 17, 1998, Hearing before the House Banking and Financial Services Committee ("July 17, 1998, House Banking Hearing") at 2. Rep. Leach had long been considered an independent student, and critic, of OTC derivatives markets. Frank Partnoy, Infectious greed: how deceit and risk corrupted the financial markets (H. Holt 2003 (First Owl books ed. 2004)) ("Infectious Greed") at 147–8. Markham CF Law Treatise at page 27–43 ("An aggressive and massive report was prepared at the behest of Representative James A. Leach by the minority staff of the House Committee on Banking, Finance and Urban Affairs.") See also note 23 above and notes 79 (Summers response to Harkin question at Senate Agriculture PWG Report Hearing), and 81 below for the issue of "offshore" booking of OTC derivatives.
CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
In the Dinallo FT Opinion former Insurance Superintendent Dinallo argues (1) "the fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money" and (2) banks bought credit default swaps from AIG covering "investments" held by the banks "to avoid regulation" because it allowed them to claim "they no longer had the risk of a default of the bond." It is difficult to understand how this applies to AIG (which is the company mentioned in the Dinallo FT Opinion) or what the "regulatory arbitrage" credit default swaps ("CDS") of AIG had to do with the CFMA. AIG Financial Products ("AIGFP"), before 2000 and after the CFMA became law, was located in London. Gretchen Morgenson, "Behind Insurer's Crisis, Blind Eye to a Web of Risk", The New York Times, September 28, 2008 ("Morgenson Article") (which dates the establishment of London based AIGFP to 1987); Peter Koeing, "AIG Trail Leads to London Casino", Telegraph, October 18, 2008; "AIG Blames its London Office"Forbes, March 13, 2009. If US-based CDS counterparties of AIGFP were also internationally active (as the Morgenson Article suggests in noting the "'global swath' of top-notch entities" that" were counterparties to AIGFP CDS), they likely would have been able to book their CDS transactions with AIGFP through their own non-US offices to avoid the application of the CEA if the CFMA had not been enacted. See notes 23, 37, and 79 (Summers response to Harkin question at Senate Agriculture PWG Report Hearing) above for the issue of "offshore" booking of OTC derivatives. More clearly, the seller of AIG's "regulatory arbitrage" credit default swaps was Banque AIG, not an insurance company. See pages 133-134 of AIG's 2008 Form 10-K Report ("AIG 2008 10-K"). This is noted in the Morgenson Article. ("the London-based units...trades were routed through Banque A.I.G., a French institution"). As explained on page 133 of the AIG 2008 10-K, Banque AIG is a French bank regulated under French banking law. As also explained on page 133 of the AIG 2008 10-K, the "regulatory arbitrage" from those CDS was not because they were credit default swaps, but because they operated as guarantees from a bank in an OECD country (i.e. France). See also Daniel K. Tarullo, Banking on Basel: the future of international financial regulation (Peterson Institute 2008) for an explanation (at 57–60) of how the Basel I Accord (as described in the AIG 2008 10-K) established "generic" risk categories so "all loans to nonbanking corporations were risk-weighted at 100 percent" but all "claims on, or guaranteed by, banks incorporated in the OECD" were risk-weighted at 20%. In 1999 U.S. banking regulators reviewed multiple transaction structures similar to the AIGFP "regulatory arbitrage" CDS transactions and concluded a "super senior" exposure held by a bank that was guaranteed by the Banque AIG CDS (as depicted on page 133 of the AIG 2008 10-K) could receive a 20% "risk weighting" without being supported by a bank issued CDS or other form of bank guarantee if certain "stringent" conditions were met. Federal Reserve Board and Office of the Comptroller of the Currency, "Capital Interpretations, Synthetic Collateralized Loan Obligations, November 15, 1999", Federal Reserve Board Supervisory Release 99-32Archived May 14, 2009, at the Wayback Machine. ("US Synthetic CLO Interpretation"). To the extent the "stringent minimum requirements" described at pages 6-7 of the US Synthetic CLO Interpretation were met, this would eliminate the need to acquire such CDS. Under the US Synthetic CLO Interpretation, one important element was that an outside investor acquire an interest in the relevant loan pool that would be subordinate to the "super senior" exposure but still be rated AAA. This requirement is why the bank retained exposure is considered "super senior." As depicted on page 133 of the AIG 2008 10-K, this is the type of "super senior" exposure covered by the AIG "regulatory arbitrage" CDS. As the AIG 2008 10-K also explains at page 133 the implementation of Basel II eliminates the need for the Banque AIG "regulatory" CDS, because Basel II recognizes the low risk nature of the "super senior" exposure and requires corresponding capital, not a flat 8% requirement based on a "generic" capital requirement. U.S. banking regulators described in 1996 when CDS or other credit derivatives would operate as bank guarantees for purposes of capital rules and how the bank providing such a guarantee would be required to hold regulatory capital equal to that required if it directly held the guaranteed bond or other obligation. Federal Reserve Board Division of Banking Supervision and Regulation, "Supervisory Guidance for Credit Derivatives"Archived 2009-05-12 at the Wayback Machine, SR 96-17 (GEN), August 12, 1996. Nevertheless, similar to the Dinallo FT Opinion, Joe Nocera, "Propping Up a House of Cards", The New York Times, February 28, 2009, describes AIG's "regulatory arbitrage" CDS by stating (1) it allowed "banks to make their balance sheet look safer than they really were" because of AIG's AAA rating (when the European banks acquiring the CDS protection received reduced regulatory capital requirements because the CDS represented an OECD country bank guarantee, regardless of the rating of that bank); (2) because the CDS "were not even categorized as a traditional insurance product, A.I.G. didn't have to put anything aside for losses" (when the regulatory capital requirement for the CDS would be determined by French banking law, not any insurance regulator, and the US banking regulators would have required regulatory capital equal to that required for the underlying exposure); (3) that this was only possible because a "misguided set of international rules that took hold toward the end of the 1990s" permitted banks "to use their own internal risk measurements to set their capital requirements" (when those "misguided" rules, known as Basel II, are what is ending the need for the "regulatory arbitrage" provided by the Banque AIG CDS, as described on page 133 of the 2008 AIG 10-K, and only the earlier Basel I standards provided the "generic" 20% risk-weighting for bank obligations, including bank guarantees.) For the location of General Re's derivatives dealer in London and the difficulties incurred by Berkshire Hathaway in winding down that dealer after it acquired General Re, see "General Re Securities Limited", Business Week, Snapshot (click on Detailed Description for the 1991 UK incorporation) and Ari Weinberg, "The Great Derivatives Smackdown", Forbes, May 9, 2003, which contrasts the Alan Greenspan and Warren Buffett views of derivatives, mentions the shuttering of General Re Securities with a remaining derivatives book, and curiously refers to AIG's "extensive disclosures" and lists AIG FP's credit derivative disclosures.
CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
Remarks of CFTC Chairperson Brooksley Born to Chicago Kent-IIT Commodities Law Institute, October 24, 1996 ("in my view, it is appropriate that regulation of this market ["the domestic over-the-counter market"] should be limited to issues relating to fraud and manipulation.") Born February 11, 1997, Senate Oral Testimony (in which Chairperson Born expressed CFTC opposition to the proposed enactment into law of existing regulatory exemptions for OTC derivatives because that "would eliminate all regulatory flexibility to respond quickly if developments in that market required, but also stated "both the Commission and the President's Working Group on Financial Markets have been watching and evaluating this enormous and evolving $53 trillion market" and "the Commission has no plans to modify its exemptions.")
Dean Anason, "In Brief: Bottleneck Seen on Swaps Exemption Bill"[permanent dead link], American Banker, October 16, 2000, (referring to a statement issued the previous Friday, October 13, the article stated "Senate Agriculture Committee Chairman Richard G. Lugar said prospects are grim for a compromise on legislation that would protect swap contracts from federal regulation." Sen. Lugar added "failure to pass the Commodity Futures Modernization Act of 2000 will cause grave repercussions throughout the financial markets.") For similar expectations of a CFTC Commissioner critical of the CFMA see "Remarks of Commissioner Thomas J. Erickson" before the Silver User's Association on October 18, 2000 ("I think it is important to understand how these bills might work – despite the fact that they probably will not be passed in this session – because I believe they represent the current thinking of many legislators.") For the Administration's statement of support, see Statement of Administration Policy: H.R. 4541 - Commodity Futures Modernization Act of 2000, October 19, 2000, ("The Administration strongly supports the version of H.R. 4541, the Commodity Futures Modernization Act of 2000, that the Administration understands will be considered on the House floor.") The text of the statement was also introduced into the Congressional Record by Rep. Stenholm at Congressional Record page H10441.
See House Banking Committee Report at 13 for Section 110, which would have added a new Section 2(i) to the CEA as the exclusion for "Swap Transactions" (defined to require that "the material economic terms" be "subject to individual negotiation.") See H.R. 4541 as passed by the House at 47 for Section 107, which would have added a new Section 2(h) to the CEA as the exclusion for "Swap Transactions." See the CFMAArchived 2009-03-20 at the Wayback Machine at 40 for Section 105(b), which created Section 2(g) of the CEA. See the Gramm-Leach-Bliley Act at 58 for Section 206(b), which defines "swap agreement" to be "individually negotiated." For CEA Section 2(g)'s use of the Gramm-Leach-Bliley definition, see ISDA CFMA Memo at 27 to 28 and 39. Kloner CFMA at 292.
chicagobooth.edu
July 24, 1998 House Banking Hearing; Testimony of Alan Greenspan, Chairman, Board of Governors of Federal Reserve Board, before the U.S. Senate Committee on Agriculture, Nutrition and Forestry, July 30, 1998Archived August 5, 2009, at the Wayback Machine ("Greenspan July 1998 Senate Agriculture Testimony"); Testimony of Treasury Deputy Secretary Lawrence H. SummersArchived 2009-08-05 at the Wayback Machine for the same July 10, 1998, Senate Agriculture Committee Hearing ("Summers July 1998 Senate Agriculture Testimony"); and Testimony of SEC Chairman Arthur LevittArchived 2009-08-05 at the Wayback Machine for that July 10, 1998, Senate Agriculture Committee Hearing ("Levitt July 1998 Senate Agriculture Testimony"). In the July 24, 1998 House Banking Hearing at 171-2, Chairman Greenspan pointed to the growth of the Eurodollar market in the 1960s, which in his account was established as a way to avoid US law limiting interest on deposits, which market did not return to the US even after the regulatory issue was overcome. In the June 10, 1998, House Agriculture Subcommittee Hearing (at 42) Richard Lindsay, Director of the SEC's Division of Market Regulation, made a similar argument about the loss of US capital market activity to the Eurobond market when "a very simple law change moved the Eurobond market from the United States, where it was a vibrant market, abroad virtually overnight. And that market has never returned." While Regulation Q (the regulatory limit on deposit interest) is usually cited as the cause for the development of the Eurodollar market, there are competing views that at least a partial cause was fear of US "political risk" focused more on potential US seizures or blocks on foreign (particularly Soviet Union) money in US banks. Milton Friedman,"The Eurodollar Market: Some First Principles"Archived 2010-05-27 at the Wayback Machine, Selected Papers No. 34, University of Chicago School of Business. Charles P. Kindelberger, A Financial History of Western Europe (2d Ed. Oxford University Press 1993) at 439–441 (for the Eurodollar market) and 441 (for the Eurobond market). For the "forward rate agreement" market, which was often conducted by U.S. banks through "offshore" branches because of concern such agreements looked too much like "futures" traded on U.S. exchanges, see Philip McBride Johnson, Michael S. Sackheim and Thomas A. Hale "Future Rate Agreements: Implications under the Commodity Exchange Act", Commodities Law Letter, March 1987, at 3-6. See also notes 37, 79 (Summers response to Harkin question at Senate Agriculture PWG Report hearing), and 81 below for the issue of "offshore" booking of OTC derivative transactions.
citizen.org
Before the FTPA exemptions were issued, the elements required by the CFTC policy statement were (1) individually negotiated (not "standardized") terms, (2) no "offset" or other termination except as privately agreed, (3) credit exposure between the parties (i.e., no intervening "clearing facility" or full margin requirement guaranteeing against defaults), (4) contracting only in connection with a line of business (including "financial intermediation" for banks and other dealers) or financing such a business, and (5) no marketing to the public. CFTC. "Policy Statement Concerning Swap Transactions", 54 Federal Register 30694 (July 21, 1989). GAO CEA Issues Report at 12 to 13. PWG Report at 10. Markham CF Law Treatise at page 27-23. Johnson/Hazen Derivatives Regulation Treatise at 43. The exemptions under the FTPA required that the transaction (1) be between "eligible swap participants" (defined as businesses, government entities, investment pools, and high-net-worth individuals), (2) not be standardized in material economic terms, (3) subject each party to the credit risk of the other, (4) and not be traded on a "multilateral transaction execution facility" on which multiple parties could offer and accept transactions. CFTC, "Exemption for Certain Swap Agreements", 58 Federal Register 5587 (January 22, 1993). GAO CEA Issues Report at 14 to 16. PWG Report at 10 to 12. Markham CF Law Treatise at pages 27-25 to 26. Johnson/Hazen Derivatives Regulation Treatise at 43 to 44 and 47 to 49 (which notes, at 44, that the swaps exemption retained for qualifying swaps that might still be "futures" the "antifraud and antimanipulation provisions" of the CEA). GAO 1999 CFTC Reauthorization Report at 10 to 11. The FTPA exemption, therefore, more broadly permitted "speculators" in the swaps market and tailored the exemption to the financial "sophistication" of the parties and the absence of both exchange style "netting" of exposures and public availability of offers. For the role of "speculators" in OTC derivatives markets, see Mark Jickling and Lynn J. Cunningham, "Speculation and Energy Prices: Legislative Responses", RL 34555, CRS Report for CongressArchived 2009-02-12 at the Wayback Machine, updated August 6, 2008. The requirements for "hybrid instruments" under the 1990 "statutory interpretation" and the 1993 exemption were similar. Both required that the instrument be a security or bank deposit, the commodity dependent value of the instrument be limited, the instrument not be marketed as a commodity option or futures contract, and the instrument not be subject to settlement through a delivery instrument specified by a regulated exchange. While there were further requirements for each, the 1993 exemption moved towards criteria later included in the CFMA in requiring that the instrument be regulated by the SEC or banking regulators and that the issuer receive full payment at the time of sale and not receive future payments from the holder. CFTC, "Statutory Interpretation Concerning Certain Hybrid Instruments", 55 Federal Register 13582 (April 11, 1990) (for the hybrid instrument statutory interpretation). CFTC, "Regulation of Hybrid Instruments", 58 Federal Register 5580 (January 22, 1993) (for the hybrid instrument exemption). PWG Report at 28. Johnson/Hazen Derivatives Regulation at 59 to 60. The 1990 "forward transaction" statutory interpretation and 1993 exemption were similar in requiring that the transaction be between "commercial" parties able to make or take delivery of the energy product, that the agreement be subject to individual negotiation between the two parties, and that the contract create binding obligations to make and take delivery, with no automatic right to make cash settlement. CFTC, "Statutory Interpretation Concerning Forward Transactions", 55 Federal Register 39188 (September 25, 1990). CFTC, "Exemption for Certain Contracts Involving Energy Products", 58 Federal Register 21286 (April 20, 1993) (issued April 13, 1993, with Acting Chairman Albrecht and Commissioner Dial concurring, and Commissioner Bair dissenting, as noted at 58 Federal Register 21294). GAO 1999 CFTC Reauthorization Report at 38 to 39. Johnson/Hazen Derivatives Regulation at 68 to 69. For the controversy that arose from the 1993 order's exemption of energy contracts from the CEA's fraud provisions, see the April 28, 1993, Hearing before the Subcommittee on Environment, Credit, and Rural Development of the House Committee on Agriculture ("1993 House Hearing"). For an influential account of the 1993 House Hearing and of the entire 1992-3 exemption process, which describes former CFTC Chair Wendy Gramm as having cast the deciding vote on the energy contracts exemption and as being the target of criticism by Representative Glenn English (D-OK) at the April 28, 1993, hearing, even though the account also notes she resigned from the CFTC on January 20, 1993, well before the 2-1 vote on the exemption order was taken and the hearing was held, see Public Citizen, "Blind Faith: How Deregulation and Enron's Influence over Government Looted Billions from Americans" ("Blind Faith") at 9 to 12. The statement of Rep. English quoted at 12 of Blind Faith is at 45 to 46 at the end of the testimony in the 1993 House Hearing. For the influence of Blind Faith on accounts of the CFMA see note 70 below.
commondreams.org
CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
Erik Sirri, Director, Division of Trading and Markets, U.S. Securities and Exchange Commission ("Sirri"), Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, November 20, 2008; Sirri, Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, October 15, 2008; Dechert LLP, "Derivatives Developments: Tackling the $50 Trillion Credit Default Swap Market and Beyond"Archived 2010-01-31 at the Wayback Machine, December 2008; Pillsbury Winthrop Shaw Pittman LLP, "SEC Seeks to Regulate Credit Default Swaps"Archived 2011-07-15 at the Wayback Machine, November 10, 2008. The pre-CFMA status of swaps as "securities" under the securities laws is discussed in Johnson/Hazen Derivatives Regulation at 12 to 13 ("Most commodities, and hence futures contracts, do not fall within the definition of security....In contrast to the typical raw material or bullion contract, if the underlying commodity is itself a security, such as with government bonds, the securities laws, on their face, would seem to apply."); Markham CF Law Treatise at 28-27 to 28-28 (describing a federal district court ruling finding an "equity swap" not to be a "security", which was overruled by a federal circuit court finding it was); James Hamilton, J.D., L.L.M., Kenneth R. Benson, J.D., Matthew W. Lisle, J.D., A Guide To Federal Regulation of Derivatives, (Commerce Clearing House 1998) at 49 to 50 (describing how the "risk shifting" function of derivatives has been viewed as not meeting the "common enterprise and expectation of profits from the efforts of others" requirements established for defining "securities" given their "capital raising" function). ISDA CFMA Memo at 9-10 and 40-43 (describing at 41 how the CFMA provisions "effectively end any confusion about the status of swaps under the U.S. securities laws" and at 9-10 how the security law description of swaps adopted the new definition that the "material terms (other than price and quantity) are subject to individual negotiation" rather than the less stringent Gramm-Leach-Bliley Act definition that the swap be subject to individual negotiation, as described in notes 57 and 76 above). For the post-CFMA view of then SEC Commissioner Annette Nazareth, who was SEC Director. Division of Trading and Markets, at the time the CFMA was debated and passed by Congress, see "SEC Historical Society Interview with Annette Nazareth Conducted on November 4, 2005, by Kenneth Durr" (at 19 to 22 describing the SEC's involvement with the CFMA and at 19 stating "while the whole package was quite deregulatory, there was some additional certainty that we were able to achieve with respect to derivatives that were securities-based swaps—securities-based swaps were subject to anti-fraud provisions. We thought it was clear but it was awfully good to get it in the legislation.")
Greenberger June 3, 2008, Senate Testimony at 7, fn. 28. "The Enron Loophole has Closed and Goes Into Effect on September 30, 2009", citing the Wikipedia article Enron Loophole. Ervin CFTC Energy Regulation at 11 (describing the 2002 "Feinstein Bill" that would repeal the Section 2(g) swaps exclusion, along with making other CFMA amendments.) The language of Section 2(g) was contained in Section 107 of H.R. 4541, as passed by the House, at page 47, as creating a new Section 2(h) of the CEA. In the CFMA it was Section 105(b) of H.R. 5660 at page 40, as described in note 57 above. During House consideration of H.R. 4541 (as cited and linked in note 54 above), Rep. Dingell (at H10446) objected to this "redundant exclusion" but accepted its "strict' requirements, including the requirement that "each of the material economic terms of the swap must be individually negotiated." Although this was changed in Section 105(b) of H.R. 5660 to require only that the swap be "subject to individual negotiation by the parties", Rep. Dingell did not criticize this provision in his Floor statements on H.R. 5660 (as cited and linked in note 69 above). For the significance of Section 2(g) for energy contracts, see also ISDA CFMA Memo at 27-28.
enronexplorer.com
Even before House passage of H.R. 4541, press reports and statements by Republicans in the Congressional Record indicated Republican unhappiness with the "compromise" reached on H.R. 4541. Dean Anason, "In Brief: Swaps Bill Getting Slim Odds in Senate"[permanent dead link], American Banker, October 19, 2000; "In Brief: House Backs Swaps Bill; Senate in Doubt", American Banker, October 23, 2000; Michelle Heller, "In Brief: Bank Legislation Faces Election Deadline"[permanent dead link], American Banker, November 1, 2000; William Roberts (Bloomberg News) and Michele Heller, "Congress Likely to Get Election Timeout", American Banker, November 2, 2000; "Legislative Update"[permanent dead link], American Banker, November 9, 2000. While the October 2000 Congressional Record statements of Democrats referenced in note 54 above showed unhappiness with the "process" by which they were excluded from negotiations, with late input leading to an acceptable bill, October 19, 2000, Congressional Record statements by Republican Representatives (in the discussion at H10416-10449 cited and linked in note 54 above) expressed unhappiness the bill did not contain broader "protections." Rep. Jim Leach (at H10444 and again in "extended remarks" at Congressional Record E1877-8, October 23, 2000 expressed the wish "more could have been done" but said "progressive strides had been made." Representative Richard A. Baker (R-LA) (at H10448) bemoaned the "compromise" that had stripped the bill of "protections for swaps" He went on to announce he expected to work with Sen. Gramm "because it is evident these problems will not be solved on the House side." Although Representative Patrick J. Toomey (R-PA) stated that it was "a good bill" he said it was not a "perfect bill" and that he hoped "the other body will eliminate the remaining legal uncertainty that will still shadow the use of these transactions by retail customers. I hope that they will allow greater flexibility in the electronic trading of the over-the-counter derivatives." In the "rule suspension" discussion at H10411-15 (cited and linked in note 54 above) a "bipartisan" discontent was expressed by Representatives Sue Wilkins Myrick (R-NC) (at H10411) and Melvin Watt (D-NC) (at H10414-15) who criticized the removal of provisions in the House Banking Committee version of the bill that they thought better "protected" electronic trading platforms. This had special significance for the North Carolina based D&I Holdings (as explained by Rep. Watt at H10414). At this time, Enron emails continued to report Sen. Gramm was the obstacle to H.R. 4541 being enacted into law. Lipton Enron Article (quoting an October 25, 2000, email from Kenneth M. Raisler to Tom Briggs of Enron, "explaining how Senator Gramm is holding up the legislation" and an October 27, 2000, email also from Mr. Raisler to Enron executives describing how "Senator Gramm is activiely engaged and his issues are being aggressively negotiated" after Gramm had "been contacted by a number of people including members of our Energy Group and Alan Greenspan urging passage of the bill.") See also the October 20, 2000, email from Cynthia Sandherr of Enron to Mark Palmer of EnronArchived February 7, 2009, at the Wayback Machine ("The last deal which needs to be cut is with Senator Gramm (he is the only obstacle to enactment in the Senate.)...it is other issues which do not directly affect Enron which are being negotiated.")
Rob Garver, "Legislators Racing to Get Pro-Bank Swaps Bill Passed"[permanent dead link], American Banker, December 11, 2000; Miriam Eljas, "In Brief: Treasury Engaged in Talks on Swaps Bill"[permanent dead link], American Banker, December 12, 2000; "Legislative Update"[permanent dead link], American Banker, December 14, 2000, ("Attempts to jump-start negotiations between the administration and congressional Republicans on the Commodity Futures Modernization Act appear to be failing...Democrats charge that under that plan [i.e. the Republican Senate plan to bar the CFTC from regulating "bank products"] futures exchanges could escape Futures Commission oversight by merging with a bank. The Treasury Department, the lead for the Clinton Administration on this issue, countered late Monday with draft legislation of its own. A Senate Banking Committee spokeswoman described the Treasury offer as a step backwards.") In the Enron email, however, a December 11, 2000, email from Allison Navin to Mark Haedicke of Enron and othersArchived February 7, 2009, at the Wayback Machine enclosed a December 9, 2000, Congressional Quarterly report that the "commodity laws rewrite" was "alive" after representatives of the "big commodity exchanges" met with "the Senator who has been blocking the bill" with the Senator identified as Sen. Gramm). Lipton Enron Article (which describes December 12, 2000, emails from Stacy Cary of ISDA showing "Mr. Gramm is being pressured to give in and sign off on the legislation, but he is still pushing for certain changes" and from Chris Long showing "Mr. Gramm was able to persuade the players to accept some modest amendments to the legislation, including a change that will further protect swaps from regulation, as he had long sought-a change that would benefit Enron." It is unclear what Mr. Long means in his email when he describes his "understanding from Treasury that the swap exemption is expanded slightly to say that if you are trading on a facility (MTF) and you are trading on principle-to-principle [sic] basis among eligible contract participants you are no longer subject anti-fraud and anti-manipulation as contained in Sec. 107 of the House passed legislation." As described in note 57 above and note 74 below, Section 107 of H.R. 4541 contained the same Section 2(h)(1) "bilateral swaps" exemption as Section 106 of H.R. 5660. Both applied the CEA's anti-fraud and anti-manipulation provisions to "eligible contract participants", but not the anti-fraud provisions to "principal to principal" transactions between "eligible commercial entities." Perhaps (1) an intervening draft of the legislation would have changed the Section 2(h)(1) provision from that in H.R. 4541, (2) the provision was further changed back to that in H.R. 4541 after Mr. Long's conversation, or (3) Mr. Long misunderstood what the Treasury Department told him.
At the July 10, 2002, Senate Agriculture Hearing, CFTC Commissioner Thomas Erickson, who had been a critic of the CFMA in 2000, explained Section 2(h)(3) was not the "Enron Loophole" used by EnronOnline. He suggested (at 17 to 18, 22 to 23, 25, 26, and 30 to 31) that the bulk of the OTC derivatives market used the 2(g) exclusion for "swaps" and that this was available to EnronOnline. See also Sen. Fitzgerald at 25 ("Enron Online and Intercontinental Exchange are just exempt by statute here with Section 2(g)") and page 48 for Professor Coffee's view. While the differences between Commissioner Erickson and CFTC Chair Newsome at the hearing (at 17 and at 30-31) were characterized as a "disagreement" over whether Section 2(g) "trumped" Section 2(h), Chairman Newsome states (at 17-18) that "swap transactions were excluded from our jurisdiction prior to the CFMA by administrative action of the CFTC and they were excluded after the CFMA by codification of Congress." He goes on to state Section 2(h) is not "trumped by the swap's exclusion for transactions in energy products that are not deemed to be swaps transactions." Thus, Chairman Newsome acknowledged Section 2(g) did "trump" Section 2(h) for swap transactions. While the 1993 swaps exemption exempted swaps from the CEA, as described in note 19 above, it did not exempt such transactions from the fraud and anti-manipulation provisions of the CEA to the extent the transactions were "futures" under the CEA. The CFMA granted an exclusion from such provisions. Further testimony at the July 10, 2002, Senate Agriculture Hearing (at 57) explained the Section 2(g) exclusion would apply to "online" transactions in which after agreeing to price the parties would "go offline" and "negotiate the credit terms." This type of transaction would be eligible for the Section 2(g) exclusion if it dealt with either an excluded or an exempt commodity. The Section 2(h)(1) exemption for "bilateral swaps" would be available if the two parties completed their "private" transaction online without "individual negotiation" but without both the offer and acceptance being available to multiple parties. This is the way Enron OnLine is usually described as having operated, because Enron was always a party to each transaction. Infectious Greed at 320 ('its trades were judged to be 'bilateral contracts' between the two parties trading on Enron's website"). At the January 29, 2002 Senate Energy Hearing, Chairman Bingaman explained (at 1 to 2) "EnronOnline did not match buyers and sellers. It contracted with each separately, so that Enron was on the other side of every deal." See also the prepared statement of Patrick Woods, III, Chairman, Fedederal Energy Regulatory Commission, at 14 ("EnronOnline uses a one-to-many trading format, where an Enron affiliate is always on one side of each energy transaction, either as a seller or a buyer. The price of a commodity or derivative on EnronOnline is determined when a buyer or a seller accepts an offer or bid price posted by an Enron trader." In contrast, Chairman Woods describes the Intercontinental Exchange ("ICE") as a "many-to-many platform." A December 16, 2000, email from Chris Long of EnronArchived February 7, 2009, at the Wayback Machine indicated Enron was aware it would need to change EnronOnline to have Section 2(h)(3) apply to it. (in describing Section 2(f) the email states "This exemption could facilitate expansion of EnronOnline to allow for multi-party transactions, however certain legal requirements will have to be met.").
fdic.gov
Extended Remarks of Representative Thomas Ewing (R-IL), Congressional Record, E2181-2182 (December 14, 2000) introducing H.R. 5660 (the bill "contains the major provisions of the House passed H.R. 4541. These provisions are in Titles I and II of the legislation... "). H.R. 4541 as passed by the House. H.R. 5660 as introduced in the House and enacted into law through H.R. 4577 The two differences between Title I in the two bills that are apparent from the tables of contents (see page 2 for each bill) are that H.R. 5660 eliminated the "Rules of Construction" that were in Section 128 of H.R. 4541 and inserted H.R. 4541's Section 107 dealing with "Swap transactions" into Section 105 as Section 105(b) of H.R. 5660. The first change led to the colloquy between Reps. Bliley and Combest described in note 69 below, in which they confirmed nothing in the CFMA granted a bank any additional power to own equity securities (which was previously covered by Section 128 of H.R. 4541). The second change lead to an overall "re-lettering" of language in Title I, because the swaps "exclusion" became Section 2(g) rather than 2(h) of the CEA. This meant the CFMA's exclusions were consecutively "lettered" as 2(c)-(g) with Section 2(h) the "exemptions." Under H.R. 4541, Section 2(g) would have been the new "exemptions" and Section 2(h) would have been the final "exclusion." The new Section 2(g) was also modified from H.R. 4541 in its definition of "swap agreement" to require "individual negotiation" but not "individual negotiation" of "each material term" (other than price and quantity) and in adding a Section 105(c) requirement for a PWG study of "retail swaps." The last change addressed an issue raised by Republican Representatives in the House Floor debate of H.R. 4541 (as described in note 58 below). The PWG issued its "Joint Report on Retail Swaps"Archived 2009-08-31 at the Wayback Machine in December 2001 and found (at page 9) it was not "necessary at this time to recommend legislative action for swap agreements offered to persons other than ECPs." Aside from these two changes and various typographical or stylistic corrections, the changes to Title I were: (1) the definition of "hybrid instrument" was expanded to permit delivery of a commodity and the H.R. 4541 definition of "deposit instrument" was replaced by the new Title IV's definition of "identified banking product" contained in Section 402(b) of H.R. 5660, which did not include the limitations for foreign and other deposits listed in H.R. 4541's exclusions for subparagraphs (A), (B), and (C) of Section 3(l) of the Federal Deposit Insurance Act (compare pages 21 and 252-253 of H.R. 5660 with pages 20-21 of H.R. 4541); (2) the new Title IV exclusions from the CEA were added to the list of excluded transactions in several parts of Title I (compare the definition of "security future" at 28 of each bill, the description of the application of the CEA in Section 107 (at 50) of H.R. 5660 and in Section 108 (at 48) of H.R. 4541, the description of transactions permitted to be cleared by a Derivatives Clearing Organization ("DCO") in Section 112 (at 88-9) of H.R. 5660 and in Section 113 (at 86) of H.R. 4541, the preemption of state law in Section 117 (at 105) in H.R. 5660 and in Section 118 (at 101-2) of H.R. 4541, and the contract enforcement provision in Section 120 (at 108) of H.R. 5660 and in Section 121 (at 105-6) in H.R. 4541); (3) the definition of "trading facility" was revised to clarify the listed "exclusions" did not require CFTC confirmation of that status (compare pages 29-31 of H.R. 5660 with pages 28-30 of H.R. 4541); (4) the definition of "excluded electronic trading facility" was expanded to expressly permit submission of transactions to a DCO for clearance without thereby becoming a "trading facility" (compare pages 37-38 of H.R. 5660 with pages 36-37 of H.R. 4541); and (5) a "Derivatives Transaction Execution Facility ("DTEF") that delegated any duties was given an explicit obligation to address non-compliance with the delegated function (compare Section 113 (at 97) of H.R. 5660 with Section 114 (at 94-5) of H.R. 4541.
federalreserve.gov
In the Dinallo FT Opinion former Insurance Superintendent Dinallo argues (1) "the fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money" and (2) banks bought credit default swaps from AIG covering "investments" held by the banks "to avoid regulation" because it allowed them to claim "they no longer had the risk of a default of the bond." It is difficult to understand how this applies to AIG (which is the company mentioned in the Dinallo FT Opinion) or what the "regulatory arbitrage" credit default swaps ("CDS") of AIG had to do with the CFMA. AIG Financial Products ("AIGFP"), before 2000 and after the CFMA became law, was located in London. Gretchen Morgenson, "Behind Insurer's Crisis, Blind Eye to a Web of Risk", The New York Times, September 28, 2008 ("Morgenson Article") (which dates the establishment of London based AIGFP to 1987); Peter Koeing, "AIG Trail Leads to London Casino", Telegraph, October 18, 2008; "AIG Blames its London Office"Forbes, March 13, 2009. If US-based CDS counterparties of AIGFP were also internationally active (as the Morgenson Article suggests in noting the "'global swath' of top-notch entities" that" were counterparties to AIGFP CDS), they likely would have been able to book their CDS transactions with AIGFP through their own non-US offices to avoid the application of the CEA if the CFMA had not been enacted. See notes 23, 37, and 79 (Summers response to Harkin question at Senate Agriculture PWG Report Hearing) above for the issue of "offshore" booking of OTC derivatives. More clearly, the seller of AIG's "regulatory arbitrage" credit default swaps was Banque AIG, not an insurance company. See pages 133-134 of AIG's 2008 Form 10-K Report ("AIG 2008 10-K"). This is noted in the Morgenson Article. ("the London-based units...trades were routed through Banque A.I.G., a French institution"). As explained on page 133 of the AIG 2008 10-K, Banque AIG is a French bank regulated under French banking law. As also explained on page 133 of the AIG 2008 10-K, the "regulatory arbitrage" from those CDS was not because they were credit default swaps, but because they operated as guarantees from a bank in an OECD country (i.e. France). See also Daniel K. Tarullo, Banking on Basel: the future of international financial regulation (Peterson Institute 2008) for an explanation (at 57–60) of how the Basel I Accord (as described in the AIG 2008 10-K) established "generic" risk categories so "all loans to nonbanking corporations were risk-weighted at 100 percent" but all "claims on, or guaranteed by, banks incorporated in the OECD" were risk-weighted at 20%. In 1999 U.S. banking regulators reviewed multiple transaction structures similar to the AIGFP "regulatory arbitrage" CDS transactions and concluded a "super senior" exposure held by a bank that was guaranteed by the Banque AIG CDS (as depicted on page 133 of the AIG 2008 10-K) could receive a 20% "risk weighting" without being supported by a bank issued CDS or other form of bank guarantee if certain "stringent" conditions were met. Federal Reserve Board and Office of the Comptroller of the Currency, "Capital Interpretations, Synthetic Collateralized Loan Obligations, November 15, 1999", Federal Reserve Board Supervisory Release 99-32Archived May 14, 2009, at the Wayback Machine. ("US Synthetic CLO Interpretation"). To the extent the "stringent minimum requirements" described at pages 6-7 of the US Synthetic CLO Interpretation were met, this would eliminate the need to acquire such CDS. Under the US Synthetic CLO Interpretation, one important element was that an outside investor acquire an interest in the relevant loan pool that would be subordinate to the "super senior" exposure but still be rated AAA. This requirement is why the bank retained exposure is considered "super senior." As depicted on page 133 of the AIG 2008 10-K, this is the type of "super senior" exposure covered by the AIG "regulatory arbitrage" CDS. As the AIG 2008 10-K also explains at page 133 the implementation of Basel II eliminates the need for the Banque AIG "regulatory" CDS, because Basel II recognizes the low risk nature of the "super senior" exposure and requires corresponding capital, not a flat 8% requirement based on a "generic" capital requirement. U.S. banking regulators described in 1996 when CDS or other credit derivatives would operate as bank guarantees for purposes of capital rules and how the bank providing such a guarantee would be required to hold regulatory capital equal to that required if it directly held the guaranteed bond or other obligation. Federal Reserve Board Division of Banking Supervision and Regulation, "Supervisory Guidance for Credit Derivatives"Archived 2009-05-12 at the Wayback Machine, SR 96-17 (GEN), August 12, 1996. Nevertheless, similar to the Dinallo FT Opinion, Joe Nocera, "Propping Up a House of Cards", The New York Times, February 28, 2009, describes AIG's "regulatory arbitrage" CDS by stating (1) it allowed "banks to make their balance sheet look safer than they really were" because of AIG's AAA rating (when the European banks acquiring the CDS protection received reduced regulatory capital requirements because the CDS represented an OECD country bank guarantee, regardless of the rating of that bank); (2) because the CDS "were not even categorized as a traditional insurance product, A.I.G. didn't have to put anything aside for losses" (when the regulatory capital requirement for the CDS would be determined by French banking law, not any insurance regulator, and the US banking regulators would have required regulatory capital equal to that required for the underlying exposure); (3) that this was only possible because a "misguided set of international rules that took hold toward the end of the 1990s" permitted banks "to use their own internal risk measurements to set their capital requirements" (when those "misguided" rules, known as Basel II, are what is ending the need for the "regulatory arbitrage" provided by the Banque AIG CDS, as described on page 133 of the 2008 AIG 10-K, and only the earlier Basel I standards provided the "generic" 20% risk-weighting for bank obligations, including bank guarantees.) For the location of General Re's derivatives dealer in London and the difficulties incurred by Berkshire Hathaway in winding down that dealer after it acquired General Re, see "General Re Securities Limited", Business Week, Snapshot (click on Detailed Description for the 1991 UK incorporation) and Ari Weinberg, "The Great Derivatives Smackdown", Forbes, May 9, 2003, which contrasts the Alan Greenspan and Warren Buffett views of derivatives, mentions the shuttering of General Re Securities with a remaining derivatives book, and curiously refers to AIG's "extensive disclosures" and lists AIG FP's credit derivative disclosures.
In the Dinallo FT Opinion former Insurance Superintendent Dinallo argues (1) "the fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money" and (2) banks bought credit default swaps from AIG covering "investments" held by the banks "to avoid regulation" because it allowed them to claim "they no longer had the risk of a default of the bond." It is difficult to understand how this applies to AIG (which is the company mentioned in the Dinallo FT Opinion) or what the "regulatory arbitrage" credit default swaps ("CDS") of AIG had to do with the CFMA. AIG Financial Products ("AIGFP"), before 2000 and after the CFMA became law, was located in London. Gretchen Morgenson, "Behind Insurer's Crisis, Blind Eye to a Web of Risk", The New York Times, September 28, 2008 ("Morgenson Article") (which dates the establishment of London based AIGFP to 1987); Peter Koeing, "AIG Trail Leads to London Casino", Telegraph, October 18, 2008; "AIG Blames its London Office"Forbes, March 13, 2009. If US-based CDS counterparties of AIGFP were also internationally active (as the Morgenson Article suggests in noting the "'global swath' of top-notch entities" that" were counterparties to AIGFP CDS), they likely would have been able to book their CDS transactions with AIGFP through their own non-US offices to avoid the application of the CEA if the CFMA had not been enacted. See notes 23, 37, and 79 (Summers response to Harkin question at Senate Agriculture PWG Report Hearing) above for the issue of "offshore" booking of OTC derivatives. More clearly, the seller of AIG's "regulatory arbitrage" credit default swaps was Banque AIG, not an insurance company. See pages 133-134 of AIG's 2008 Form 10-K Report ("AIG 2008 10-K"). This is noted in the Morgenson Article. ("the London-based units...trades were routed through Banque A.I.G., a French institution"). As explained on page 133 of the AIG 2008 10-K, Banque AIG is a French bank regulated under French banking law. As also explained on page 133 of the AIG 2008 10-K, the "regulatory arbitrage" from those CDS was not because they were credit default swaps, but because they operated as guarantees from a bank in an OECD country (i.e. France). See also Daniel K. Tarullo, Banking on Basel: the future of international financial regulation (Peterson Institute 2008) for an explanation (at 57–60) of how the Basel I Accord (as described in the AIG 2008 10-K) established "generic" risk categories so "all loans to nonbanking corporations were risk-weighted at 100 percent" but all "claims on, or guaranteed by, banks incorporated in the OECD" were risk-weighted at 20%. In 1999 U.S. banking regulators reviewed multiple transaction structures similar to the AIGFP "regulatory arbitrage" CDS transactions and concluded a "super senior" exposure held by a bank that was guaranteed by the Banque AIG CDS (as depicted on page 133 of the AIG 2008 10-K) could receive a 20% "risk weighting" without being supported by a bank issued CDS or other form of bank guarantee if certain "stringent" conditions were met. Federal Reserve Board and Office of the Comptroller of the Currency, "Capital Interpretations, Synthetic Collateralized Loan Obligations, November 15, 1999", Federal Reserve Board Supervisory Release 99-32Archived May 14, 2009, at the Wayback Machine. ("US Synthetic CLO Interpretation"). To the extent the "stringent minimum requirements" described at pages 6-7 of the US Synthetic CLO Interpretation were met, this would eliminate the need to acquire such CDS. Under the US Synthetic CLO Interpretation, one important element was that an outside investor acquire an interest in the relevant loan pool that would be subordinate to the "super senior" exposure but still be rated AAA. This requirement is why the bank retained exposure is considered "super senior." As depicted on page 133 of the AIG 2008 10-K, this is the type of "super senior" exposure covered by the AIG "regulatory arbitrage" CDS. As the AIG 2008 10-K also explains at page 133 the implementation of Basel II eliminates the need for the Banque AIG "regulatory" CDS, because Basel II recognizes the low risk nature of the "super senior" exposure and requires corresponding capital, not a flat 8% requirement based on a "generic" capital requirement. U.S. banking regulators described in 1996 when CDS or other credit derivatives would operate as bank guarantees for purposes of capital rules and how the bank providing such a guarantee would be required to hold regulatory capital equal to that required if it directly held the guaranteed bond or other obligation. Federal Reserve Board Division of Banking Supervision and Regulation, "Supervisory Guidance for Credit Derivatives"Archived 2009-05-12 at the Wayback Machine, SR 96-17 (GEN), August 12, 1996. Nevertheless, similar to the Dinallo FT Opinion, Joe Nocera, "Propping Up a House of Cards", The New York Times, February 28, 2009, describes AIG's "regulatory arbitrage" CDS by stating (1) it allowed "banks to make their balance sheet look safer than they really were" because of AIG's AAA rating (when the European banks acquiring the CDS protection received reduced regulatory capital requirements because the CDS represented an OECD country bank guarantee, regardless of the rating of that bank); (2) because the CDS "were not even categorized as a traditional insurance product, A.I.G. didn't have to put anything aside for losses" (when the regulatory capital requirement for the CDS would be determined by French banking law, not any insurance regulator, and the US banking regulators would have required regulatory capital equal to that required for the underlying exposure); (3) that this was only possible because a "misguided set of international rules that took hold toward the end of the 1990s" permitted banks "to use their own internal risk measurements to set their capital requirements" (when those "misguided" rules, known as Basel II, are what is ending the need for the "regulatory arbitrage" provided by the Banque AIG CDS, as described on page 133 of the 2008 AIG 10-K, and only the earlier Basel I standards provided the "generic" 20% risk-weighting for bank obligations, including bank guarantees.) For the location of General Re's derivatives dealer in London and the difficulties incurred by Berkshire Hathaway in winding down that dealer after it acquired General Re, see "General Re Securities Limited", Business Week, Snapshot (click on Detailed Description for the 1991 UK incorporation) and Ari Weinberg, "The Great Derivatives Smackdown", Forbes, May 9, 2003, which contrasts the Alan Greenspan and Warren Buffett views of derivatives, mentions the shuttering of General Re Securities with a remaining derivatives book, and curiously refers to AIG's "extensive disclosures" and lists AIG FP's credit derivative disclosures.
ft.com
Eric Dinallo, "We Modernized Ourselves into the Ice Age", Financial Times, March 30, 2009 ("Dinallo FT Opinion") (stating "unregulated speculation" was a major cause of the bank panic of 1907, in reaction states passed "anti-bucket shop and gambling laws, outlawing the activity that helped to ruin the economy", and the CFMA "exempted credit default swaps from these laws" which meant "we might have avoided the worst of the current troubles if we had not overturned laws adopted in response to earlier crises.") For the PWG's recommendations to exclude from the CEA (and include in the CEA's preemption of state laws) OTC derivatives in "non-exempt securities" see PWG Report at 17 (for swaps) and at 29 (for hybrid instruments).
Johnson/Hazen Derivatives Regulation Treatise at 50 to 54. CRS Derivatives Regulation Report at CRS-5. PWG Report at 6. The CEA required that futures contracts be transacted on a "contract market" designated by the CFTC. "Designated contract markets" (such as the Chicago Board of Trade, Chicago Mercantile Exchange, or New York Mercantile Exchange (NYMEX)) are generally referred to as "exchanges" but are also called "boards of trade." Markham CF Trading History at 15 and 69. For the notion the meaning of "future delivery" evolved, see GAO Report, "CFTC and SEC: Issues Related to the Shad-Johnson Jurisdictional Accord", GAO/GGD-00-89Archived September 5, 2009, at the Wayback Machine, April 2000 ("GAO Shad-Johnson Report") at 14, fn. 35 ("the definition has evolved through judicial and agency interpretations.") For a broader discussion of the issue see GAO CEA Issues Report at 6.
GAO CEA Issues Report at 12 to 17. PWG Report at 8 to 10. Markham CF Law Treatise at pages 27-23 to 27-26. Johnson/Hazen Derivatives Regulation Treatise at 43 to 48 and 60 to 66. For the significance of the 1992 legislation's preemption of state laws, see Born July 30, 1998, Senate Agriculture Testimony at 6 where Chairperson Born describes its role in providing "legal certainty." As noted in the GAO CEA Issues Report at 15, the Conference Report for the FTPA stated: "The Conferees do not intend that the exercise of exemptive authority by the Commission would require any determination beforehand that the agreement, instrument, or transaction for which an exemption is sought is subject to the Act." H10937, Congressional Record, October 2, 1992. The entire Conference Report for the FTPA is available by searching "conference report on H.R. 707" at this link for the Search the Congressional Record on the 102d Congress page of The Library of Congress Thomas service ("Thomas LOC").Archived 2009-05-06 at the Wayback Machine The Conference Report also stated (at H10936) that "the Conferees expect and strongly encourage the Commission to use its new exemptive powers promptly upon enactment of this legislation in four areas where significant concerns of legal uncertainty have arisen: (1) hybrids, (2) swaps, (3) forwards, and (4) bank deposits and accounts." The Report went on to explain (at H10937) the "forwards" were the oil market transactions covered by the existing Brent oil market "statutory interpretation." For the view Congress had thereby "instructed" the CFTC to grant the exemptions, see the testimony of CFTC Chair William Rainer at Senate Agriculture PWG Report Hearing at 15 ("amid strong signals that swap market participants feared their contracts could be declared unenforceable, Congress reacted decisively instructing the CFTC not to regulate swaps entered into by sophisticated parties.") See also GAO Report "The Commodity Exchange Act: Issues Related to the Commodity Futures Trading Commission's Reauthorization", GAO/GGD-99-74Archived September 5, 2009, at the Wayback Machine, May 1999 ("GAO 1999 CFTC Reauthorization Report") at 10 ("According to the 1992 act's legislative history, Congress expected CFTC to use its exemptive authority promptly to reduce legal risk for swaps, forwards, and hybrids.")
Markham CF Law Treatise at pages 27-38 to 27-49. GAO Report, "Financial Derivatives: Actions Needed to Protect the Financial System", GAO/GGD-94-133, May 1994 ("GAO 1994 Derivatives Report"). GAO Report, "Financial Derivatives: Actions Taken or Proposed Since May 1994", GAO/GGD/AIMD-97-8Archived September 3, 2009, at the Wayback Machine, November 1996 ("GAO 1996 Derivatives Report") at 31 to 32 lists the six 1994 legislative proposals and four derivatives bills pending in 1996, and at 44 to 45 notes the six securities firms in the Derivatives Policy Group accounted for over 90% of the derivatives dealer activities of securities firms. At least in the context of the 1998 Congressional hearings concerning the CFTC "concept release" described in Section 1.2.1 below, Representative James A. Leach (R-IA) stated that by 1998 "the major provisions" of the 900-page 1993 minority staff report mentioned in note 37 below had been "implemented" by "industry and regulators" so that derivatives markets are sturdier and more consistently supervised than they were several years ago. July 17, 1998, Hearing before the House Committee on Banking and Financial Services ("July 17, 1998, House Banking Hearing") at 2.
GAO Report, "Long-Term Capital Management: Regulators Need to Focus Greater Attention on Systemic Risk," GAO/GGD-00-3Archived 2010-01-07 at the Wayback Machine, October 1999 ("GAO LTCM Report") at 16 to 17 (for "regulators did not identify weaknesses in firms' risk management practices until after the crisis"), 17 to 19 (for "offsite monitoring did not reveal the potential systemic threat posed by LTCM"), and 21 (for "existing coordination could be improved to enhance regulators' ability to identify risks across industries and markets.") GAO LTCM Report at 31 (for the recommendation Congress "consider providing SEC and CFTC with the authority to regulate the activities of securities and futures firms' affiliates similar to that provided the Federal Reserve with respect to bank holding companies.") "Congressional Agency Faults a Report on Hedge-Fund Risk", The New York Times, November 20, 1999. Michael Schroeder, "General Accounting Office's Report Urges Tighter Broker-Dealer Oversight", The Wall Street Journal, November 22, 1999. Both news articles stated the GAO recommended Congress enact consolidated supervision of securities and commodities firms, although the GAO Report only stated Congress should "consider" such legislation. Perhaps these news reports more accurately described GAO's actual intent.
archive.gao.gov
GAO CEA Issues Report at 11 to 14. Johnson/Hazen Derivatives Regulation Treatise at 55 to 60 (for swaps and hybrids) and 67 to 69 (for forward transactions). Markham CF Law Treatise at pages 27-23 to 25. For the effects of the UK court decision, see GAO Report, "Financial Derivatives: Actions Needed to Protect the Financial System", GAO/GGD-94-133, May 1994, ("GAO 1994 Derivatives Report") at 64 to 66. A typical "hybrid instrument" would be a bank deposit that provided an "extra" interest amount based on the return on the S&P 500 Index or a security that provided a return tied in part to the appreciation of the yen or some other currency relative to the dollar. For a description of more complex "hybrid instruments", see Frank Partnoy, F.I.A.S.C.O.: the inside story of a Wall Street trader (Penguin 1999).
Markham CF Law Treatise at pages 27-38 to 27-49. GAO Report, "Financial Derivatives: Actions Needed to Protect the Financial System", GAO/GGD-94-133, May 1994 ("GAO 1994 Derivatives Report"). GAO Report, "Financial Derivatives: Actions Taken or Proposed Since May 1994", GAO/GGD/AIMD-97-8Archived September 3, 2009, at the Wayback Machine, November 1996 ("GAO 1996 Derivatives Report") at 31 to 32 lists the six 1994 legislative proposals and four derivatives bills pending in 1996, and at 44 to 45 notes the six securities firms in the Derivatives Policy Group accounted for over 90% of the derivatives dealer activities of securities firms. At least in the context of the 1998 Congressional hearings concerning the CFTC "concept release" described in Section 1.2.1 below, Representative James A. Leach (R-IA) stated that by 1998 "the major provisions" of the 900-page 1993 minority staff report mentioned in note 37 below had been "implemented" by "industry and regulators" so that derivatives markets are sturdier and more consistently supervised than they were several years ago. July 17, 1998, Hearing before the House Committee on Banking and Financial Services ("July 17, 1998, House Banking Hearing") at 2.
govexec.com
Consolidated Tesimony of the Futures Exchanges of the United States to Senate Agriculture Committee, February 11, 1997Archived December 2, 2009, at the Wayback Machine ("U.S. futures markets have found it increasingly difficult to compete with foreign exchanges and OTC dealers as our competition's regulatory costs have diminished or remained virtually non-existent while ours have escalated.") John M. Broder, "Chicago Exchanges Seek to Loosen Yoke of Regulation", The New York Times, June 4, 1997. George Gunsel, "Big Guns Loading for Deregulation Battle", Chicago Tribune, March 23, 1997 (quoting the CBOT's president as stating "We were promised an even-handed landscape in 1992 (legislation) and it didn't happen. We lost business to oversees and the over-the-counter markets." George Burns, "Deregulation of Futures May be Derailed, CBOT, Merc in Opposing Factions on Key Issues, and Time's Running Out in Congress", Chicago Tribune, July 25, 1997 ("the Board of Trade wants Congress to authorize the trading of equity swaps in unregulated markets" and "the Merc worries that giving legal certainty to equity swaps would hurt its stock-index futures contracts.") Jerry Hegstrom, "Commodity Clash"Archived 2008-07-06 at the Wayback Machine, Government Executive, October 1, 1997.
govtrack.us
110th Congress (2007) (September 17, 2007). "S. 2058 (110th)". Legislation. GovTrack.us. Retrieved October 1, 2013. Close the Enron Loophole Act{{cite web}}: CS1 maint: numeric names: authors list (link)
For the Treasury Amendment, see also Johnson/Hazen Derivatives Regulation Treatise at 9 to 10; CRS Derivatives Regulation Report at CRS-6; and PWG Report at 24 to 27. Before the CFTC, a Commodity Exchange Authority under the control of the Secretary of Agriculture regulated commodity exchanges. Jerry W. Markham,The History of Commodity Futures Trading and its Regulation, (Praeger 1987) ("Markham CF Trading History") at 27 to 60. For background to the reasoning of the PWG Report, see the July 24, 1998 Hearing before the House Committee on Banking and Financial Services ("July 24, 1998, House Banking Hearing") at pages 150-156 for Alan Greenspan's extended critique of the application of the CEA to non-agricultural commodities. The transcript excerpts are in Segment 2 because the July 24, 1998, hearing was the second of two hearings by the Committee concerning H.R. 4062, legislation mentioned in Section 1.2 below that ultimately led to a moratorium on CFTC action to change the regulatory status of OTC derivatives. For how the "board of trade" qualification made it difficult for the CFTC to attack currency trading "bucket shops", see CFTC Chair William Rainer testimony at page 28 of Hearing before the Senate Agriculture Committee on the PWG Report, February 10, 2000, ("Senate Agriculture PWG Report Hearing") and Markham CF Trading History at 238 to 239.
Johnson/Hazen Derivatives Regulation at 331. ISDA CFMA Memo at 22. For the PWG recommendation on preemption see PWG Report at 18. The Title I preemption provision is Section 117 at pages 104 to 105 of H.R. 5660 as introduced in the House and at pages 404 to 405 of H.R. 4577 as enacted into law as Public Law 106-554. The entire CFMA appears as "Appendix E—H.R. 5660" to that Public Law (pages 367-463). A separate preemption provisions is in Section 408 of H.R. 5660. A provision of that preemption that is potentially broader than Section 117 is the preemption for a "hybrid instrument that is predominantly a banking product." The definition of "covered swap agreement" generally overlaps with the "aggregate effect' of the CEA Section 2(d)(1) exclusion for transactions in "excluded commodities", the Section 2(h)(1) exemption for transactions in "exempt commodities (both limited to transactions transacted off a "trading facility"), and the Section 2(g) exclusion for transactions in either even on an "electronic trading facility." ISDA CFMA Memo at 28 (noting as a possible difference that the Section 402(d) term "covered swap agreements" would "in the first instance be interpreted by the banking regulators" whereas the Section 105(b) "excluded swap transactions" would "in the first instance be interpreted by the CFTC.") A difference is that "covered swap agreement" would cover a transaction in "excluded commodities" on an electronic trading facility even if not subject to "individual negotiation" (compare Section 105(b) with Section 402(d)(2) of the CFMA on this).
Rob Garver, "In Brief: Swaps Measure Delayed as Agencies Argue"[permanent dead link], American Banker, May 12, 2000, ( In describing Rep. Ewing's plan to offer legislation concerning swaps, the article noted Senators Lugar and Gramm "had been expected to introduce similar legislation in the Senate on Thursday, but a debate between the Securities and Exchange Commission and the Commodity Futures Trading Commission over other regulatory matters in the bill has held it up.") For Senate Committee Chair Lugar's remarks, see June 21, 2000, Joint Senate Committee Hearing at 2 to 3 and at 37 ("it should have been apparent to the two of you [the CFTC and SEC Chairmen] that we are intent upon passing a bill...why the two of you are not equally arduous"). For House Subcommittee Chair Ewing's remarks, see Hearing before House Subcommittee on Risk Management, Research, and Specialty Crops, June 19, 2000, ("June 19, 2000, House Agriculture Subcommittee Hearing") at 10 (for the tight legislative calendar) and at 43 to 55 (for extended "single stock futures" questions). For Commerce Committee Chair Bliley's remarks, see Hearing before the Subcommittee on Finance and Hazardous Materials on H.R. 4541, July 12, 2000, (" July 12, 2000, House Commerce Subcommittee Hearing") at 4. For Ranking Member LaFalce's statement see Hearing before House Committee on Banking and Financial Services on H.R. 4541, July 19, 2000, ("July 19, 2000, House Banking Committee Hearing") at 14 ("it is unfortunate that we are getting this bill referral that says we have to report it out by September 6th, which means we have to report it out next week.") See also Committee Chair Leach at 91 ("my own sense is one of great frustration working within the constraints of this Act"). Rep. Leach had introduced on April 6, 2000, his own bill H.R. 4203 to implement, separate from CFTC reauthorization, portions of the PWG Report applicable to OTC derivatives. As the Thomas LOC All Congressional Action Page for H.R. 4203Archived 2016-07-04 at the Wayback Machine shows, this bill did not proceed past the Committee referral stage.
Dean Anason, "In Brief: Bottleneck Seen on Swaps Exemption Bill"[permanent dead link], American Banker, October 16, 2000, (referring to a statement issued the previous Friday, October 13, the article stated "Senate Agriculture Committee Chairman Richard G. Lugar said prospects are grim for a compromise on legislation that would protect swap contracts from federal regulation." Sen. Lugar added "failure to pass the Commodity Futures Modernization Act of 2000 will cause grave repercussions throughout the financial markets.") For similar expectations of a CFTC Commissioner critical of the CFMA see "Remarks of Commissioner Thomas J. Erickson" before the Silver User's Association on October 18, 2000 ("I think it is important to understand how these bills might work – despite the fact that they probably will not be passed in this session – because I believe they represent the current thinking of many legislators.") For the Administration's statement of support, see Statement of Administration Policy: H.R. 4541 - Commodity Futures Modernization Act of 2000, October 19, 2000, ("The Administration strongly supports the version of H.R. 4541, the Commodity Futures Modernization Act of 2000, that the Administration understands will be considered on the House floor.") The text of the statement was also introduced into the Congressional Record by Rep. Stenholm at Congressional Record page H10441.
Extended Remarks of Representative Thomas Ewing (R-IL), Congressional Record, E2181-2182 (December 14, 2000) introducing H.R. 5660 (the bill "contains the major provisions of the House passed H.R. 4541. These provisions are in Titles I and II of the legislation... "). H.R. 4541 as passed by the House. H.R. 5660 as introduced in the House and enacted into law through H.R. 4577 The two differences between Title I in the two bills that are apparent from the tables of contents (see page 2 for each bill) are that H.R. 5660 eliminated the "Rules of Construction" that were in Section 128 of H.R. 4541 and inserted H.R. 4541's Section 107 dealing with "Swap transactions" into Section 105 as Section 105(b) of H.R. 5660. The first change led to the colloquy between Reps. Bliley and Combest described in note 69 below, in which they confirmed nothing in the CFMA granted a bank any additional power to own equity securities (which was previously covered by Section 128 of H.R. 4541). The second change lead to an overall "re-lettering" of language in Title I, because the swaps "exclusion" became Section 2(g) rather than 2(h) of the CEA. This meant the CFMA's exclusions were consecutively "lettered" as 2(c)-(g) with Section 2(h) the "exemptions." Under H.R. 4541, Section 2(g) would have been the new "exemptions" and Section 2(h) would have been the final "exclusion." The new Section 2(g) was also modified from H.R. 4541 in its definition of "swap agreement" to require "individual negotiation" but not "individual negotiation" of "each material term" (other than price and quantity) and in adding a Section 105(c) requirement for a PWG study of "retail swaps." The last change addressed an issue raised by Republican Representatives in the House Floor debate of H.R. 4541 (as described in note 58 below). The PWG issued its "Joint Report on Retail Swaps"Archived 2009-08-31 at the Wayback Machine in December 2001 and found (at page 9) it was not "necessary at this time to recommend legislative action for swap agreements offered to persons other than ECPs." Aside from these two changes and various typographical or stylistic corrections, the changes to Title I were: (1) the definition of "hybrid instrument" was expanded to permit delivery of a commodity and the H.R. 4541 definition of "deposit instrument" was replaced by the new Title IV's definition of "identified banking product" contained in Section 402(b) of H.R. 5660, which did not include the limitations for foreign and other deposits listed in H.R. 4541's exclusions for subparagraphs (A), (B), and (C) of Section 3(l) of the Federal Deposit Insurance Act (compare pages 21 and 252-253 of H.R. 5660 with pages 20-21 of H.R. 4541); (2) the new Title IV exclusions from the CEA were added to the list of excluded transactions in several parts of Title I (compare the definition of "security future" at 28 of each bill, the description of the application of the CEA in Section 107 (at 50) of H.R. 5660 and in Section 108 (at 48) of H.R. 4541, the description of transactions permitted to be cleared by a Derivatives Clearing Organization ("DCO") in Section 112 (at 88-9) of H.R. 5660 and in Section 113 (at 86) of H.R. 4541, the preemption of state law in Section 117 (at 105) in H.R. 5660 and in Section 118 (at 101-2) of H.R. 4541, and the contract enforcement provision in Section 120 (at 108) of H.R. 5660 and in Section 121 (at 105-6) in H.R. 4541); (3) the definition of "trading facility" was revised to clarify the listed "exclusions" did not require CFTC confirmation of that status (compare pages 29-31 of H.R. 5660 with pages 28-30 of H.R. 4541); (4) the definition of "excluded electronic trading facility" was expanded to expressly permit submission of transactions to a DCO for clearance without thereby becoming a "trading facility" (compare pages 37-38 of H.R. 5660 with pages 36-37 of H.R. 4541); and (5) a "Derivatives Transaction Execution Facility ("DTEF") that delegated any duties was given an explicit obligation to address non-compliance with the delegated function (compare Section 113 (at 97) of H.R. 5660 with Section 114 (at 94-5) of H.R. 4541.
H.R. 4577 All Actions Page, which shows December 15, 2000, Senate "consideration" and action. It is noted at Congressional Record page S11855 that the Conference Report was published in full in the House proceedings for December 15, 2000, as described in note 66 above. The Conference Report passed the Senate by "unanimous consent." The H.R. 4577 All Actions Page shows the Senate "discussion" of the Conference Report taking place on December 15, 2000, from pages S11855-S11878 with no vote taking place. When the Senate adopts a rule permitting adoption of legislation by "unanimous consent" the bill or other matter before the Senate is adopted "unless an objection is stated." At S11876, both Senators James Inhofe (R-OK) and Paul Wellstone (D-MN) derided the procedure. Under the "consent agreement" described by Sen. Wellstone this did not constitute an "objection" that defeated the unanimous consent. Sandy Streeter, "Continuing Appropriations Acts: Brief Overview of Recent Practices", CRS Report for Congress RL30343, Updated December 22, 2000 ( explaining, in footnote b to Table 1, that "a unanimous consent request is proposed to adopt the measure and if no Member objects, the resolution is adopted."). Paul M. Irvin, "Appropriations for FY2001: Labor, Health and Human Services, and Education, CRS Report for Congress, RL30503 Updated January 18, 2001, at CRS-2 (explaining the text of the Conference Report for H.R. 4577 is at H12100-H12439 and H12531, that the House debated the Conference Report at H12442-12501, with a roll call vote at H12502, and that the Senate passed the Report by unanimous consent at S11855-11885). Page H12531 is the printing order for the Conference Report that appears at pages H12100-12439.
In the House, Representative John LaFalce (D-NY), Ranking Member of the House Banking Committee, was a co-sponsor of H.R. 5660Archived 2016-07-05 at the Wayback Machine. The House proposed the order to consider the H.R. 4577 Conference Report at Congressional Record, H12441, December 15, 2000, and proceeded to debate it at H12442-12501 (as cited and linked at the end of note 66 above). Representative Charles Stenholm (D-TX), Ranking Member of the House Agriculture Committee, spoke in favor of H.R. 5660 at H12491. Representative John Dingell (D-MI), Ranking Member of the House Commerce Committee, spoke at length in support of H.R. 5660 at H12497-8 . Representative Sheila Jackson-Lee (D-TX) spoke at H12495. Among Republicans, Rep. Ewing, the bill's sponsor, had introduced H.R. 5660 (as described in note 64 above) and spoke in support at H12485 and H12488-9. Rep. Leach spoke in support at H12498-9. Representative Thomas Bliley (R-VA), Chair of the House Commerce Committee, (at H12501) and Representative Larry Combest (R-TX), Chair of the full Agriculture Committee (at H12497) exchanged "statutory interpretation" remarks agreeing that nothing in Title II of the CFMA would give banks increased powers to own securities.
In the Senate the two Ranking Members of the Agriculture and Banking Committees introduced letters from the PWG confirming its unanimous "strong support" for H.R. 5660. Senator Thomas Harkin (D-IA), Ranking Member of the Senate Agriculture Committee and a co-sponsor of the equivalent S.3283Archived 2016-07-05 at the Wayback Machine, was the only Democrat who entered a statement about the bill on December 15, which appears at Congressional Record, S11896-7. Sen. Harkin noted (at S11896) he had worked to eliminate "an outright exclusion" for energy, preferring to continue "the substantial exemption" already provided by the CFTC, but that "further negotiations" brought "the provisions on this subject that are in this bill." He recognized "the need for compromise" given "the overall importance and positive features of this legislation." He also noted (at S11896) he had worked with Senator Lugar on the legislation and that Senators Gramm and Sarbanes had cooperated "in completing this bill." At S11897 he concluded by complementing Sen. Lugar, Rep. Ewing and "all staff involved for their outstanding work in making this important legislation a reality." Senator Paul Sarbanes (D-MD) did not speak on December 15, but when Congress returned on January 2, he noted the PWG's strong support for H.R. 5660 and introduced the version of the PWG letter addressed to him. Congressional Record, S11946, January 2, 2001. During the actual Senate "consideration" of H.R. 4577 (at Congressional Record, S11855-11878, December 15, 2000), Republican Senator Gramm (at S11926) was the only Senator to speak in support of H.R. 5660. In added remarks at Congressional Record, S11878-11885, December 15, 2000 Senator Peter Fitzgerald (R-IL) spoke (at S11878-9) in support of the CFMA. In the December 15, 2000 statements on introduced bills at S11918-11930 Sen. Lugar (at S11924-6) in introducing S. 3283 as the equivalent of H.R. 5660 spoke in support of H.R. 5660. The only change to H.R. 4577 made during the House and Senate consideration of the H.R. 4577 conference report was an amendment to H.R. 5666 made by joint resolution of the two Houses. See amendment as introducedas enacted, and as enrolled. This shows in section 1(a)(4) of H.R. 4577 as enacted into law as Public Law 106-554.
For the removal of the exempt commercial market language from the Senate bill, see the Senate Agriculture S. 2697 Report at 9 ("although this exemption is limited to transactions between eligible contract participants that occur off a trading facility, the CFTC is encouraged to use its current exemptive authority, as appropriate and consistent with the public interest, under Section 4(c) of the CEA to exempt transactions between eligible contract participants that occur on an electronic trading facility.") The revised Senate Agriculture Committee Section 2(h)(1) language, which provided a broader exemption than the CFMA in not requiring that eligible contract participants ("ECPs") act as "principals", is at page 42 of the Senate Agriculture S. 2697 Report and at pages 159 to 161 of the reported version of S. 2697, as Section 9. Section 5 of S. 2697 as introduced in the Senate would have excluded from most CEA provisions electronic trading of all energy commodities (which, along with financial commodities, were defined as "Exclusion Eligible Commodities") by ECPs acting as principals . See pages 23 to 25 of the Senate Agriculture S. 2697 Report or pages 23 to 25 of S. 2697 as introduced in the Senate. For the later Senate Agriculture Committee recriminations concerning the "source" for Section 2(h)(3), see Hearing before the Senate Committee on Agriculture, Nutrition, and Forestry, "CFTC Regulation and Oversight of Derivatives", July 10, 2002Archived May 4, 2009, at the Wayback Machine ("July 10, 2002, Senate Agriculture Hearing") at 2 (Senator Tom Harkin: "The final version of the legislation included in the omnibus appropriations bill differed from our committee bill regarding energy and metals derivatives markets. I supported the CFMA, although I had some concerns about its treatment of energy and metals. There is a statement I gave on the floor to which I would refer you that is in the Congressional Record regarding that, because I thought at the time it had a number of very positive features. On the whole, I thought it was a good bill, and I still think it is." As described in note 69 above, Sen. Harkin had entered a statement in the December 15, 2000, Congressional Record in support of H.R. 5660. He had noted his misgivings about its treatment of energy derivatives, but had recognized "the need to compromise." Although, as described in note 69 above, they had entered in the Congressional Record statements in support of H.R. 5660, Senators Fitzgerald and Lugar had not stated any misgivings about the bill's treatment of energy derivatives. At the July 10, 2002, hearing they joined Sen. Harkin in expressing dismay over the energy provisions of the CFMA (Sen. Fitzgerald at 9: "somehow, somewhere in the process, somebody slipped in this mysterious exemption for energy and metals trading" and at 58: "As we had it in Committee, it did not have that special carve-out and somehow... special carve-out came and it does not seem to have a father. No one can figure out who did it." Sen. Lugar at 11: "Somebody in the process of that conference talked about exemption of bilateral trade on electronic platforms, precisely the sort of thing that Enron was to be involved in...We all should have been brighter, perhaps, in reading the type, but nevertheless, that is the one that already occurred and that is why it is here.") None of Senators Harkin, Fitzgerald, or Lugar discussed at the hearing whether they thought S. 2697, which had never been voted on in the Senate and which was organized differently from H.R. 4541 and H.R. 5660, was the source for H.R. 5660, rather than H.R. 4541, which had passed the House and contained the same Section 2(h)(3) trading facility exemption as the CFMA. As described in note 78 below, CFTC Commissioner Thomas Erickson, who had been a critic of the CFMA back in 2000, explained Section 2(h) was not the "Enron Loophole" used by EnronOnline. At the January 29, 2002, Hearing before the Senate Committee on Energy and Natural Resources to Receive Testimony Concerning the Impact of the Enron Collapse on Energy Markets("January 29, 2002, Senate Energy Hearing") the prepared testimony of Vincent Viola, Chairman of NYMEX, which had "lobbied" against Section 2(h)(3) for exempting from the CEA energy and metals "futures contracts traded on electronic trading platforms from nearly all federal regulatory oversight", recounted (at 37) that lobbying effort and explained "Thankfully, Mr. Chairman [i.e. Senator Jeff Bingaman (D-NM)], you, Senator Charles Schumer, and Senators Richard Lugar and Tom Harkin (Attachment 3) with the Senate Agriculture Committee, as well as number of members of congress including Congresswoman Carolyn Maloney, Congressmen Peter King, John Dingell, and others recognized the serious policy flaws with this extreme deregulatory measure, and quite courageously challenged Enron and others, preventing it from becoming law in its most draconian form." In his prepared testimony for the same hearing (at 63), Senator Charles Schumer (D-NY) recalled that effort and stated "During the debate regarding the CFMA, I was greatly concerned about the similar effects that granting electronic trading facilities an exclusion from CFTC oversight would have had on the market, and fought hard against such an exclusion...There would have been no anti-market manipulation rules, among others, to protect the markets. Those of us who were concerned about the ramifications of an ETF exemption fought that provision and won." In Sen. Schumer's questioning (at 63-4) he elicited from NYMEX Chairman Viola (at 64) the statement "I think clearly the last minute efforts at sort of not having complete deregulation and exemption occur in the CFMA helped greatly in keeping markets stable..." As described above, at the July 10, 2002 Senate Agriculture Hearing, this Congressional involvement with Section 2(h)(3) was forgotten. Instead, in Sen. Fitzgerald's words, the "loophole' had "no father." In the House considerations of H.R. 4541, the Section 2(h) exemptions for "exempt commodities" was criticized by the CFTC at all three hearings on the bill and by House Floor statements of Representative Carolyn Maloney (D-NY) and, at E1879 of his "extended remarks" cited and linked in note 41 above, by Rep. Markey ("I also have some concerns with the breadth of the exemption in section 106 of this bill, and its potential anticompetitive and anticonsumer effects. There may be less anticompetitive ways to address an energy swaps exemption in a way that provides for fair competition and adequate consumer protections in this market. Such a result would be in the public interest. What is currently in the bill is not, and I would hope that it could be fixed as this bill moves forward.") On September 28, 2000, at H8436, Congressional Record, September 28, 2000, Rep. Maloney called upon the House to block consideration of H.R. 4541 by refusing the necessary 2/3 vote for a rule "suspension" if the "energy provisions" were not given a "full hearing." She entered into the record on the same page a letter she had received from CFTC Chair William Rainer describing CFTC opposition to the provision expressed at all four Congressional hearings on H.R. 4541 and S. 2697. On October 19, 2000, in supporting the required "rule suspension", Rep. Maloney stated (at Congressional Record, H10412, October 19, 2000) that her concerns "had been addressed at least in part" but that "the provision could be further improved by deleting language that favors electronic trading facilities over traditional exchanges." Rep. Maloney's statements came after Rep. Leach entered (at Congressional Record, H10365, October 19, 2000) a "Supplemental Report" from the House Banking Committee that showed as an "errata" to the Committee's earlier report a Committee vote of 20-12 defeating an amendment proposed by Rep. Maloney "to delete the provision providing a partial exclusion from the CEA for exempt commodities entered into solely between eligible contract participants and executed on an electronic trading facility." For the supplemental report see House of Representative Report 106-711, Part 4.
Greenberger June 3, 2008, Senate Testimony at 7, fn. 28. "The Enron Loophole has Closed and Goes Into Effect on September 30, 2009", citing the Wikipedia article Enron Loophole. Ervin CFTC Energy Regulation at 11 (describing the 2002 "Feinstein Bill" that would repeal the Section 2(g) swaps exclusion, along with making other CFMA amendments.) The language of Section 2(g) was contained in Section 107 of H.R. 4541, as passed by the House, at page 47, as creating a new Section 2(h) of the CEA. In the CFMA it was Section 105(b) of H.R. 5660 at page 40, as described in note 57 above. During House consideration of H.R. 4541 (as cited and linked in note 54 above), Rep. Dingell (at H10446) objected to this "redundant exclusion" but accepted its "strict' requirements, including the requirement that "each of the material economic terms of the swap must be individually negotiated." Although this was changed in Section 105(b) of H.R. 5660 to require only that the swap be "subject to individual negotiation by the parties", Rep. Dingell did not criticize this provision in his Floor statements on H.R. 5660 (as cited and linked in note 69 above). For the significance of Section 2(g) for energy contracts, see also ISDA CFMA Memo at 27-28.
See House Banking Committee Report at 13 for Section 110, which would have added a new Section 2(i) to the CEA as the exclusion for "Swap Transactions" (defined to require that "the material economic terms" be "subject to individual negotiation.") See H.R. 4541 as passed by the House at 47 for Section 107, which would have added a new Section 2(h) to the CEA as the exclusion for "Swap Transactions." See the CFMAArchived 2009-03-20 at the Wayback Machine at 40 for Section 105(b), which created Section 2(g) of the CEA. See the Gramm-Leach-Bliley Act at 58 for Section 206(b), which defines "swap agreement" to be "individually negotiated." For CEA Section 2(g)'s use of the Gramm-Leach-Bliley definition, see ISDA CFMA Memo at 27 to 28 and 39. Kloner CFMA at 292.
Alison Veshkin, "House Passes Rules for Wall Street Over Objections", Bloomberg, December 11, 2009. Roll Call 968 on House enactment of H.R. 4173. The OTC derivatives legislation is in various amendments to H.R. 4173 contained in House Report 111-370. The largest portion of OTC derivatives legislation, including the repeals of CFMA provisions noted above, is in Amendment 3 offered by Representative Colin Peterson (D-MN) as the Derivative Markets Transparency and Accountability Act, Title III to H.R. 4173, which begins at page 103 of House Report 111-370. This amendment was adopted by voice vote on December 10, 2009, as noted on pages H14708-14709 of the House consideration of H.R. 4173 contained in Congressional Record, H14496-H14728, December 10, 2009. Pages H14682-H14705 repeat the text of Amendment 3 and pages H14705-14709 contain the House discussion of Amendment 3. House Agriculture News Release "House Passes Peterson-Frank Amendment to Strengthen Regulation of Over-the-Counter Derivatives"Archived 2010-01-06 at the Wayback Machine, December 10, 2009. For a description of pending Senate legislation to regulate over-the-counter derivatives, as part of broader financial regulation reform, see page 6 of "Summary: Restoring American Financial Stability: Committee Print"Archived 2009-12-02 at the Wayback Machine, issued by Senator Christopher Dodd (D-CT), as Chairman of the Senate Banking Committee.
The October 19, 2000, House consideration of H.R. 4541 is found at Congressional Record, H10416-10449, December 19, 2000. The preceding House discussion of the necessary "rule suspension" is at Congressional Record, H10411-H10415, October 19, 2000. Representative Charles Stenholm (D-TX) complained (at H10440) about the "bizarre twist" in which after the "bipartisan" development of draft bills in Committees, "the leadership intervened and decided to substitute partisan negotiations in place of the bipartisan discussions that were already under way and that were under way and that were yielding productive results." He went on to complement the leaders of the House Committees involved, particularly citing Rep. Ewing as "a true consensus builder." Rep. Edward Markey (D-MA) complained (at H10445) about "the process that has brought this bill to the floor and some of its provisions." Rep. John Dingell (D-MI) elaborated (at H10445-6) that following "one bipartisan meeting, which from all counts was constructive, Democratic staff were booted out of the negotiations on this bill, at the direction of the Republican leadership." Only when "2 weeks ago, the Committee on Agriculture majority staff started circulating drafts of legislation for Democratic review and comment" did a bill develop "which is worth moving to the next stage", although he concluded it would "not be possible to support this bill if it is not significantly improved at the next stage of the process." In "Extended Remarks" at Congressional Record, E1878-80, Rep. Markey expanded on his Floor statements and noted the presence of Sen. Gramm in the House negotiations as inappropriate (see E1878, noting Democrats were barred from negotiations "after just a few bipartisan staff meeting" and that "the chairman of the Senate Banking Committee was invited into those negotiations—despite the fact that this bill comes within the Agriculture Committee's jurisdiction over in the Senate and the Senate has not even passed a CEA bill"). For contemporary accounts of the "negotiations" see Rob Garver, "Armey Pushes for Compromise on Swaps"[permanent dead link], American Banker, September 27, 2000 ("In a sign that Republicans are serious about passing a bill to revise the laws governing derivatives transactions, Majority Leader Richard K. Armey met Tuesday with representatives of the three House committees-each pushing different versions of the same bill-and urged them to hammer out a deal...Of the three, the Banking Committee version, sponsored by Chairman Jim Leach is most popular with the financial services industry...Rep. Leach's bill is also the most likely to satisfy several requirements laid out by Senate Banking Committee Chairman Phil Gramm...He wants the Securities and Exchange Commission to explicitly be barred from regulating swaps as well."); Rob Garver, "In Brief: Armey Says Swaps Talks Making Progress"[permanent dead link], American Banker, September 29, 2000 ("Lawmakers and administration officials remained locked in complex negotiations Thursday over a bill that would assure the legal enforceability of swaps contracts...One of the three versions of the bill that cleared House committees protected swaps from CFTC regulations, but Senate Banking Committee Chairman Phil Gramm has said that, in order to pass the Senate, SEC regulation of swaps will have to be explicitly banned as well."); Michele Heller, "Bank Bills May Ride Piggyback"[permanent dead link], American Banker, October 11, 2000 ("lobbyists representing financial services firms that offer swap contracts are not happy with a Republican compromise proposal on legislation that would revise the laws governing derivatives transactions. Staff members of the House and Senate Banking and Agriculture committees and the House Commerce Committee sent the Treasury Department and congressional Democrats a 247-page draft written over the weekend.") In this context Enron emails indicate they it was seeking to influence Sen. Gramm to stop blocking the legislation. Lipton Enron Article (citing an October 13, 2000, email from Chris Long to Tori Wells of Enron and others: "Senator Gramm continues to raise objections unrelated to legal certainty for our business. There are two issues (which we understand have primarily been advanced by Senator Gramm, one on bank products and one on SEC jurisdiction)."
Even before House passage of H.R. 4541, press reports and statements by Republicans in the Congressional Record indicated Republican unhappiness with the "compromise" reached on H.R. 4541. Dean Anason, "In Brief: Swaps Bill Getting Slim Odds in Senate"[permanent dead link], American Banker, October 19, 2000; "In Brief: House Backs Swaps Bill; Senate in Doubt", American Banker, October 23, 2000; Michelle Heller, "In Brief: Bank Legislation Faces Election Deadline"[permanent dead link], American Banker, November 1, 2000; William Roberts (Bloomberg News) and Michele Heller, "Congress Likely to Get Election Timeout", American Banker, November 2, 2000; "Legislative Update"[permanent dead link], American Banker, November 9, 2000. While the October 2000 Congressional Record statements of Democrats referenced in note 54 above showed unhappiness with the "process" by which they were excluded from negotiations, with late input leading to an acceptable bill, October 19, 2000, Congressional Record statements by Republican Representatives (in the discussion at H10416-10449 cited and linked in note 54 above) expressed unhappiness the bill did not contain broader "protections." Rep. Jim Leach (at H10444 and again in "extended remarks" at Congressional Record E1877-8, October 23, 2000 expressed the wish "more could have been done" but said "progressive strides had been made." Representative Richard A. Baker (R-LA) (at H10448) bemoaned the "compromise" that had stripped the bill of "protections for swaps" He went on to announce he expected to work with Sen. Gramm "because it is evident these problems will not be solved on the House side." Although Representative Patrick J. Toomey (R-PA) stated that it was "a good bill" he said it was not a "perfect bill" and that he hoped "the other body will eliminate the remaining legal uncertainty that will still shadow the use of these transactions by retail customers. I hope that they will allow greater flexibility in the electronic trading of the over-the-counter derivatives." In the "rule suspension" discussion at H10411-15 (cited and linked in note 54 above) a "bipartisan" discontent was expressed by Representatives Sue Wilkins Myrick (R-NC) (at H10411) and Melvin Watt (D-NC) (at H10414-15) who criticized the removal of provisions in the House Banking Committee version of the bill that they thought better "protected" electronic trading platforms. This had special significance for the North Carolina based D&I Holdings (as explained by Rep. Watt at H10414). At this time, Enron emails continued to report Sen. Gramm was the obstacle to H.R. 4541 being enacted into law. Lipton Enron Article (quoting an October 25, 2000, email from Kenneth M. Raisler to Tom Briggs of Enron, "explaining how Senator Gramm is holding up the legislation" and an October 27, 2000, email also from Mr. Raisler to Enron executives describing how "Senator Gramm is activiely engaged and his issues are being aggressively negotiated" after Gramm had "been contacted by a number of people including members of our Energy Group and Alan Greenspan urging passage of the bill.") See also the October 20, 2000, email from Cynthia Sandherr of Enron to Mark Palmer of EnronArchived February 7, 2009, at the Wayback Machine ("The last deal which needs to be cut is with Senator Gramm (he is the only obstacle to enactment in the Senate.)...it is other issues which do not directly affect Enron which are being negotiated.")
Thomas LOC All Congressional Actions Page for H.R. 5660Archived 2016-07-05 at the Wayback Machine ("H.R. 5660 All Actions Page"). Rep. Ewing's remarks introducing the bill (at E2181-2 of the December 14, 2000 Congressional Record) were inserted into the Congressional Record as "extensions of remarks", not actual statements made on the House Floor. They demonstrate this "latest version of the legislation", although formally assigned to four committees as shown on the H.R. 5660 All Actions Page, was "the final package" reflecting the "many hours working through this language to reach agreement" among the Administration, Treasury, the CFTC, the SEC and the Senate. Charles W. Edwards, J.D., James Hamilton, J.D., L.L.M., Heather Montgomery, J.D., Commodity Futures Modernization Act of 2000: Law and Explanation (CCH Incorporated 2000) (ISBN0-8080-0600-2) ("CCH CFMA Guide") at 15 ("After an arduous effort, the 106th Congress passed the Commodity Futures Modernization Act of 2000, H.R. 5660, Public Law 106-554, as Section 1(a)(5) of H.R. 4577, the Consolidated Appropriations Act of 2001. It was signed by President Clinton on December 21, 2000, without change, as introduced on December 14, 2000 in the House of Representatives.")
CRS 2003 CFMA Report at 6 ("identical bills H.R. 5660 and S. 3282 [sic] were introduced"). Thomas LOC All Congressional Actions Page for S. 3283Archived 2016-07-05 at the Wayback Machine Sen. Lugar's introduction of the bill at S11924-6 of the December 15, 2000, Senate bill introductions in Congressional Record, S11918-11930, December 15, 2000 states (at S11924) H.R. 5660 would be the legislation "which will be enacted as part of the final appropriations package today." Sen. Gramm states (at S11926) "We are introducing the bill today as the finished product of years of work involving half a dozen committees in both Houses of Congress, and as many agencies of the Federal government. This bill is identical to, and is the Senate companion to, H.R. 5660, introduced yesterday in the House and which will be approved by the House and the Senate today. We introduce this bill in the Senate to demonstrate the bicameral authorship and support for this important legislation.")
CRS 2003 CFMA Report at 6 ("H.R. 5660 was incorporated by reference into H.R. 4577"). CCH CFMA Guide at 15. Paul M. Irvin, "Appropriations for FY2001: Labor, Health and Human Services, and Education, CRS Report for Congress, RL30503 Updated January 18, 2001 ("CRS 2001 Appropriations Report"), at CRS-2 (explaining the text of the Conference Report for H.R. 4577 is at H12100-H12439 and H12531). The text of the CFMA (then as H.R. 5660) is in H12320 to H12345 of the full Conference Report contained in Congressional Record, H12100-12439, December 15, 2000. H12100 lists H.R. 5660 as (5) of (9) House bills incorporated into the spending bill. H12439 shows the names of the 15 House Managers and 15 Senate Managers for the Conference, who unanimously approved the Conference Report subject to Rep. Jesse L. Jackson, Jr.'s objections to the four items listed after his name, not including any objection concerning H.R 5660. Sen. Gramm is not listed as a Senate Manager. His ability to keep legislation out of the Conference Report, however, was noted by Representative Barney Frank (D-MA) in the House debate of the Conference Report at Congressional Record, H12442-12502, December 15, 2000, during which (at H12483) Rep. Frank noted a measure with bipartisan support had not been included in the Conference Report because it "was killed by the objection of the senior Senator from Texas."
H.R. 4577 All Actions Page, which shows December 15, 2000, Senate "consideration" and action. It is noted at Congressional Record page S11855 that the Conference Report was published in full in the House proceedings for December 15, 2000, as described in note 66 above. The Conference Report passed the Senate by "unanimous consent." The H.R. 4577 All Actions Page shows the Senate "discussion" of the Conference Report taking place on December 15, 2000, from pages S11855-S11878 with no vote taking place. When the Senate adopts a rule permitting adoption of legislation by "unanimous consent" the bill or other matter before the Senate is adopted "unless an objection is stated." At S11876, both Senators James Inhofe (R-OK) and Paul Wellstone (D-MN) derided the procedure. Under the "consent agreement" described by Sen. Wellstone this did not constitute an "objection" that defeated the unanimous consent. Sandy Streeter, "Continuing Appropriations Acts: Brief Overview of Recent Practices", CRS Report for Congress RL30343, Updated December 22, 2000 ( explaining, in footnote b to Table 1, that "a unanimous consent request is proposed to adopt the measure and if no Member objects, the resolution is adopted."). Paul M. Irvin, "Appropriations for FY2001: Labor, Health and Human Services, and Education, CRS Report for Congress, RL30503 Updated January 18, 2001, at CRS-2 (explaining the text of the Conference Report for H.R. 4577 is at H12100-H12439 and H12531, that the House debated the Conference Report at H12442-12501, with a roll call vote at H12502, and that the Senate passed the Report by unanimous consent at S11855-11885). Page H12531 is the printing order for the Conference Report that appears at pages H12100-12439.
In the House, Representative John LaFalce (D-NY), Ranking Member of the House Banking Committee, was a co-sponsor of H.R. 5660Archived 2016-07-05 at the Wayback Machine. The House proposed the order to consider the H.R. 4577 Conference Report at Congressional Record, H12441, December 15, 2000, and proceeded to debate it at H12442-12501 (as cited and linked at the end of note 66 above). Representative Charles Stenholm (D-TX), Ranking Member of the House Agriculture Committee, spoke in favor of H.R. 5660 at H12491. Representative John Dingell (D-MI), Ranking Member of the House Commerce Committee, spoke at length in support of H.R. 5660 at H12497-8 . Representative Sheila Jackson-Lee (D-TX) spoke at H12495. Among Republicans, Rep. Ewing, the bill's sponsor, had introduced H.R. 5660 (as described in note 64 above) and spoke in support at H12485 and H12488-9. Rep. Leach spoke in support at H12498-9. Representative Thomas Bliley (R-VA), Chair of the House Commerce Committee, (at H12501) and Representative Larry Combest (R-TX), Chair of the full Agriculture Committee (at H12497) exchanged "statutory interpretation" remarks agreeing that nothing in Title II of the CFMA would give banks increased powers to own securities.
In the Senate the two Ranking Members of the Agriculture and Banking Committees introduced letters from the PWG confirming its unanimous "strong support" for H.R. 5660. Senator Thomas Harkin (D-IA), Ranking Member of the Senate Agriculture Committee and a co-sponsor of the equivalent S.3283Archived 2016-07-05 at the Wayback Machine, was the only Democrat who entered a statement about the bill on December 15, which appears at Congressional Record, S11896-7. Sen. Harkin noted (at S11896) he had worked to eliminate "an outright exclusion" for energy, preferring to continue "the substantial exemption" already provided by the CFTC, but that "further negotiations" brought "the provisions on this subject that are in this bill." He recognized "the need for compromise" given "the overall importance and positive features of this legislation." He also noted (at S11896) he had worked with Senator Lugar on the legislation and that Senators Gramm and Sarbanes had cooperated "in completing this bill." At S11897 he concluded by complementing Sen. Lugar, Rep. Ewing and "all staff involved for their outstanding work in making this important legislation a reality." Senator Paul Sarbanes (D-MD) did not speak on December 15, but when Congress returned on January 2, he noted the PWG's strong support for H.R. 5660 and introduced the version of the PWG letter addressed to him. Congressional Record, S11946, January 2, 2001. During the actual Senate "consideration" of H.R. 4577 (at Congressional Record, S11855-11878, December 15, 2000), Republican Senator Gramm (at S11926) was the only Senator to speak in support of H.R. 5660. In added remarks at Congressional Record, S11878-11885, December 15, 2000 Senator Peter Fitzgerald (R-IL) spoke (at S11878-9) in support of the CFMA. In the December 15, 2000 statements on introduced bills at S11918-11930 Sen. Lugar (at S11924-6) in introducing S. 3283 as the equivalent of H.R. 5660 spoke in support of H.R. 5660. The only change to H.R. 4577 made during the House and Senate consideration of the H.R. 4577 conference report was an amendment to H.R. 5666 made by joint resolution of the two Houses. See amendment as introducedas enacted, and as enrolled. This shows in section 1(a)(4) of H.R. 4577 as enacted into law as Public Law 106-554.
For the removal of the exempt commercial market language from the Senate bill, see the Senate Agriculture S. 2697 Report at 9 ("although this exemption is limited to transactions between eligible contract participants that occur off a trading facility, the CFTC is encouraged to use its current exemptive authority, as appropriate and consistent with the public interest, under Section 4(c) of the CEA to exempt transactions between eligible contract participants that occur on an electronic trading facility.") The revised Senate Agriculture Committee Section 2(h)(1) language, which provided a broader exemption than the CFMA in not requiring that eligible contract participants ("ECPs") act as "principals", is at page 42 of the Senate Agriculture S. 2697 Report and at pages 159 to 161 of the reported version of S. 2697, as Section 9. Section 5 of S. 2697 as introduced in the Senate would have excluded from most CEA provisions electronic trading of all energy commodities (which, along with financial commodities, were defined as "Exclusion Eligible Commodities") by ECPs acting as principals . See pages 23 to 25 of the Senate Agriculture S. 2697 Report or pages 23 to 25 of S. 2697 as introduced in the Senate. For the later Senate Agriculture Committee recriminations concerning the "source" for Section 2(h)(3), see Hearing before the Senate Committee on Agriculture, Nutrition, and Forestry, "CFTC Regulation and Oversight of Derivatives", July 10, 2002Archived May 4, 2009, at the Wayback Machine ("July 10, 2002, Senate Agriculture Hearing") at 2 (Senator Tom Harkin: "The final version of the legislation included in the omnibus appropriations bill differed from our committee bill regarding energy and metals derivatives markets. I supported the CFMA, although I had some concerns about its treatment of energy and metals. There is a statement I gave on the floor to which I would refer you that is in the Congressional Record regarding that, because I thought at the time it had a number of very positive features. On the whole, I thought it was a good bill, and I still think it is." As described in note 69 above, Sen. Harkin had entered a statement in the December 15, 2000, Congressional Record in support of H.R. 5660. He had noted his misgivings about its treatment of energy derivatives, but had recognized "the need to compromise." Although, as described in note 69 above, they had entered in the Congressional Record statements in support of H.R. 5660, Senators Fitzgerald and Lugar had not stated any misgivings about the bill's treatment of energy derivatives. At the July 10, 2002, hearing they joined Sen. Harkin in expressing dismay over the energy provisions of the CFMA (Sen. Fitzgerald at 9: "somehow, somewhere in the process, somebody slipped in this mysterious exemption for energy and metals trading" and at 58: "As we had it in Committee, it did not have that special carve-out and somehow... special carve-out came and it does not seem to have a father. No one can figure out who did it." Sen. Lugar at 11: "Somebody in the process of that conference talked about exemption of bilateral trade on electronic platforms, precisely the sort of thing that Enron was to be involved in...We all should have been brighter, perhaps, in reading the type, but nevertheless, that is the one that already occurred and that is why it is here.") None of Senators Harkin, Fitzgerald, or Lugar discussed at the hearing whether they thought S. 2697, which had never been voted on in the Senate and which was organized differently from H.R. 4541 and H.R. 5660, was the source for H.R. 5660, rather than H.R. 4541, which had passed the House and contained the same Section 2(h)(3) trading facility exemption as the CFMA. As described in note 78 below, CFTC Commissioner Thomas Erickson, who had been a critic of the CFMA back in 2000, explained Section 2(h) was not the "Enron Loophole" used by EnronOnline. At the January 29, 2002, Hearing before the Senate Committee on Energy and Natural Resources to Receive Testimony Concerning the Impact of the Enron Collapse on Energy Markets("January 29, 2002, Senate Energy Hearing") the prepared testimony of Vincent Viola, Chairman of NYMEX, which had "lobbied" against Section 2(h)(3) for exempting from the CEA energy and metals "futures contracts traded on electronic trading platforms from nearly all federal regulatory oversight", recounted (at 37) that lobbying effort and explained "Thankfully, Mr. Chairman [i.e. Senator Jeff Bingaman (D-NM)], you, Senator Charles Schumer, and Senators Richard Lugar and Tom Harkin (Attachment 3) with the Senate Agriculture Committee, as well as number of members of congress including Congresswoman Carolyn Maloney, Congressmen Peter King, John Dingell, and others recognized the serious policy flaws with this extreme deregulatory measure, and quite courageously challenged Enron and others, preventing it from becoming law in its most draconian form." In his prepared testimony for the same hearing (at 63), Senator Charles Schumer (D-NY) recalled that effort and stated "During the debate regarding the CFMA, I was greatly concerned about the similar effects that granting electronic trading facilities an exclusion from CFTC oversight would have had on the market, and fought hard against such an exclusion...There would have been no anti-market manipulation rules, among others, to protect the markets. Those of us who were concerned about the ramifications of an ETF exemption fought that provision and won." In Sen. Schumer's questioning (at 63-4) he elicited from NYMEX Chairman Viola (at 64) the statement "I think clearly the last minute efforts at sort of not having complete deregulation and exemption occur in the CFMA helped greatly in keeping markets stable..." As described above, at the July 10, 2002 Senate Agriculture Hearing, this Congressional involvement with Section 2(h)(3) was forgotten. Instead, in Sen. Fitzgerald's words, the "loophole' had "no father." In the House considerations of H.R. 4541, the Section 2(h) exemptions for "exempt commodities" was criticized by the CFTC at all three hearings on the bill and by House Floor statements of Representative Carolyn Maloney (D-NY) and, at E1879 of his "extended remarks" cited and linked in note 41 above, by Rep. Markey ("I also have some concerns with the breadth of the exemption in section 106 of this bill, and its potential anticompetitive and anticonsumer effects. There may be less anticompetitive ways to address an energy swaps exemption in a way that provides for fair competition and adequate consumer protections in this market. Such a result would be in the public interest. What is currently in the bill is not, and I would hope that it could be fixed as this bill moves forward.") On September 28, 2000, at H8436, Congressional Record, September 28, 2000, Rep. Maloney called upon the House to block consideration of H.R. 4541 by refusing the necessary 2/3 vote for a rule "suspension" if the "energy provisions" were not given a "full hearing." She entered into the record on the same page a letter she had received from CFTC Chair William Rainer describing CFTC opposition to the provision expressed at all four Congressional hearings on H.R. 4541 and S. 2697. On October 19, 2000, in supporting the required "rule suspension", Rep. Maloney stated (at Congressional Record, H10412, October 19, 2000) that her concerns "had been addressed at least in part" but that "the provision could be further improved by deleting language that favors electronic trading facilities over traditional exchanges." Rep. Maloney's statements came after Rep. Leach entered (at Congressional Record, H10365, October 19, 2000) a "Supplemental Report" from the House Banking Committee that showed as an "errata" to the Committee's earlier report a Committee vote of 20-12 defeating an amendment proposed by Rep. Maloney "to delete the provision providing a partial exclusion from the CEA for exempt commodities entered into solely between eligible contract participants and executed on an electronic trading facility." For the supplemental report see House of Representative Report 106-711, Part 4.
Alison Veshkin, "House Passes Rules for Wall Street Over Objections", Bloomberg, December 11, 2009. Roll Call 968 on House enactment of H.R. 4173. The OTC derivatives legislation is in various amendments to H.R. 4173 contained in House Report 111-370. The largest portion of OTC derivatives legislation, including the repeals of CFMA provisions noted above, is in Amendment 3 offered by Representative Colin Peterson (D-MN) as the Derivative Markets Transparency and Accountability Act, Title III to H.R. 4173, which begins at page 103 of House Report 111-370. This amendment was adopted by voice vote on December 10, 2009, as noted on pages H14708-14709 of the House consideration of H.R. 4173 contained in Congressional Record, H14496-H14728, December 10, 2009. Pages H14682-H14705 repeat the text of Amendment 3 and pages H14705-14709 contain the House discussion of Amendment 3. House Agriculture News Release "House Passes Peterson-Frank Amendment to Strengthen Regulation of Over-the-Counter Derivatives"Archived 2010-01-06 at the Wayback Machine, December 10, 2009. For a description of pending Senate legislation to regulate over-the-counter derivatives, as part of broader financial regulation reform, see page 6 of "Summary: Restoring American Financial Stability: Committee Print"Archived 2009-12-02 at the Wayback Machine, issued by Senator Christopher Dodd (D-CT), as Chairman of the Senate Banking Committee.
access.gpo.gov
Markham CF Law Treatise at pages 27-83 to 84 and page 28-20. (At page 27-83 it states, "The CFTC's action was actually a thinly disguised response to an SEC proposal to pull the derivatives dealers under its regulatory umbrella"). Johnson/Hazen Derivatives Regulation Treatise at 45 to 46. For Professor Coffee's judgment see pages 82 to 83 of the July 17, 1998, House Banking Hearing. ("It may be in part their game plan that enough pressure, enough pain being caused to all, will lead the SEC to back down and withdraw their deregulatory proposals in their Broker Lite rule. If that happens, a tactic that I think is unfair will have worked, and it will probably be used again in what I think are the likelihood of continuing border wars between agencies that have somewhat overlapping jurisdiction.") In 2002, Professor Coffee repeated the narrative that a "turf war" led to the CFMA at the July 10, 2002 Hearing before the Senate Committee on Agriculture, Nutrition, and Forestry, "CFTC Regulation and Oversight of Derivatives"Archived May 4, 2009, at the Wayback Machine at 38 ("let me remind you of something you already know, but I think the record should set this forth clearly, the 2000 Act was precipitated by a turf war between the SEC and CFTC, and as a result of that, there was suddenly a serious question about the legal status of swaps and the possibility that the longstanding 1993 swaps exemption might be repealed suddenly. That sent a friction of fear across Wall Street and the President's Working Group understandably recommended that financial derivatives be deregulated to the extent they traded over-the-counter.") For the CFTC's description of events see Born July 1998 Senate Agriculture Testimony at 5 to 11. The CFTC's dissatisfaction with the Broker-Dealer Lite proposal and the fact it was issued without a PWG meeting is expressed by Chairwoman Born at pages 11–14 of the June 10, 1998, Hearing before House Subcommittee on Risk Management and Specialty Crops.
For the removal of the exempt commercial market language from the Senate bill, see the Senate Agriculture S. 2697 Report at 9 ("although this exemption is limited to transactions between eligible contract participants that occur off a trading facility, the CFTC is encouraged to use its current exemptive authority, as appropriate and consistent with the public interest, under Section 4(c) of the CEA to exempt transactions between eligible contract participants that occur on an electronic trading facility.") The revised Senate Agriculture Committee Section 2(h)(1) language, which provided a broader exemption than the CFMA in not requiring that eligible contract participants ("ECPs") act as "principals", is at page 42 of the Senate Agriculture S. 2697 Report and at pages 159 to 161 of the reported version of S. 2697, as Section 9. Section 5 of S. 2697 as introduced in the Senate would have excluded from most CEA provisions electronic trading of all energy commodities (which, along with financial commodities, were defined as "Exclusion Eligible Commodities") by ECPs acting as principals . See pages 23 to 25 of the Senate Agriculture S. 2697 Report or pages 23 to 25 of S. 2697 as introduced in the Senate. For the later Senate Agriculture Committee recriminations concerning the "source" for Section 2(h)(3), see Hearing before the Senate Committee on Agriculture, Nutrition, and Forestry, "CFTC Regulation and Oversight of Derivatives", July 10, 2002Archived May 4, 2009, at the Wayback Machine ("July 10, 2002, Senate Agriculture Hearing") at 2 (Senator Tom Harkin: "The final version of the legislation included in the omnibus appropriations bill differed from our committee bill regarding energy and metals derivatives markets. I supported the CFMA, although I had some concerns about its treatment of energy and metals. There is a statement I gave on the floor to which I would refer you that is in the Congressional Record regarding that, because I thought at the time it had a number of very positive features. On the whole, I thought it was a good bill, and I still think it is." As described in note 69 above, Sen. Harkin had entered a statement in the December 15, 2000, Congressional Record in support of H.R. 5660. He had noted his misgivings about its treatment of energy derivatives, but had recognized "the need to compromise." Although, as described in note 69 above, they had entered in the Congressional Record statements in support of H.R. 5660, Senators Fitzgerald and Lugar had not stated any misgivings about the bill's treatment of energy derivatives. At the July 10, 2002, hearing they joined Sen. Harkin in expressing dismay over the energy provisions of the CFMA (Sen. Fitzgerald at 9: "somehow, somewhere in the process, somebody slipped in this mysterious exemption for energy and metals trading" and at 58: "As we had it in Committee, it did not have that special carve-out and somehow... special carve-out came and it does not seem to have a father. No one can figure out who did it." Sen. Lugar at 11: "Somebody in the process of that conference talked about exemption of bilateral trade on electronic platforms, precisely the sort of thing that Enron was to be involved in...We all should have been brighter, perhaps, in reading the type, but nevertheless, that is the one that already occurred and that is why it is here.") None of Senators Harkin, Fitzgerald, or Lugar discussed at the hearing whether they thought S. 2697, which had never been voted on in the Senate and which was organized differently from H.R. 4541 and H.R. 5660, was the source for H.R. 5660, rather than H.R. 4541, which had passed the House and contained the same Section 2(h)(3) trading facility exemption as the CFMA. As described in note 78 below, CFTC Commissioner Thomas Erickson, who had been a critic of the CFMA back in 2000, explained Section 2(h) was not the "Enron Loophole" used by EnronOnline. At the January 29, 2002, Hearing before the Senate Committee on Energy and Natural Resources to Receive Testimony Concerning the Impact of the Enron Collapse on Energy Markets("January 29, 2002, Senate Energy Hearing") the prepared testimony of Vincent Viola, Chairman of NYMEX, which had "lobbied" against Section 2(h)(3) for exempting from the CEA energy and metals "futures contracts traded on electronic trading platforms from nearly all federal regulatory oversight", recounted (at 37) that lobbying effort and explained "Thankfully, Mr. Chairman [i.e. Senator Jeff Bingaman (D-NM)], you, Senator Charles Schumer, and Senators Richard Lugar and Tom Harkin (Attachment 3) with the Senate Agriculture Committee, as well as number of members of congress including Congresswoman Carolyn Maloney, Congressmen Peter King, John Dingell, and others recognized the serious policy flaws with this extreme deregulatory measure, and quite courageously challenged Enron and others, preventing it from becoming law in its most draconian form." In his prepared testimony for the same hearing (at 63), Senator Charles Schumer (D-NY) recalled that effort and stated "During the debate regarding the CFMA, I was greatly concerned about the similar effects that granting electronic trading facilities an exclusion from CFTC oversight would have had on the market, and fought hard against such an exclusion...There would have been no anti-market manipulation rules, among others, to protect the markets. Those of us who were concerned about the ramifications of an ETF exemption fought that provision and won." In Sen. Schumer's questioning (at 63-4) he elicited from NYMEX Chairman Viola (at 64) the statement "I think clearly the last minute efforts at sort of not having complete deregulation and exemption occur in the CFMA helped greatly in keeping markets stable..." As described above, at the July 10, 2002 Senate Agriculture Hearing, this Congressional involvement with Section 2(h)(3) was forgotten. Instead, in Sen. Fitzgerald's words, the "loophole' had "no father." In the House considerations of H.R. 4541, the Section 2(h) exemptions for "exempt commodities" was criticized by the CFTC at all three hearings on the bill and by House Floor statements of Representative Carolyn Maloney (D-NY) and, at E1879 of his "extended remarks" cited and linked in note 41 above, by Rep. Markey ("I also have some concerns with the breadth of the exemption in section 106 of this bill, and its potential anticompetitive and anticonsumer effects. There may be less anticompetitive ways to address an energy swaps exemption in a way that provides for fair competition and adequate consumer protections in this market. Such a result would be in the public interest. What is currently in the bill is not, and I would hope that it could be fixed as this bill moves forward.") On September 28, 2000, at H8436, Congressional Record, September 28, 2000, Rep. Maloney called upon the House to block consideration of H.R. 4541 by refusing the necessary 2/3 vote for a rule "suspension" if the "energy provisions" were not given a "full hearing." She entered into the record on the same page a letter she had received from CFTC Chair William Rainer describing CFTC opposition to the provision expressed at all four Congressional hearings on H.R. 4541 and S. 2697. On October 19, 2000, in supporting the required "rule suspension", Rep. Maloney stated (at Congressional Record, H10412, October 19, 2000) that her concerns "had been addressed at least in part" but that "the provision could be further improved by deleting language that favors electronic trading facilities over traditional exchanges." Rep. Maloney's statements came after Rep. Leach entered (at Congressional Record, H10365, October 19, 2000) a "Supplemental Report" from the House Banking Committee that showed as an "errata" to the Committee's earlier report a Committee vote of 20-12 defeating an amendment proposed by Rep. Maloney "to delete the provision providing a partial exclusion from the CEA for exempt commodities entered into solely between eligible contract participants and executed on an electronic trading facility." For the supplemental report see House of Representative Report 106-711, Part 4.
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For the Treasury Amendment, see also Johnson/Hazen Derivatives Regulation Treatise at 9 to 10; CRS Derivatives Regulation Report at CRS-6; and PWG Report at 24 to 27. Before the CFTC, a Commodity Exchange Authority under the control of the Secretary of Agriculture regulated commodity exchanges. Jerry W. Markham,The History of Commodity Futures Trading and its Regulation, (Praeger 1987) ("Markham CF Trading History") at 27 to 60. For background to the reasoning of the PWG Report, see the July 24, 1998 Hearing before the House Committee on Banking and Financial Services ("July 24, 1998, House Banking Hearing") at pages 150-156 for Alan Greenspan's extended critique of the application of the CEA to non-agricultural commodities. The transcript excerpts are in Segment 2 because the July 24, 1998, hearing was the second of two hearings by the Committee concerning H.R. 4062, legislation mentioned in Section 1.2 below that ultimately led to a moratorium on CFTC action to change the regulatory status of OTC derivatives. For how the "board of trade" qualification made it difficult for the CFTC to attack currency trading "bucket shops", see CFTC Chair William Rainer testimony at page 28 of Hearing before the Senate Agriculture Committee on the PWG Report, February 10, 2000, ("Senate Agriculture PWG Report Hearing") and Markham CF Trading History at 238 to 239.
Markham CF Law Treatise at pages 27-38 to 27-49. GAO Report, "Financial Derivatives: Actions Needed to Protect the Financial System", GAO/GGD-94-133, May 1994 ("GAO 1994 Derivatives Report"). GAO Report, "Financial Derivatives: Actions Taken or Proposed Since May 1994", GAO/GGD/AIMD-97-8Archived September 3, 2009, at the Wayback Machine, November 1996 ("GAO 1996 Derivatives Report") at 31 to 32 lists the six 1994 legislative proposals and four derivatives bills pending in 1996, and at 44 to 45 notes the six securities firms in the Derivatives Policy Group accounted for over 90% of the derivatives dealer activities of securities firms. At least in the context of the 1998 Congressional hearings concerning the CFTC "concept release" described in Section 1.2.1 below, Representative James A. Leach (R-IA) stated that by 1998 "the major provisions" of the 900-page 1993 minority staff report mentioned in note 37 below had been "implemented" by "industry and regulators" so that derivatives markets are sturdier and more consistently supervised than they were several years ago. July 17, 1998, Hearing before the House Committee on Banking and Financial Services ("July 17, 1998, House Banking Hearing") at 2.
Markham CF Law Treatise at pages 27-83 to 84 and page 28-20. (At page 27-83 it states, "The CFTC's action was actually a thinly disguised response to an SEC proposal to pull the derivatives dealers under its regulatory umbrella"). Johnson/Hazen Derivatives Regulation Treatise at 45 to 46. For Professor Coffee's judgment see pages 82 to 83 of the July 17, 1998, House Banking Hearing. ("It may be in part their game plan that enough pressure, enough pain being caused to all, will lead the SEC to back down and withdraw their deregulatory proposals in their Broker Lite rule. If that happens, a tactic that I think is unfair will have worked, and it will probably be used again in what I think are the likelihood of continuing border wars between agencies that have somewhat overlapping jurisdiction.") In 2002, Professor Coffee repeated the narrative that a "turf war" led to the CFMA at the July 10, 2002 Hearing before the Senate Committee on Agriculture, Nutrition, and Forestry, "CFTC Regulation and Oversight of Derivatives"Archived May 4, 2009, at the Wayback Machine at 38 ("let me remind you of something you already know, but I think the record should set this forth clearly, the 2000 Act was precipitated by a turf war between the SEC and CFTC, and as a result of that, there was suddenly a serious question about the legal status of swaps and the possibility that the longstanding 1993 swaps exemption might be repealed suddenly. That sent a friction of fear across Wall Street and the President's Working Group understandably recommended that financial derivatives be deregulated to the extent they traded over-the-counter.") For the CFTC's description of events see Born July 1998 Senate Agriculture Testimony at 5 to 11. The CFTC's dissatisfaction with the Broker-Dealer Lite proposal and the fact it was issued without a PWG meeting is expressed by Chairwoman Born at pages 11–14 of the June 10, 1998, Hearing before House Subcommittee on Risk Management and Specialty Crops.
CRS Derivatives Regulation Report at CRS-8. PWG Report at 15 to 21. For Rep. Leach's views see July 17, 1998, Hearing before the House Banking and Financial Services Committee ("July 17, 1998, House Banking Hearing") at 2. Rep. Leach had long been considered an independent student, and critic, of OTC derivatives markets. Frank Partnoy, Infectious greed: how deceit and risk corrupted the financial markets (H. Holt 2003 (First Owl books ed. 2004)) ("Infectious Greed") at 147–8. Markham CF Law Treatise at page 27–43 ("An aggressive and massive report was prepared at the behest of Representative James A. Leach by the minority staff of the House Committee on Banking, Finance and Urban Affairs.") See also note 23 above and notes 79 (Summers response to Harkin question at Senate Agriculture PWG Report Hearing), and 81 below for the issue of "offshore" booking of OTC derivatives.
Rob Garver, "In Brief: Swaps Measure Delayed as Agencies Argue"[permanent dead link], American Banker, May 12, 2000, ( In describing Rep. Ewing's plan to offer legislation concerning swaps, the article noted Senators Lugar and Gramm "had been expected to introduce similar legislation in the Senate on Thursday, but a debate between the Securities and Exchange Commission and the Commodity Futures Trading Commission over other regulatory matters in the bill has held it up.") For Senate Committee Chair Lugar's remarks, see June 21, 2000, Joint Senate Committee Hearing at 2 to 3 and at 37 ("it should have been apparent to the two of you [the CFTC and SEC Chairmen] that we are intent upon passing a bill...why the two of you are not equally arduous"). For House Subcommittee Chair Ewing's remarks, see Hearing before House Subcommittee on Risk Management, Research, and Specialty Crops, June 19, 2000, ("June 19, 2000, House Agriculture Subcommittee Hearing") at 10 (for the tight legislative calendar) and at 43 to 55 (for extended "single stock futures" questions). For Commerce Committee Chair Bliley's remarks, see Hearing before the Subcommittee on Finance and Hazardous Materials on H.R. 4541, July 12, 2000, (" July 12, 2000, House Commerce Subcommittee Hearing") at 4. For Ranking Member LaFalce's statement see Hearing before House Committee on Banking and Financial Services on H.R. 4541, July 19, 2000, ("July 19, 2000, House Banking Committee Hearing") at 14 ("it is unfortunate that we are getting this bill referral that says we have to report it out by September 6th, which means we have to report it out next week.") See also Committee Chair Leach at 91 ("my own sense is one of great frustration working within the constraints of this Act"). Rep. Leach had introduced on April 6, 2000, his own bill H.R. 4203 to implement, separate from CFTC reauthorization, portions of the PWG Report applicable to OTC derivatives. As the Thomas LOC All Congressional Action Page for H.R. 4203Archived 2016-07-04 at the Wayback Machine shows, this bill did not proceed past the Committee referral stage.
June 19, 2000, House Agriculture Subcommittee Hearing. July 12, 2000, House Commerce Subcommittee Hearing. July 19, 2000, House Banking Committee Hearing. June 21, 2000, Joint Senate Agriculture and Banking Committees Hearing. Although the exclusions for financial OTC derivatives were not controversial at these hearings, at earlier 2000 hearings considering the PWG Report the issue was discussed, particularly whether a regulatory exemption would be better than a statutory exclusion. Senate Agriculture PWG Report Hearing at 9 (in describing what might happen if "you have a problem that crops up", Sen. Harkin states "if you have an exclusion, then it would take an act of Congress to do something about it....if you have an exemption, then the CFTC could respond more readily to something like that." Treasury Secretary Summers responds: "you are clearly correct that an exemption provides more flexibility than an exclusion, but it is precisely the presence of that flexibility and the recognition that it might be used that undercuts legal certainty and creates a greater possibility that these transactions will take place and be booked abroad where they will not be subject to American law.") At the May 18, 1999, Hearing before the House Subcommittee on Risk Management, Research, and Specialty Crops concerning Reauthorization of the CFTC in anticipation of the recommendations of the PWG Report, Patrick M. Parkinson, Associate Director, Division of Research and Statistics, Board of Governors of the Federal Reserve System, spoke (at 130) about credit derivatives but dismissed price manipulation and "price discovery" concerns that have become central to critiques of credit default swaps: "some types of OTC contracts that have a limited deliverable supply, such as equity swaps and some credit derivatives, are growing in importance. However, unlike agricultural futures, for which failure to deliver has additional significant penalties, costs of failure to deliver in OTC derivatives are almost always limited to actual damages. Thus, manipulators attempting to corner a market, even if successful, would have great difficulty inducing sellers in privately negotiated transactions to pay significantly higher prices to offset their contracts or to purchase the underlying assets. Finally, the prices established in privately negotiated transactions are not used directly or indiscriminately as the basis for pricing other transactions. Counterparties in the OTC markets can be expected to recognize the risks to which they would be exposed by failing to make their own independent valuations of their transactions, whose economic and credit terms may differ in significant respects. Moreover, they usually have access to other, often more reliable or more relevant, sources of information on valuations. Hence, any price distortions in particular transactions would not affect other buyers or sellers of the underlying asset.")
Alison Veshkin, "House Passes Rules for Wall Street Over Objections", Bloomberg, December 11, 2009. Roll Call 968 on House enactment of H.R. 4173. The OTC derivatives legislation is in various amendments to H.R. 4173 contained in House Report 111-370. The largest portion of OTC derivatives legislation, including the repeals of CFMA provisions noted above, is in Amendment 3 offered by Representative Colin Peterson (D-MN) as the Derivative Markets Transparency and Accountability Act, Title III to H.R. 4173, which begins at page 103 of House Report 111-370. This amendment was adopted by voice vote on December 10, 2009, as noted on pages H14708-14709 of the House consideration of H.R. 4173 contained in Congressional Record, H14496-H14728, December 10, 2009. Pages H14682-H14705 repeat the text of Amendment 3 and pages H14705-14709 contain the House discussion of Amendment 3. House Agriculture News Release "House Passes Peterson-Frank Amendment to Strengthen Regulation of Over-the-Counter Derivatives"Archived 2010-01-06 at the Wayback Machine, December 10, 2009. For a description of pending Senate legislation to regulate over-the-counter derivatives, as part of broader financial regulation reform, see page 6 of "Summary: Restoring American Financial Stability: Committee Print"Archived 2009-12-02 at the Wayback Machine, issued by Senator Christopher Dodd (D-CT), as Chairman of the Senate Banking Committee.
Alison Veshkin, "House Passes Rules for Wall Street Over Objections", Bloomberg, December 11, 2009. Roll Call 968 on House enactment of H.R. 4173. The OTC derivatives legislation is in various amendments to H.R. 4173 contained in House Report 111-370. The largest portion of OTC derivatives legislation, including the repeals of CFMA provisions noted above, is in Amendment 3 offered by Representative Colin Peterson (D-MN) as the Derivative Markets Transparency and Accountability Act, Title III to H.R. 4173, which begins at page 103 of House Report 111-370. This amendment was adopted by voice vote on December 10, 2009, as noted on pages H14708-14709 of the House consideration of H.R. 4173 contained in Congressional Record, H14496-H14728, December 10, 2009. Pages H14682-H14705 repeat the text of Amendment 3 and pages H14705-14709 contain the House discussion of Amendment 3. House Agriculture News Release "House Passes Peterson-Frank Amendment to Strengthen Regulation of Over-the-Counter Derivatives"Archived 2010-01-06 at the Wayback Machine, December 10, 2009. For a description of pending Senate legislation to regulate over-the-counter derivatives, as part of broader financial regulation reform, see page 6 of "Summary: Restoring American Financial Stability: Committee Print"Archived 2009-12-02 at the Wayback Machine, issued by Senator Christopher Dodd (D-CT), as Chairman of the Senate Banking Committee.
GAO CEA Issues Report at 12 to 17. PWG Report at 8 to 10. Markham CF Law Treatise at pages 27-23 to 27-26. Johnson/Hazen Derivatives Regulation Treatise at 43 to 48 and 60 to 66. For the significance of the 1992 legislation's preemption of state laws, see Born July 30, 1998, Senate Agriculture Testimony at 6 where Chairperson Born describes its role in providing "legal certainty." As noted in the GAO CEA Issues Report at 15, the Conference Report for the FTPA stated: "The Conferees do not intend that the exercise of exemptive authority by the Commission would require any determination beforehand that the agreement, instrument, or transaction for which an exemption is sought is subject to the Act." H10937, Congressional Record, October 2, 1992. The entire Conference Report for the FTPA is available by searching "conference report on H.R. 707" at this link for the Search the Congressional Record on the 102d Congress page of The Library of Congress Thomas service ("Thomas LOC").Archived 2009-05-06 at the Wayback Machine The Conference Report also stated (at H10936) that "the Conferees expect and strongly encourage the Commission to use its new exemptive powers promptly upon enactment of this legislation in four areas where significant concerns of legal uncertainty have arisen: (1) hybrids, (2) swaps, (3) forwards, and (4) bank deposits and accounts." The Report went on to explain (at H10937) the "forwards" were the oil market transactions covered by the existing Brent oil market "statutory interpretation." For the view Congress had thereby "instructed" the CFTC to grant the exemptions, see the testimony of CFTC Chair William Rainer at Senate Agriculture PWG Report Hearing at 15 ("amid strong signals that swap market participants feared their contracts could be declared unenforceable, Congress reacted decisively instructing the CFTC not to regulate swaps entered into by sophisticated parties.") See also GAO Report "The Commodity Exchange Act: Issues Related to the Commodity Futures Trading Commission's Reauthorization", GAO/GGD-99-74Archived September 5, 2009, at the Wayback Machine, May 1999 ("GAO 1999 CFTC Reauthorization Report") at 10 ("According to the 1992 act's legislative history, Congress expected CFTC to use its exemptive authority promptly to reduce legal risk for swaps, forwards, and hybrids.")
Thomas LOC Summary and Status Page for H.R. 4541Archived 2008-11-27 at the Wayback Machine and Thomas LOC Committee Page for H.R. 4541. Aside from implementing and expanding on the PWG Report's recommendations, H.R. 4541 and S. 2697 would "reauthorize" the CFTC. Under the CEA as amended in 1974 to create the CFTC, the Commission was only "authorized" for five years. Since 1974, the "reauthorization" of the CFTC has served as the occasion for "reconsideration" of the provisions of the CEA, most dramatically in 1999 to 2000 with the CFMA. Such "reauthorization" has not always occurred on a timely basis, so that the CFTC has continued in existence on an interim basis, when (as on September 30, 2000) its "authorization" has expired. Markham CF Law Treatise at pages 28-13 to 28-20. For a description of each "reauthorization" see GAO 1999 CFTC Reauthorization Report at 55 to 60.
Rob Garver, "In Brief: Swaps Measure Delayed as Agencies Argue"[permanent dead link], American Banker, May 12, 2000, ( In describing Rep. Ewing's plan to offer legislation concerning swaps, the article noted Senators Lugar and Gramm "had been expected to introduce similar legislation in the Senate on Thursday, but a debate between the Securities and Exchange Commission and the Commodity Futures Trading Commission over other regulatory matters in the bill has held it up.") For Senate Committee Chair Lugar's remarks, see June 21, 2000, Joint Senate Committee Hearing at 2 to 3 and at 37 ("it should have been apparent to the two of you [the CFTC and SEC Chairmen] that we are intent upon passing a bill...why the two of you are not equally arduous"). For House Subcommittee Chair Ewing's remarks, see Hearing before House Subcommittee on Risk Management, Research, and Specialty Crops, June 19, 2000, ("June 19, 2000, House Agriculture Subcommittee Hearing") at 10 (for the tight legislative calendar) and at 43 to 55 (for extended "single stock futures" questions). For Commerce Committee Chair Bliley's remarks, see Hearing before the Subcommittee on Finance and Hazardous Materials on H.R. 4541, July 12, 2000, (" July 12, 2000, House Commerce Subcommittee Hearing") at 4. For Ranking Member LaFalce's statement see Hearing before House Committee on Banking and Financial Services on H.R. 4541, July 19, 2000, ("July 19, 2000, House Banking Committee Hearing") at 14 ("it is unfortunate that we are getting this bill referral that says we have to report it out by September 6th, which means we have to report it out next week.") See also Committee Chair Leach at 91 ("my own sense is one of great frustration working within the constraints of this Act"). Rep. Leach had introduced on April 6, 2000, his own bill H.R. 4203 to implement, separate from CFTC reauthorization, portions of the PWG Report applicable to OTC derivatives. As the Thomas LOC All Congressional Action Page for H.R. 4203Archived 2016-07-04 at the Wayback Machine shows, this bill did not proceed past the Committee referral stage.
Thomas LOC All Congressional Actions Page for H.R. 5660Archived 2016-07-05 at the Wayback Machine ("H.R. 5660 All Actions Page"). Rep. Ewing's remarks introducing the bill (at E2181-2 of the December 14, 2000 Congressional Record) were inserted into the Congressional Record as "extensions of remarks", not actual statements made on the House Floor. They demonstrate this "latest version of the legislation", although formally assigned to four committees as shown on the H.R. 5660 All Actions Page, was "the final package" reflecting the "many hours working through this language to reach agreement" among the Administration, Treasury, the CFTC, the SEC and the Senate. Charles W. Edwards, J.D., James Hamilton, J.D., L.L.M., Heather Montgomery, J.D., Commodity Futures Modernization Act of 2000: Law and Explanation (CCH Incorporated 2000) (ISBN0-8080-0600-2) ("CCH CFMA Guide") at 15 ("After an arduous effort, the 106th Congress passed the Commodity Futures Modernization Act of 2000, H.R. 5660, Public Law 106-554, as Section 1(a)(5) of H.R. 4577, the Consolidated Appropriations Act of 2001. It was signed by President Clinton on December 21, 2000, without change, as introduced on December 14, 2000 in the House of Representatives.")
CRS 2003 CFMA Report at 6 ("identical bills H.R. 5660 and S. 3282 [sic] were introduced"). Thomas LOC All Congressional Actions Page for S. 3283Archived 2016-07-05 at the Wayback Machine Sen. Lugar's introduction of the bill at S11924-6 of the December 15, 2000, Senate bill introductions in Congressional Record, S11918-11930, December 15, 2000 states (at S11924) H.R. 5660 would be the legislation "which will be enacted as part of the final appropriations package today." Sen. Gramm states (at S11926) "We are introducing the bill today as the finished product of years of work involving half a dozen committees in both Houses of Congress, and as many agencies of the Federal government. This bill is identical to, and is the Senate companion to, H.R. 5660, introduced yesterday in the House and which will be approved by the House and the Senate today. We introduce this bill in the Senate to demonstrate the bicameral authorship and support for this important legislation.")
In the House, Representative John LaFalce (D-NY), Ranking Member of the House Banking Committee, was a co-sponsor of H.R. 5660Archived 2016-07-05 at the Wayback Machine. The House proposed the order to consider the H.R. 4577 Conference Report at Congressional Record, H12441, December 15, 2000, and proceeded to debate it at H12442-12501 (as cited and linked at the end of note 66 above). Representative Charles Stenholm (D-TX), Ranking Member of the House Agriculture Committee, spoke in favor of H.R. 5660 at H12491. Representative John Dingell (D-MI), Ranking Member of the House Commerce Committee, spoke at length in support of H.R. 5660 at H12497-8 . Representative Sheila Jackson-Lee (D-TX) spoke at H12495. Among Republicans, Rep. Ewing, the bill's sponsor, had introduced H.R. 5660 (as described in note 64 above) and spoke in support at H12485 and H12488-9. Rep. Leach spoke in support at H12498-9. Representative Thomas Bliley (R-VA), Chair of the House Commerce Committee, (at H12501) and Representative Larry Combest (R-TX), Chair of the full Agriculture Committee (at H12497) exchanged "statutory interpretation" remarks agreeing that nothing in Title II of the CFMA would give banks increased powers to own securities.
In the Senate the two Ranking Members of the Agriculture and Banking Committees introduced letters from the PWG confirming its unanimous "strong support" for H.R. 5660. Senator Thomas Harkin (D-IA), Ranking Member of the Senate Agriculture Committee and a co-sponsor of the equivalent S.3283Archived 2016-07-05 at the Wayback Machine, was the only Democrat who entered a statement about the bill on December 15, which appears at Congressional Record, S11896-7. Sen. Harkin noted (at S11896) he had worked to eliminate "an outright exclusion" for energy, preferring to continue "the substantial exemption" already provided by the CFTC, but that "further negotiations" brought "the provisions on this subject that are in this bill." He recognized "the need for compromise" given "the overall importance and positive features of this legislation." He also noted (at S11896) he had worked with Senator Lugar on the legislation and that Senators Gramm and Sarbanes had cooperated "in completing this bill." At S11897 he concluded by complementing Sen. Lugar, Rep. Ewing and "all staff involved for their outstanding work in making this important legislation a reality." Senator Paul Sarbanes (D-MD) did not speak on December 15, but when Congress returned on January 2, he noted the PWG's strong support for H.R. 5660 and introduced the version of the PWG letter addressed to him. Congressional Record, S11946, January 2, 2001. During the actual Senate "consideration" of H.R. 4577 (at Congressional Record, S11855-11878, December 15, 2000), Republican Senator Gramm (at S11926) was the only Senator to speak in support of H.R. 5660. In added remarks at Congressional Record, S11878-11885, December 15, 2000 Senator Peter Fitzgerald (R-IL) spoke (at S11878-9) in support of the CFMA. In the December 15, 2000 statements on introduced bills at S11918-11930 Sen. Lugar (at S11924-6) in introducing S. 3283 as the equivalent of H.R. 5660 spoke in support of H.R. 5660. The only change to H.R. 4577 made during the House and Senate consideration of the H.R. 4577 conference report was an amendment to H.R. 5666 made by joint resolution of the two Houses. See amendment as introducedas enacted, and as enrolled. This shows in section 1(a)(4) of H.R. 4577 as enacted into law as Public Law 106-554.
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CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
npr.org
CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
Consolidated Tesimony of the Futures Exchanges of the United States to Senate Agriculture Committee, February 11, 1997Archived December 2, 2009, at the Wayback Machine ("U.S. futures markets have found it increasingly difficult to compete with foreign exchanges and OTC dealers as our competition's regulatory costs have diminished or remained virtually non-existent while ours have escalated.") John M. Broder, "Chicago Exchanges Seek to Loosen Yoke of Regulation", The New York Times, June 4, 1997. George Gunsel, "Big Guns Loading for Deregulation Battle", Chicago Tribune, March 23, 1997 (quoting the CBOT's president as stating "We were promised an even-handed landscape in 1992 (legislation) and it didn't happen. We lost business to oversees and the over-the-counter markets." George Burns, "Deregulation of Futures May be Derailed, CBOT, Merc in Opposing Factions on Key Issues, and Time's Running Out in Congress", Chicago Tribune, July 25, 1997 ("the Board of Trade wants Congress to authorize the trading of equity swaps in unregulated markets" and "the Merc worries that giving legal certainty to equity swaps would hurt its stock-index futures contracts.") Jerry Hegstrom, "Commodity Clash"Archived 2008-07-06 at the Wayback Machine, Government Executive, October 1, 1997.
GAO Report, "Long-Term Capital Management: Regulators Need to Focus Greater Attention on Systemic Risk," GAO/GGD-00-3Archived 2010-01-07 at the Wayback Machine, October 1999 ("GAO LTCM Report") at 16 to 17 (for "regulators did not identify weaknesses in firms' risk management practices until after the crisis"), 17 to 19 (for "offsite monitoring did not reveal the potential systemic threat posed by LTCM"), and 21 (for "existing coordination could be improved to enhance regulators' ability to identify risks across industries and markets.") GAO LTCM Report at 31 (for the recommendation Congress "consider providing SEC and CFTC with the authority to regulate the activities of securities and futures firms' affiliates similar to that provided the Federal Reserve with respect to bank holding companies.") "Congressional Agency Faults a Report on Hedge-Fund Risk", The New York Times, November 20, 1999. Michael Schroeder, "General Accounting Office's Report Urges Tighter Broker-Dealer Oversight", The Wall Street Journal, November 22, 1999. Both news articles stated the GAO recommended Congress enact consolidated supervision of securities and commodities firms, although the GAO Report only stated Congress should "consider" such legislation. Perhaps these news reports more accurately described GAO's actual intent.
"Accord Ends Dispute Between Regulators", The New York Times, September 15, 2000. Remarks by Treasury Under Secretary Gary Gensler to the American Bankers Association Government Relations Council, September 19, 2000Archived August 31, 2009, at the Wayback Machine (after describing the previous week's agreement between the SEC and CFTC to permit single stock futures trading and how that opened the way to enactment of the CFMA, Under Secretary Gensler stated "With this historic agreement, the Congress has a tremendous opportunity to complete this important legislation. We should not miss this opportunity to modernize the regulatory structure of our derivatives markets, reduce systemic risk, and promote the competitiveness of our markets.") Remarks by Treasury Assistant Secretary Lewis A. Sachs, Alexander Hamilton Awards New York, NY, September 26, 2000Archived August 31, 2009, at the Wayback Machine (after describing the OTC derivatives market, Assistant Secretary Sachs promoted the OTC derivatives legislation in Congress because "this legislation would allow the electronic trading and centralized clearing of derivatives, thereby helping to: reduce counterparty risk; promote innovation; make our markets more competitive, transparent, and efficient; and reduce the costs of hedging risk and reducing exposure to other markets. It is important that Congress enact such legislation this year.")
Rob Garver, "Armey Pushes for Compromise on Swaps"[permanent dead link], American Banker, September 27, 2000, ("Sen. Gramm said that he would prefer a bill in which the SEC and CFTC have no jurisdiction at all over swaps, but he has suggested a compromise under which the SEC would have the authority to intervene to protect customers from price manipulation or fraud.") According to internal Enron emails, Sen. Gramm had been blocking Senate action. Eric Lipton, "Gramm and the 'Enron Loophole'", The New York Times, November 14, 2008 ("Lipton Enron Article") (quoting an August 10, 2000, email from Chris Long to several Enron recipients "the bill is not moving quickly in the Senate due to Senator Phil Gramm's desire to see significant changes made to the legislation (not directly related to our energy language.")
CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
In the Dinallo FT Opinion former Insurance Superintendent Dinallo argues (1) "the fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money" and (2) banks bought credit default swaps from AIG covering "investments" held by the banks "to avoid regulation" because it allowed them to claim "they no longer had the risk of a default of the bond." It is difficult to understand how this applies to AIG (which is the company mentioned in the Dinallo FT Opinion) or what the "regulatory arbitrage" credit default swaps ("CDS") of AIG had to do with the CFMA. AIG Financial Products ("AIGFP"), before 2000 and after the CFMA became law, was located in London. Gretchen Morgenson, "Behind Insurer's Crisis, Blind Eye to a Web of Risk", The New York Times, September 28, 2008 ("Morgenson Article") (which dates the establishment of London based AIGFP to 1987); Peter Koeing, "AIG Trail Leads to London Casino", Telegraph, October 18, 2008; "AIG Blames its London Office"Forbes, March 13, 2009. If US-based CDS counterparties of AIGFP were also internationally active (as the Morgenson Article suggests in noting the "'global swath' of top-notch entities" that" were counterparties to AIGFP CDS), they likely would have been able to book their CDS transactions with AIGFP through their own non-US offices to avoid the application of the CEA if the CFMA had not been enacted. See notes 23, 37, and 79 (Summers response to Harkin question at Senate Agriculture PWG Report Hearing) above for the issue of "offshore" booking of OTC derivatives. More clearly, the seller of AIG's "regulatory arbitrage" credit default swaps was Banque AIG, not an insurance company. See pages 133-134 of AIG's 2008 Form 10-K Report ("AIG 2008 10-K"). This is noted in the Morgenson Article. ("the London-based units...trades were routed through Banque A.I.G., a French institution"). As explained on page 133 of the AIG 2008 10-K, Banque AIG is a French bank regulated under French banking law. As also explained on page 133 of the AIG 2008 10-K, the "regulatory arbitrage" from those CDS was not because they were credit default swaps, but because they operated as guarantees from a bank in an OECD country (i.e. France). See also Daniel K. Tarullo, Banking on Basel: the future of international financial regulation (Peterson Institute 2008) for an explanation (at 57–60) of how the Basel I Accord (as described in the AIG 2008 10-K) established "generic" risk categories so "all loans to nonbanking corporations were risk-weighted at 100 percent" but all "claims on, or guaranteed by, banks incorporated in the OECD" were risk-weighted at 20%. In 1999 U.S. banking regulators reviewed multiple transaction structures similar to the AIGFP "regulatory arbitrage" CDS transactions and concluded a "super senior" exposure held by a bank that was guaranteed by the Banque AIG CDS (as depicted on page 133 of the AIG 2008 10-K) could receive a 20% "risk weighting" without being supported by a bank issued CDS or other form of bank guarantee if certain "stringent" conditions were met. Federal Reserve Board and Office of the Comptroller of the Currency, "Capital Interpretations, Synthetic Collateralized Loan Obligations, November 15, 1999", Federal Reserve Board Supervisory Release 99-32Archived May 14, 2009, at the Wayback Machine. ("US Synthetic CLO Interpretation"). To the extent the "stringent minimum requirements" described at pages 6-7 of the US Synthetic CLO Interpretation were met, this would eliminate the need to acquire such CDS. Under the US Synthetic CLO Interpretation, one important element was that an outside investor acquire an interest in the relevant loan pool that would be subordinate to the "super senior" exposure but still be rated AAA. This requirement is why the bank retained exposure is considered "super senior." As depicted on page 133 of the AIG 2008 10-K, this is the type of "super senior" exposure covered by the AIG "regulatory arbitrage" CDS. As the AIG 2008 10-K also explains at page 133 the implementation of Basel II eliminates the need for the Banque AIG "regulatory" CDS, because Basel II recognizes the low risk nature of the "super senior" exposure and requires corresponding capital, not a flat 8% requirement based on a "generic" capital requirement. U.S. banking regulators described in 1996 when CDS or other credit derivatives would operate as bank guarantees for purposes of capital rules and how the bank providing such a guarantee would be required to hold regulatory capital equal to that required if it directly held the guaranteed bond or other obligation. Federal Reserve Board Division of Banking Supervision and Regulation, "Supervisory Guidance for Credit Derivatives"Archived 2009-05-12 at the Wayback Machine, SR 96-17 (GEN), August 12, 1996. Nevertheless, similar to the Dinallo FT Opinion, Joe Nocera, "Propping Up a House of Cards", The New York Times, February 28, 2009, describes AIG's "regulatory arbitrage" CDS by stating (1) it allowed "banks to make their balance sheet look safer than they really were" because of AIG's AAA rating (when the European banks acquiring the CDS protection received reduced regulatory capital requirements because the CDS represented an OECD country bank guarantee, regardless of the rating of that bank); (2) because the CDS "were not even categorized as a traditional insurance product, A.I.G. didn't have to put anything aside for losses" (when the regulatory capital requirement for the CDS would be determined by French banking law, not any insurance regulator, and the US banking regulators would have required regulatory capital equal to that required for the underlying exposure); (3) that this was only possible because a "misguided set of international rules that took hold toward the end of the 1990s" permitted banks "to use their own internal risk measurements to set their capital requirements" (when those "misguided" rules, known as Basel II, are what is ending the need for the "regulatory arbitrage" provided by the Banque AIG CDS, as described on page 133 of the 2008 AIG 10-K, and only the earlier Basel I standards provided the "generic" 20% risk-weighting for bank obligations, including bank guarantees.) For the location of General Re's derivatives dealer in London and the difficulties incurred by Berkshire Hathaway in winding down that dealer after it acquired General Re, see "General Re Securities Limited", Business Week, Snapshot (click on Detailed Description for the 1991 UK incorporation) and Ari Weinberg, "The Great Derivatives Smackdown", Forbes, May 9, 2003, which contrasts the Alan Greenspan and Warren Buffett views of derivatives, mentions the shuttering of General Re Securities with a remaining derivatives book, and curiously refers to AIG's "extensive disclosures" and lists AIG FP's credit derivative disclosures.
Mark Jickling, "Regulation of Energy Derivatives" RS21401Archived 2011-07-19 at the Wayback Machine, CRS Report for Congress, updated April 21, 2006 ("CRS Energy Derivatives Report") at CRS-3. For a broader review of "legal uncertainty" issues and the 1999 PWG's view of how those issues led to its recommendations that formed the basis for the CFMA, see PWG Report at 6 through 14.
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Erik Sirri, Director, Division of Trading and Markets, U.S. Securities and Exchange Commission ("Sirri"), Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, November 20, 2008; Sirri, Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, October 15, 2008; Dechert LLP, "Derivatives Developments: Tackling the $50 Trillion Credit Default Swap Market and Beyond"Archived 2010-01-31 at the Wayback Machine, December 2008; Pillsbury Winthrop Shaw Pittman LLP, "SEC Seeks to Regulate Credit Default Swaps"Archived 2011-07-15 at the Wayback Machine, November 10, 2008. The pre-CFMA status of swaps as "securities" under the securities laws is discussed in Johnson/Hazen Derivatives Regulation at 12 to 13 ("Most commodities, and hence futures contracts, do not fall within the definition of security....In contrast to the typical raw material or bullion contract, if the underlying commodity is itself a security, such as with government bonds, the securities laws, on their face, would seem to apply."); Markham CF Law Treatise at 28-27 to 28-28 (describing a federal district court ruling finding an "equity swap" not to be a "security", which was overruled by a federal circuit court finding it was); James Hamilton, J.D., L.L.M., Kenneth R. Benson, J.D., Matthew W. Lisle, J.D., A Guide To Federal Regulation of Derivatives, (Commerce Clearing House 1998) at 49 to 50 (describing how the "risk shifting" function of derivatives has been viewed as not meeting the "common enterprise and expectation of profits from the efforts of others" requirements established for defining "securities" given their "capital raising" function). ISDA CFMA Memo at 9-10 and 40-43 (describing at 41 how the CFMA provisions "effectively end any confusion about the status of swaps under the U.S. securities laws" and at 9-10 how the security law description of swaps adopted the new definition that the "material terms (other than price and quantity) are subject to individual negotiation" rather than the less stringent Gramm-Leach-Bliley Act definition that the swap be subject to individual negotiation, as described in notes 57 and 76 above). For the post-CFMA view of then SEC Commissioner Annette Nazareth, who was SEC Director. Division of Trading and Markets, at the time the CFMA was debated and passed by Congress, see "SEC Historical Society Interview with Annette Nazareth Conducted on November 4, 2005, by Kenneth Durr" (at 19 to 22 describing the SEC's involvement with the CFMA and at 19 stating "while the whole package was quite deregulatory, there was some additional certainty that we were able to achieve with respect to derivatives that were securities-based swaps—securities-based swaps were subject to anti-fraud provisions. We thought it was clear but it was awfully good to get it in the legislation.")
In the Dinallo FT Opinion former Insurance Superintendent Dinallo argues (1) "the fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money" and (2) banks bought credit default swaps from AIG covering "investments" held by the banks "to avoid regulation" because it allowed them to claim "they no longer had the risk of a default of the bond." It is difficult to understand how this applies to AIG (which is the company mentioned in the Dinallo FT Opinion) or what the "regulatory arbitrage" credit default swaps ("CDS") of AIG had to do with the CFMA. AIG Financial Products ("AIGFP"), before 2000 and after the CFMA became law, was located in London. Gretchen Morgenson, "Behind Insurer's Crisis, Blind Eye to a Web of Risk", The New York Times, September 28, 2008 ("Morgenson Article") (which dates the establishment of London based AIGFP to 1987); Peter Koeing, "AIG Trail Leads to London Casino", Telegraph, October 18, 2008; "AIG Blames its London Office"Forbes, March 13, 2009. If US-based CDS counterparties of AIGFP were also internationally active (as the Morgenson Article suggests in noting the "'global swath' of top-notch entities" that" were counterparties to AIGFP CDS), they likely would have been able to book their CDS transactions with AIGFP through their own non-US offices to avoid the application of the CEA if the CFMA had not been enacted. See notes 23, 37, and 79 (Summers response to Harkin question at Senate Agriculture PWG Report Hearing) above for the issue of "offshore" booking of OTC derivatives. More clearly, the seller of AIG's "regulatory arbitrage" credit default swaps was Banque AIG, not an insurance company. See pages 133-134 of AIG's 2008 Form 10-K Report ("AIG 2008 10-K"). This is noted in the Morgenson Article. ("the London-based units...trades were routed through Banque A.I.G., a French institution"). As explained on page 133 of the AIG 2008 10-K, Banque AIG is a French bank regulated under French banking law. As also explained on page 133 of the AIG 2008 10-K, the "regulatory arbitrage" from those CDS was not because they were credit default swaps, but because they operated as guarantees from a bank in an OECD country (i.e. France). See also Daniel K. Tarullo, Banking on Basel: the future of international financial regulation (Peterson Institute 2008) for an explanation (at 57–60) of how the Basel I Accord (as described in the AIG 2008 10-K) established "generic" risk categories so "all loans to nonbanking corporations were risk-weighted at 100 percent" but all "claims on, or guaranteed by, banks incorporated in the OECD" were risk-weighted at 20%. In 1999 U.S. banking regulators reviewed multiple transaction structures similar to the AIGFP "regulatory arbitrage" CDS transactions and concluded a "super senior" exposure held by a bank that was guaranteed by the Banque AIG CDS (as depicted on page 133 of the AIG 2008 10-K) could receive a 20% "risk weighting" without being supported by a bank issued CDS or other form of bank guarantee if certain "stringent" conditions were met. Federal Reserve Board and Office of the Comptroller of the Currency, "Capital Interpretations, Synthetic Collateralized Loan Obligations, November 15, 1999", Federal Reserve Board Supervisory Release 99-32Archived May 14, 2009, at the Wayback Machine. ("US Synthetic CLO Interpretation"). To the extent the "stringent minimum requirements" described at pages 6-7 of the US Synthetic CLO Interpretation were met, this would eliminate the need to acquire such CDS. Under the US Synthetic CLO Interpretation, one important element was that an outside investor acquire an interest in the relevant loan pool that would be subordinate to the "super senior" exposure but still be rated AAA. This requirement is why the bank retained exposure is considered "super senior." As depicted on page 133 of the AIG 2008 10-K, this is the type of "super senior" exposure covered by the AIG "regulatory arbitrage" CDS. As the AIG 2008 10-K also explains at page 133 the implementation of Basel II eliminates the need for the Banque AIG "regulatory" CDS, because Basel II recognizes the low risk nature of the "super senior" exposure and requires corresponding capital, not a flat 8% requirement based on a "generic" capital requirement. U.S. banking regulators described in 1996 when CDS or other credit derivatives would operate as bank guarantees for purposes of capital rules and how the bank providing such a guarantee would be required to hold regulatory capital equal to that required if it directly held the guaranteed bond or other obligation. Federal Reserve Board Division of Banking Supervision and Regulation, "Supervisory Guidance for Credit Derivatives"Archived 2009-05-12 at the Wayback Machine, SR 96-17 (GEN), August 12, 1996. Nevertheless, similar to the Dinallo FT Opinion, Joe Nocera, "Propping Up a House of Cards", The New York Times, February 28, 2009, describes AIG's "regulatory arbitrage" CDS by stating (1) it allowed "banks to make their balance sheet look safer than they really were" because of AIG's AAA rating (when the European banks acquiring the CDS protection received reduced regulatory capital requirements because the CDS represented an OECD country bank guarantee, regardless of the rating of that bank); (2) because the CDS "were not even categorized as a traditional insurance product, A.I.G. didn't have to put anything aside for losses" (when the regulatory capital requirement for the CDS would be determined by French banking law, not any insurance regulator, and the US banking regulators would have required regulatory capital equal to that required for the underlying exposure); (3) that this was only possible because a "misguided set of international rules that took hold toward the end of the 1990s" permitted banks "to use their own internal risk measurements to set their capital requirements" (when those "misguided" rules, known as Basel II, are what is ending the need for the "regulatory arbitrage" provided by the Banque AIG CDS, as described on page 133 of the 2008 AIG 10-K, and only the earlier Basel I standards provided the "generic" 20% risk-weighting for bank obligations, including bank guarantees.) For the location of General Re's derivatives dealer in London and the difficulties incurred by Berkshire Hathaway in winding down that dealer after it acquired General Re, see "General Re Securities Limited", Business Week, Snapshot (click on Detailed Description for the 1991 UK incorporation) and Ari Weinberg, "The Great Derivatives Smackdown", Forbes, May 9, 2003, which contrasts the Alan Greenspan and Warren Buffett views of derivatives, mentions the shuttering of General Re Securities with a remaining derivatives book, and curiously refers to AIG's "extensive disclosures" and lists AIG FP's credit derivative disclosures.
Erik Sirri, Director, Division of Trading and Markets, U.S. Securities and Exchange Commission ("Sirri"), Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, November 20, 2008; Sirri, Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, October 15, 2008; Dechert LLP, "Derivatives Developments: Tackling the $50 Trillion Credit Default Swap Market and Beyond"Archived 2010-01-31 at the Wayback Machine, December 2008; Pillsbury Winthrop Shaw Pittman LLP, "SEC Seeks to Regulate Credit Default Swaps"Archived 2011-07-15 at the Wayback Machine, November 10, 2008. The pre-CFMA status of swaps as "securities" under the securities laws is discussed in Johnson/Hazen Derivatives Regulation at 12 to 13 ("Most commodities, and hence futures contracts, do not fall within the definition of security....In contrast to the typical raw material or bullion contract, if the underlying commodity is itself a security, such as with government bonds, the securities laws, on their face, would seem to apply."); Markham CF Law Treatise at 28-27 to 28-28 (describing a federal district court ruling finding an "equity swap" not to be a "security", which was overruled by a federal circuit court finding it was); James Hamilton, J.D., L.L.M., Kenneth R. Benson, J.D., Matthew W. Lisle, J.D., A Guide To Federal Regulation of Derivatives, (Commerce Clearing House 1998) at 49 to 50 (describing how the "risk shifting" function of derivatives has been viewed as not meeting the "common enterprise and expectation of profits from the efforts of others" requirements established for defining "securities" given their "capital raising" function). ISDA CFMA Memo at 9-10 and 40-43 (describing at 41 how the CFMA provisions "effectively end any confusion about the status of swaps under the U.S. securities laws" and at 9-10 how the security law description of swaps adopted the new definition that the "material terms (other than price and quantity) are subject to individual negotiation" rather than the less stringent Gramm-Leach-Bliley Act definition that the swap be subject to individual negotiation, as described in notes 57 and 76 above). For the post-CFMA view of then SEC Commissioner Annette Nazareth, who was SEC Director. Division of Trading and Markets, at the time the CFMA was debated and passed by Congress, see "SEC Historical Society Interview with Annette Nazareth Conducted on November 4, 2005, by Kenneth Durr" (at 19 to 22 describing the SEC's involvement with the CFMA and at 19 stating "while the whole package was quite deregulatory, there was some additional certainty that we were able to achieve with respect to derivatives that were securities-based swaps—securities-based swaps were subject to anti-fraud provisions. We thought it was clear but it was awfully good to get it in the legislation.")
sechistorical.org
Erik Sirri, Director, Division of Trading and Markets, U.S. Securities and Exchange Commission ("Sirri"), Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, November 20, 2008; Sirri, Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, October 15, 2008; Dechert LLP, "Derivatives Developments: Tackling the $50 Trillion Credit Default Swap Market and Beyond"Archived 2010-01-31 at the Wayback Machine, December 2008; Pillsbury Winthrop Shaw Pittman LLP, "SEC Seeks to Regulate Credit Default Swaps"Archived 2011-07-15 at the Wayback Machine, November 10, 2008. The pre-CFMA status of swaps as "securities" under the securities laws is discussed in Johnson/Hazen Derivatives Regulation at 12 to 13 ("Most commodities, and hence futures contracts, do not fall within the definition of security....In contrast to the typical raw material or bullion contract, if the underlying commodity is itself a security, such as with government bonds, the securities laws, on their face, would seem to apply."); Markham CF Law Treatise at 28-27 to 28-28 (describing a federal district court ruling finding an "equity swap" not to be a "security", which was overruled by a federal circuit court finding it was); James Hamilton, J.D., L.L.M., Kenneth R. Benson, J.D., Matthew W. Lisle, J.D., A Guide To Federal Regulation of Derivatives, (Commerce Clearing House 1998) at 49 to 50 (describing how the "risk shifting" function of derivatives has been viewed as not meeting the "common enterprise and expectation of profits from the efforts of others" requirements established for defining "securities" given their "capital raising" function). ISDA CFMA Memo at 9-10 and 40-43 (describing at 41 how the CFMA provisions "effectively end any confusion about the status of swaps under the U.S. securities laws" and at 9-10 how the security law description of swaps adopted the new definition that the "material terms (other than price and quantity) are subject to individual negotiation" rather than the less stringent Gramm-Leach-Bliley Act definition that the swap be subject to individual negotiation, as described in notes 57 and 76 above). For the post-CFMA view of then SEC Commissioner Annette Nazareth, who was SEC Director. Division of Trading and Markets, at the time the CFMA was debated and passed by Congress, see "SEC Historical Society Interview with Annette Nazareth Conducted on November 4, 2005, by Kenneth Durr" (at 19 to 22 describing the SEC's involvement with the CFMA and at 19 stating "while the whole package was quite deregulatory, there was some additional certainty that we were able to achieve with respect to derivatives that were securities-based swaps—securities-based swaps were subject to anti-fraud provisions. We thought it was clear but it was awfully good to get it in the legislation.")
July 24, 1998 House Banking Hearing; Testimony of Alan Greenspan, Chairman, Board of Governors of Federal Reserve Board, before the U.S. Senate Committee on Agriculture, Nutrition and Forestry, July 30, 1998Archived August 5, 2009, at the Wayback Machine ("Greenspan July 1998 Senate Agriculture Testimony"); Testimony of Treasury Deputy Secretary Lawrence H. SummersArchived 2009-08-05 at the Wayback Machine for the same July 10, 1998, Senate Agriculture Committee Hearing ("Summers July 1998 Senate Agriculture Testimony"); and Testimony of SEC Chairman Arthur LevittArchived 2009-08-05 at the Wayback Machine for that July 10, 1998, Senate Agriculture Committee Hearing ("Levitt July 1998 Senate Agriculture Testimony"). In the July 24, 1998 House Banking Hearing at 171-2, Chairman Greenspan pointed to the growth of the Eurodollar market in the 1960s, which in his account was established as a way to avoid US law limiting interest on deposits, which market did not return to the US even after the regulatory issue was overcome. In the June 10, 1998, House Agriculture Subcommittee Hearing (at 42) Richard Lindsay, Director of the SEC's Division of Market Regulation, made a similar argument about the loss of US capital market activity to the Eurobond market when "a very simple law change moved the Eurobond market from the United States, where it was a vibrant market, abroad virtually overnight. And that market has never returned." While Regulation Q (the regulatory limit on deposit interest) is usually cited as the cause for the development of the Eurodollar market, there are competing views that at least a partial cause was fear of US "political risk" focused more on potential US seizures or blocks on foreign (particularly Soviet Union) money in US banks. Milton Friedman,"The Eurodollar Market: Some First Principles"Archived 2010-05-27 at the Wayback Machine, Selected Papers No. 34, University of Chicago School of Business. Charles P. Kindelberger, A Financial History of Western Europe (2d Ed. Oxford University Press 1993) at 439–441 (for the Eurodollar market) and 441 (for the Eurobond market). For the "forward rate agreement" market, which was often conducted by U.S. banks through "offshore" branches because of concern such agreements looked too much like "futures" traded on U.S. exchanges, see Philip McBride Johnson, Michael S. Sackheim and Thomas A. Hale "Future Rate Agreements: Implications under the Commodity Exchange Act", Commodities Law Letter, March 1987, at 3-6. See also notes 37, 79 (Summers response to Harkin question at Senate Agriculture PWG Report hearing), and 81 below for the issue of "offshore" booking of OTC derivative transactions.
Consolidated Tesimony of the Futures Exchanges of the United States to Senate Agriculture Committee, February 11, 1997Archived December 2, 2009, at the Wayback Machine ("U.S. futures markets have found it increasingly difficult to compete with foreign exchanges and OTC dealers as our competition's regulatory costs have diminished or remained virtually non-existent while ours have escalated.") John M. Broder, "Chicago Exchanges Seek to Loosen Yoke of Regulation", The New York Times, June 4, 1997. George Gunsel, "Big Guns Loading for Deregulation Battle", Chicago Tribune, March 23, 1997 (quoting the CBOT's president as stating "We were promised an even-handed landscape in 1992 (legislation) and it didn't happen. We lost business to oversees and the over-the-counter markets." George Burns, "Deregulation of Futures May be Derailed, CBOT, Merc in Opposing Factions on Key Issues, and Time's Running Out in Congress", Chicago Tribune, July 25, 1997 ("the Board of Trade wants Congress to authorize the trading of equity swaps in unregulated markets" and "the Merc worries that giving legal certainty to equity swaps would hurt its stock-index futures contracts.") Jerry Hegstrom, "Commodity Clash"Archived 2008-07-06 at the Wayback Machine, Government Executive, October 1, 1997.
Alison Veshkin, "House Passes Rules for Wall Street Over Objections", Bloomberg, December 11, 2009. Roll Call 968 on House enactment of H.R. 4173. The OTC derivatives legislation is in various amendments to H.R. 4173 contained in House Report 111-370. The largest portion of OTC derivatives legislation, including the repeals of CFMA provisions noted above, is in Amendment 3 offered by Representative Colin Peterson (D-MN) as the Derivative Markets Transparency and Accountability Act, Title III to H.R. 4173, which begins at page 103 of House Report 111-370. This amendment was adopted by voice vote on December 10, 2009, as noted on pages H14708-14709 of the House consideration of H.R. 4173 contained in Congressional Record, H14496-H14728, December 10, 2009. Pages H14682-H14705 repeat the text of Amendment 3 and pages H14705-14709 contain the House discussion of Amendment 3. House Agriculture News Release "House Passes Peterson-Frank Amendment to Strengthen Regulation of Over-the-Counter Derivatives"Archived 2010-01-06 at the Wayback Machine, December 10, 2009. For a description of pending Senate legislation to regulate over-the-counter derivatives, as part of broader financial regulation reform, see page 6 of "Summary: Restoring American Financial Stability: Committee Print"Archived 2009-12-02 at the Wayback Machine, issued by Senator Christopher Dodd (D-CT), as Chairman of the Senate Banking Committee.
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CRS 2003 CFMA Report at 2. CRS Derivatives Regulation Report at CRS-9. ISDA CFMA Memo at 23 to 28. Dean Kloner, "The Commodity Futures Modernization Act of 2000"Archived 2009-11-23 at the Wayback Machine, 29 Securities Regulation Law Journal 286 (2001) ("Kloner CFMA") at 289 to 290. Markham CF Law Treatise at pages 27-88 to 89. Johnson/Hazen Derivatives Regulation at 330-333. For the PWG Report's recommendation, see PWG Report at 17 ("insofar as transactions are subject to regulated clearing, the exclusion should not prohibit fungibility of contracts or require that creditworthiness be a material consideration.")
"Accord Ends Dispute Between Regulators", The New York Times, September 15, 2000. Remarks by Treasury Under Secretary Gary Gensler to the American Bankers Association Government Relations Council, September 19, 2000Archived August 31, 2009, at the Wayback Machine (after describing the previous week's agreement between the SEC and CFTC to permit single stock futures trading and how that opened the way to enactment of the CFMA, Under Secretary Gensler stated "With this historic agreement, the Congress has a tremendous opportunity to complete this important legislation. We should not miss this opportunity to modernize the regulatory structure of our derivatives markets, reduce systemic risk, and promote the competitiveness of our markets.") Remarks by Treasury Assistant Secretary Lewis A. Sachs, Alexander Hamilton Awards New York, NY, September 26, 2000Archived August 31, 2009, at the Wayback Machine (after describing the OTC derivatives market, Assistant Secretary Sachs promoted the OTC derivatives legislation in Congress because "this legislation would allow the electronic trading and centralized clearing of derivatives, thereby helping to: reduce counterparty risk; promote innovation; make our markets more competitive, transparent, and efficient; and reduce the costs of hedging risk and reducing exposure to other markets. It is important that Congress enact such legislation this year.")
Extended Remarks of Representative Thomas Ewing (R-IL), Congressional Record, E2181-2182 (December 14, 2000) introducing H.R. 5660 (the bill "contains the major provisions of the House passed H.R. 4541. These provisions are in Titles I and II of the legislation... "). H.R. 4541 as passed by the House. H.R. 5660 as introduced in the House and enacted into law through H.R. 4577 The two differences between Title I in the two bills that are apparent from the tables of contents (see page 2 for each bill) are that H.R. 5660 eliminated the "Rules of Construction" that were in Section 128 of H.R. 4541 and inserted H.R. 4541's Section 107 dealing with "Swap transactions" into Section 105 as Section 105(b) of H.R. 5660. The first change led to the colloquy between Reps. Bliley and Combest described in note 69 below, in which they confirmed nothing in the CFMA granted a bank any additional power to own equity securities (which was previously covered by Section 128 of H.R. 4541). The second change lead to an overall "re-lettering" of language in Title I, because the swaps "exclusion" became Section 2(g) rather than 2(h) of the CEA. This meant the CFMA's exclusions were consecutively "lettered" as 2(c)-(g) with Section 2(h) the "exemptions." Under H.R. 4541, Section 2(g) would have been the new "exemptions" and Section 2(h) would have been the final "exclusion." The new Section 2(g) was also modified from H.R. 4541 in its definition of "swap agreement" to require "individual negotiation" but not "individual negotiation" of "each material term" (other than price and quantity) and in adding a Section 105(c) requirement for a PWG study of "retail swaps." The last change addressed an issue raised by Republican Representatives in the House Floor debate of H.R. 4541 (as described in note 58 below). The PWG issued its "Joint Report on Retail Swaps"Archived 2009-08-31 at the Wayback Machine in December 2001 and found (at page 9) it was not "necessary at this time to recommend legislative action for swap agreements offered to persons other than ECPs." Aside from these two changes and various typographical or stylistic corrections, the changes to Title I were: (1) the definition of "hybrid instrument" was expanded to permit delivery of a commodity and the H.R. 4541 definition of "deposit instrument" was replaced by the new Title IV's definition of "identified banking product" contained in Section 402(b) of H.R. 5660, which did not include the limitations for foreign and other deposits listed in H.R. 4541's exclusions for subparagraphs (A), (B), and (C) of Section 3(l) of the Federal Deposit Insurance Act (compare pages 21 and 252-253 of H.R. 5660 with pages 20-21 of H.R. 4541); (2) the new Title IV exclusions from the CEA were added to the list of excluded transactions in several parts of Title I (compare the definition of "security future" at 28 of each bill, the description of the application of the CEA in Section 107 (at 50) of H.R. 5660 and in Section 108 (at 48) of H.R. 4541, the description of transactions permitted to be cleared by a Derivatives Clearing Organization ("DCO") in Section 112 (at 88-9) of H.R. 5660 and in Section 113 (at 86) of H.R. 4541, the preemption of state law in Section 117 (at 105) in H.R. 5660 and in Section 118 (at 101-2) of H.R. 4541, and the contract enforcement provision in Section 120 (at 108) of H.R. 5660 and in Section 121 (at 105-6) in H.R. 4541); (3) the definition of "trading facility" was revised to clarify the listed "exclusions" did not require CFTC confirmation of that status (compare pages 29-31 of H.R. 5660 with pages 28-30 of H.R. 4541); (4) the definition of "excluded electronic trading facility" was expanded to expressly permit submission of transactions to a DCO for clearance without thereby becoming a "trading facility" (compare pages 37-38 of H.R. 5660 with pages 36-37 of H.R. 4541); and (5) a "Derivatives Transaction Execution Facility ("DTEF") that delegated any duties was given an explicit obligation to address non-compliance with the delegated function (compare Section 113 (at 97) of H.R. 5660 with Section 114 (at 94-5) of H.R. 4541.
"Statement by Treasury Secretary Lawrence H. Summers"Archived 2009-08-31 at the Wayback Machine ("We are pleased with the agreement reached last night on over-the-counter derivatives. We hope that Congress will now pass this important legislation that will allow the United States to maintain its competitive position in this rapidly growing sector by providing legal certainty and promoting innovation, transparency and efficiency in our financial markets.") "Treasury Under Secretary for Domestic Finance Gary Gensler Remarks to the Bond Market Association, New York, New York"Archived 2009-08-27 at the Wayback Machine ("As the markets turn increasingly to swaps to take on some of the functions played by Treasury securities, it is ever more important to provide legal certainty for these OTC derivatives. We have worked vigorously to pass legislation providing legal certainty for swaps under the Commodity Exchange Act. I am very pleased to announce that we reached agreement late last night with Congress on such legislation, the Commodity Futures Modernization Act of 2000. This legislation, if enacted, will provide legal certainty, promote innovation, and enhance the competitiveness of U.S. financial markets.") Michael Schroeder, "Treasury Officials, GOP Reach Accord on Commodities", The Wall Street Journal, December 15, 2000 (Eastern Edition) at 1 ("Treasury officials and senior Republican lawmakers agreed on a bill to overhaul commodities regulation. The GOP leaders hoped for passage as early as today as part of a year-end budget bill. But last night, the appropriations committees were resisting inclusion of the complex measure...Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary Lawrence Summers have said the legislation is critical to the nation's $80 trillion derivatives industry. Large banks and major corporations use derivatives to hedge risk. The measure exempts the over-the-counter financial contracts from regulation, settling an important derivatives-contract legality issue...After yearlong negotiations, proponents overcame partisan wrangling and a regulatory turf battle between the CFTC and Securities and Exchange Commission. Lifting a ban on futures contracts pegged to a company's stock was among the most contentious issues. In October, the House overwhelmingly passed a version of the bill. In the Senate, Banking Committee Chairman Phil Gramm (R., Texas) objected to certain provisions. The administration adamantly opposed his insistence on including swaps sellable to individual investors. In the compromise, he dropped his support for including retail swaps.")
Dean Anason, "In Brief: Bottleneck Seen on Swaps Exemption Bill"[permanent dead link], American Banker, October 16, 2000, (referring to a statement issued the previous Friday, October 13, the article stated "Senate Agriculture Committee Chairman Richard G. Lugar said prospects are grim for a compromise on legislation that would protect swap contracts from federal regulation." Sen. Lugar added "failure to pass the Commodity Futures Modernization Act of 2000 will cause grave repercussions throughout the financial markets.") For similar expectations of a CFTC Commissioner critical of the CFMA see "Remarks of Commissioner Thomas J. Erickson" before the Silver User's Association on October 18, 2000 ("I think it is important to understand how these bills might work – despite the fact that they probably will not be passed in this session – because I believe they represent the current thinking of many legislators.") For the Administration's statement of support, see Statement of Administration Policy: H.R. 4541 - Commodity Futures Modernization Act of 2000, October 19, 2000, ("The Administration strongly supports the version of H.R. 4541, the Commodity Futures Modernization Act of 2000, that the Administration understands will be considered on the House floor.") The text of the statement was also introduced into the Congressional Record by Rep. Stenholm at Congressional Record page H10441.
unt.edu
digital.library.unt.edu
CRS 2003 CFMA Report at 6 ("H.R. 5660 was incorporated by reference into H.R. 4577"). CCH CFMA Guide at 15. Paul M. Irvin, "Appropriations for FY2001: Labor, Health and Human Services, and Education, CRS Report for Congress, RL30503 Updated January 18, 2001 ("CRS 2001 Appropriations Report"), at CRS-2 (explaining the text of the Conference Report for H.R. 4577 is at H12100-H12439 and H12531). The text of the CFMA (then as H.R. 5660) is in H12320 to H12345 of the full Conference Report contained in Congressional Record, H12100-12439, December 15, 2000. H12100 lists H.R. 5660 as (5) of (9) House bills incorporated into the spending bill. H12439 shows the names of the 15 House Managers and 15 Senate Managers for the Conference, who unanimously approved the Conference Report subject to Rep. Jesse L. Jackson, Jr.'s objections to the four items listed after his name, not including any objection concerning H.R 5660. Sen. Gramm is not listed as a Senate Manager. His ability to keep legislation out of the Conference Report, however, was noted by Representative Barney Frank (D-MA) in the House debate of the Conference Report at Congressional Record, H12442-12502, December 15, 2000, during which (at H12483) Rep. Frank noted a measure with bipartisan support had not been included in the Conference Report because it "was killed by the objection of the senior Senator from Texas."
H.R. 4577 All Actions Page, which shows December 15, 2000, Senate "consideration" and action. It is noted at Congressional Record page S11855 that the Conference Report was published in full in the House proceedings for December 15, 2000, as described in note 66 above. The Conference Report passed the Senate by "unanimous consent." The H.R. 4577 All Actions Page shows the Senate "discussion" of the Conference Report taking place on December 15, 2000, from pages S11855-S11878 with no vote taking place. When the Senate adopts a rule permitting adoption of legislation by "unanimous consent" the bill or other matter before the Senate is adopted "unless an objection is stated." At S11876, both Senators James Inhofe (R-OK) and Paul Wellstone (D-MN) derided the procedure. Under the "consent agreement" described by Sen. Wellstone this did not constitute an "objection" that defeated the unanimous consent. Sandy Streeter, "Continuing Appropriations Acts: Brief Overview of Recent Practices", CRS Report for Congress RL30343, Updated December 22, 2000 ( explaining, in footnote b to Table 1, that "a unanimous consent request is proposed to adopt the measure and if no Member objects, the resolution is adopted."). Paul M. Irvin, "Appropriations for FY2001: Labor, Health and Human Services, and Education, CRS Report for Congress, RL30503 Updated January 18, 2001, at CRS-2 (explaining the text of the Conference Report for H.R. 4577 is at H12100-H12439 and H12531, that the House debated the Conference Report at H12442-12501, with a roll call vote at H12502, and that the Senate passed the Report by unanimous consent at S11855-11885). Page H12531 is the printing order for the Conference Report that appears at pages H12100-12439.
CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
washingtonpost.com
CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
Johnson/Hazen Derivatives Regulation Treatise at 50 to 54. CRS Derivatives Regulation Report at CRS-5. PWG Report at 6. The CEA required that futures contracts be transacted on a "contract market" designated by the CFTC. "Designated contract markets" (such as the Chicago Board of Trade, Chicago Mercantile Exchange, or New York Mercantile Exchange (NYMEX)) are generally referred to as "exchanges" but are also called "boards of trade." Markham CF Trading History at 15 and 69. For the notion the meaning of "future delivery" evolved, see GAO Report, "CFTC and SEC: Issues Related to the Shad-Johnson Jurisdictional Accord", GAO/GGD-00-89Archived September 5, 2009, at the Wayback Machine, April 2000 ("GAO Shad-Johnson Report") at 14, fn. 35 ("the definition has evolved through judicial and agency interpretations.") For a broader discussion of the issue see GAO CEA Issues Report at 6.
Mark Jickling, "Regulation of Energy Derivatives" RS21401Archived 2011-07-19 at the Wayback Machine, CRS Report for Congress, updated April 21, 2006 ("CRS Energy Derivatives Report") at CRS-3. For a broader review of "legal uncertainty" issues and the 1999 PWG's view of how those issues led to its recommendations that formed the basis for the CFMA, see PWG Report at 6 through 14.
GAO CEA Issues Report at 12 to 17. PWG Report at 8 to 10. Markham CF Law Treatise at pages 27-23 to 27-26. Johnson/Hazen Derivatives Regulation Treatise at 43 to 48 and 60 to 66. For the significance of the 1992 legislation's preemption of state laws, see Born July 30, 1998, Senate Agriculture Testimony at 6 where Chairperson Born describes its role in providing "legal certainty." As noted in the GAO CEA Issues Report at 15, the Conference Report for the FTPA stated: "The Conferees do not intend that the exercise of exemptive authority by the Commission would require any determination beforehand that the agreement, instrument, or transaction for which an exemption is sought is subject to the Act." H10937, Congressional Record, October 2, 1992. The entire Conference Report for the FTPA is available by searching "conference report on H.R. 707" at this link for the Search the Congressional Record on the 102d Congress page of The Library of Congress Thomas service ("Thomas LOC").Archived 2009-05-06 at the Wayback Machine The Conference Report also stated (at H10936) that "the Conferees expect and strongly encourage the Commission to use its new exemptive powers promptly upon enactment of this legislation in four areas where significant concerns of legal uncertainty have arisen: (1) hybrids, (2) swaps, (3) forwards, and (4) bank deposits and accounts." The Report went on to explain (at H10937) the "forwards" were the oil market transactions covered by the existing Brent oil market "statutory interpretation." For the view Congress had thereby "instructed" the CFTC to grant the exemptions, see the testimony of CFTC Chair William Rainer at Senate Agriculture PWG Report Hearing at 15 ("amid strong signals that swap market participants feared their contracts could be declared unenforceable, Congress reacted decisively instructing the CFTC not to regulate swaps entered into by sophisticated parties.") See also GAO Report "The Commodity Exchange Act: Issues Related to the Commodity Futures Trading Commission's Reauthorization", GAO/GGD-99-74Archived September 5, 2009, at the Wayback Machine, May 1999 ("GAO 1999 CFTC Reauthorization Report") at 10 ("According to the 1992 act's legislative history, Congress expected CFTC to use its exemptive authority promptly to reduce legal risk for swaps, forwards, and hybrids.")
Before the FTPA exemptions were issued, the elements required by the CFTC policy statement were (1) individually negotiated (not "standardized") terms, (2) no "offset" or other termination except as privately agreed, (3) credit exposure between the parties (i.e., no intervening "clearing facility" or full margin requirement guaranteeing against defaults), (4) contracting only in connection with a line of business (including "financial intermediation" for banks and other dealers) or financing such a business, and (5) no marketing to the public. CFTC. "Policy Statement Concerning Swap Transactions", 54 Federal Register 30694 (July 21, 1989). GAO CEA Issues Report at 12 to 13. PWG Report at 10. Markham CF Law Treatise at page 27-23. Johnson/Hazen Derivatives Regulation Treatise at 43. The exemptions under the FTPA required that the transaction (1) be between "eligible swap participants" (defined as businesses, government entities, investment pools, and high-net-worth individuals), (2) not be standardized in material economic terms, (3) subject each party to the credit risk of the other, (4) and not be traded on a "multilateral transaction execution facility" on which multiple parties could offer and accept transactions. CFTC, "Exemption for Certain Swap Agreements", 58 Federal Register 5587 (January 22, 1993). GAO CEA Issues Report at 14 to 16. PWG Report at 10 to 12. Markham CF Law Treatise at pages 27-25 to 26. Johnson/Hazen Derivatives Regulation Treatise at 43 to 44 and 47 to 49 (which notes, at 44, that the swaps exemption retained for qualifying swaps that might still be "futures" the "antifraud and antimanipulation provisions" of the CEA). GAO 1999 CFTC Reauthorization Report at 10 to 11. The FTPA exemption, therefore, more broadly permitted "speculators" in the swaps market and tailored the exemption to the financial "sophistication" of the parties and the absence of both exchange style "netting" of exposures and public availability of offers. For the role of "speculators" in OTC derivatives markets, see Mark Jickling and Lynn J. Cunningham, "Speculation and Energy Prices: Legislative Responses", RL 34555, CRS Report for CongressArchived 2009-02-12 at the Wayback Machine, updated August 6, 2008. The requirements for "hybrid instruments" under the 1990 "statutory interpretation" and the 1993 exemption were similar. Both required that the instrument be a security or bank deposit, the commodity dependent value of the instrument be limited, the instrument not be marketed as a commodity option or futures contract, and the instrument not be subject to settlement through a delivery instrument specified by a regulated exchange. While there were further requirements for each, the 1993 exemption moved towards criteria later included in the CFMA in requiring that the instrument be regulated by the SEC or banking regulators and that the issuer receive full payment at the time of sale and not receive future payments from the holder. CFTC, "Statutory Interpretation Concerning Certain Hybrid Instruments", 55 Federal Register 13582 (April 11, 1990) (for the hybrid instrument statutory interpretation). CFTC, "Regulation of Hybrid Instruments", 58 Federal Register 5580 (January 22, 1993) (for the hybrid instrument exemption). PWG Report at 28. Johnson/Hazen Derivatives Regulation at 59 to 60. The 1990 "forward transaction" statutory interpretation and 1993 exemption were similar in requiring that the transaction be between "commercial" parties able to make or take delivery of the energy product, that the agreement be subject to individual negotiation between the two parties, and that the contract create binding obligations to make and take delivery, with no automatic right to make cash settlement. CFTC, "Statutory Interpretation Concerning Forward Transactions", 55 Federal Register 39188 (September 25, 1990). CFTC, "Exemption for Certain Contracts Involving Energy Products", 58 Federal Register 21286 (April 20, 1993) (issued April 13, 1993, with Acting Chairman Albrecht and Commissioner Dial concurring, and Commissioner Bair dissenting, as noted at 58 Federal Register 21294). GAO 1999 CFTC Reauthorization Report at 38 to 39. Johnson/Hazen Derivatives Regulation at 68 to 69. For the controversy that arose from the 1993 order's exemption of energy contracts from the CEA's fraud provisions, see the April 28, 1993, Hearing before the Subcommittee on Environment, Credit, and Rural Development of the House Committee on Agriculture ("1993 House Hearing"). For an influential account of the 1993 House Hearing and of the entire 1992-3 exemption process, which describes former CFTC Chair Wendy Gramm as having cast the deciding vote on the energy contracts exemption and as being the target of criticism by Representative Glenn English (D-OK) at the April 28, 1993, hearing, even though the account also notes she resigned from the CFTC on January 20, 1993, well before the 2-1 vote on the exemption order was taken and the hearing was held, see Public Citizen, "Blind Faith: How Deregulation and Enron's Influence over Government Looted Billions from Americans" ("Blind Faith") at 9 to 12. The statement of Rep. English quoted at 12 of Blind Faith is at 45 to 46 at the end of the testimony in the 1993 House Hearing. For the influence of Blind Faith on accounts of the CFMA see note 70 below.
Markham CF Law Treatise at pages 27-38 to 27-49. GAO Report, "Financial Derivatives: Actions Needed to Protect the Financial System", GAO/GGD-94-133, May 1994 ("GAO 1994 Derivatives Report"). GAO Report, "Financial Derivatives: Actions Taken or Proposed Since May 1994", GAO/GGD/AIMD-97-8Archived September 3, 2009, at the Wayback Machine, November 1996 ("GAO 1996 Derivatives Report") at 31 to 32 lists the six 1994 legislative proposals and four derivatives bills pending in 1996, and at 44 to 45 notes the six securities firms in the Derivatives Policy Group accounted for over 90% of the derivatives dealer activities of securities firms. At least in the context of the 1998 Congressional hearings concerning the CFTC "concept release" described in Section 1.2.1 below, Representative James A. Leach (R-IA) stated that by 1998 "the major provisions" of the 900-page 1993 minority staff report mentioned in note 37 below had been "implemented" by "industry and regulators" so that derivatives markets are sturdier and more consistently supervised than they were several years ago. July 17, 1998, Hearing before the House Committee on Banking and Financial Services ("July 17, 1998, House Banking Hearing") at 2.
Markham CF Law Treatise at pages 27-83 to 84 and page 28-20. (At page 27-83 it states, "The CFTC's action was actually a thinly disguised response to an SEC proposal to pull the derivatives dealers under its regulatory umbrella"). Johnson/Hazen Derivatives Regulation Treatise at 45 to 46. For Professor Coffee's judgment see pages 82 to 83 of the July 17, 1998, House Banking Hearing. ("It may be in part their game plan that enough pressure, enough pain being caused to all, will lead the SEC to back down and withdraw their deregulatory proposals in their Broker Lite rule. If that happens, a tactic that I think is unfair will have worked, and it will probably be used again in what I think are the likelihood of continuing border wars between agencies that have somewhat overlapping jurisdiction.") In 2002, Professor Coffee repeated the narrative that a "turf war" led to the CFMA at the July 10, 2002 Hearing before the Senate Committee on Agriculture, Nutrition, and Forestry, "CFTC Regulation and Oversight of Derivatives"Archived May 4, 2009, at the Wayback Machine at 38 ("let me remind you of something you already know, but I think the record should set this forth clearly, the 2000 Act was precipitated by a turf war between the SEC and CFTC, and as a result of that, there was suddenly a serious question about the legal status of swaps and the possibility that the longstanding 1993 swaps exemption might be repealed suddenly. That sent a friction of fear across Wall Street and the President's Working Group understandably recommended that financial derivatives be deregulated to the extent they traded over-the-counter.") For the CFTC's description of events see Born July 1998 Senate Agriculture Testimony at 5 to 11. The CFTC's dissatisfaction with the Broker-Dealer Lite proposal and the fact it was issued without a PWG meeting is expressed by Chairwoman Born at pages 11–14 of the June 10, 1998, Hearing before House Subcommittee on Risk Management and Specialty Crops.
July 24, 1998 House Banking Hearing; Testimony of Alan Greenspan, Chairman, Board of Governors of Federal Reserve Board, before the U.S. Senate Committee on Agriculture, Nutrition and Forestry, July 30, 1998Archived August 5, 2009, at the Wayback Machine ("Greenspan July 1998 Senate Agriculture Testimony"); Testimony of Treasury Deputy Secretary Lawrence H. SummersArchived 2009-08-05 at the Wayback Machine for the same July 10, 1998, Senate Agriculture Committee Hearing ("Summers July 1998 Senate Agriculture Testimony"); and Testimony of SEC Chairman Arthur LevittArchived 2009-08-05 at the Wayback Machine for that July 10, 1998, Senate Agriculture Committee Hearing ("Levitt July 1998 Senate Agriculture Testimony"). In the July 24, 1998 House Banking Hearing at 171-2, Chairman Greenspan pointed to the growth of the Eurodollar market in the 1960s, which in his account was established as a way to avoid US law limiting interest on deposits, which market did not return to the US even after the regulatory issue was overcome. In the June 10, 1998, House Agriculture Subcommittee Hearing (at 42) Richard Lindsay, Director of the SEC's Division of Market Regulation, made a similar argument about the loss of US capital market activity to the Eurobond market when "a very simple law change moved the Eurobond market from the United States, where it was a vibrant market, abroad virtually overnight. And that market has never returned." While Regulation Q (the regulatory limit on deposit interest) is usually cited as the cause for the development of the Eurodollar market, there are competing views that at least a partial cause was fear of US "political risk" focused more on potential US seizures or blocks on foreign (particularly Soviet Union) money in US banks. Milton Friedman,"The Eurodollar Market: Some First Principles"Archived 2010-05-27 at the Wayback Machine, Selected Papers No. 34, University of Chicago School of Business. Charles P. Kindelberger, A Financial History of Western Europe (2d Ed. Oxford University Press 1993) at 439–441 (for the Eurodollar market) and 441 (for the Eurobond market). For the "forward rate agreement" market, which was often conducted by U.S. banks through "offshore" branches because of concern such agreements looked too much like "futures" traded on U.S. exchanges, see Philip McBride Johnson, Michael S. Sackheim and Thomas A. Hale "Future Rate Agreements: Implications under the Commodity Exchange Act", Commodities Law Letter, March 1987, at 3-6. See also notes 37, 79 (Summers response to Harkin question at Senate Agriculture PWG Report hearing), and 81 below for the issue of "offshore" booking of OTC derivative transactions.
Consolidated Tesimony of the Futures Exchanges of the United States to Senate Agriculture Committee, February 11, 1997Archived December 2, 2009, at the Wayback Machine ("U.S. futures markets have found it increasingly difficult to compete with foreign exchanges and OTC dealers as our competition's regulatory costs have diminished or remained virtually non-existent while ours have escalated.") John M. Broder, "Chicago Exchanges Seek to Loosen Yoke of Regulation", The New York Times, June 4, 1997. George Gunsel, "Big Guns Loading for Deregulation Battle", Chicago Tribune, March 23, 1997 (quoting the CBOT's president as stating "We were promised an even-handed landscape in 1992 (legislation) and it didn't happen. We lost business to oversees and the over-the-counter markets." George Burns, "Deregulation of Futures May be Derailed, CBOT, Merc in Opposing Factions on Key Issues, and Time's Running Out in Congress", Chicago Tribune, July 25, 1997 ("the Board of Trade wants Congress to authorize the trading of equity swaps in unregulated markets" and "the Merc worries that giving legal certainty to equity swaps would hurt its stock-index futures contracts.") Jerry Hegstrom, "Commodity Clash"Archived 2008-07-06 at the Wayback Machine, Government Executive, October 1, 1997.
GAO Report, "Long-Term Capital Management: Regulators Need to Focus Greater Attention on Systemic Risk," GAO/GGD-00-3Archived 2010-01-07 at the Wayback Machine, October 1999 ("GAO LTCM Report") at 16 to 17 (for "regulators did not identify weaknesses in firms' risk management practices until after the crisis"), 17 to 19 (for "offsite monitoring did not reveal the potential systemic threat posed by LTCM"), and 21 (for "existing coordination could be improved to enhance regulators' ability to identify risks across industries and markets.") GAO LTCM Report at 31 (for the recommendation Congress "consider providing SEC and CFTC with the authority to regulate the activities of securities and futures firms' affiliates similar to that provided the Federal Reserve with respect to bank holding companies.") "Congressional Agency Faults a Report on Hedge-Fund Risk", The New York Times, November 20, 1999. Michael Schroeder, "General Accounting Office's Report Urges Tighter Broker-Dealer Oversight", The Wall Street Journal, November 22, 1999. Both news articles stated the GAO recommended Congress enact consolidated supervision of securities and commodities firms, although the GAO Report only stated Congress should "consider" such legislation. Perhaps these news reports more accurately described GAO's actual intent.
PWG Report at 15 to 16. CRS Derivatives Regulation Report at CRS-7 to 8. Consistent with the Greenspan and Summers testimony described in note 34 above, the analysis was centered around "sophisticated parties" and "susceptibility to manipulation" with points (1) and (2) dealing with the former and points (3) and (4) dealing with the latter. In his testimony at the Senate Agriculture PWG Report Hearing, however, CFTC Chair William Rainer distinguished (at 15) between protecting "price discovery" and protecting against "price manipulation", concluding that Congress "identified the overarching public mission of the CFTC as that of preventing price manipulation and ensuring price transparency." Mark Jickling, "The Commodity Futures Modernization Act (P.L. 106-554)", RS20560Archived 2009-02-11 at the Wayback Machine, February 3, 2003 ("CRS 2003 CFMA Report") at 1 ("Apart from its substance, the Working Group's report was remarkable in that the four agencies, which had a history of jurisdictional quarrels, unanimously agreed on a redrawing of the regulatory lines.")
CRS 2003 CFMA Report at 2. CRS Derivatives Regulation Report at CRS-9. ISDA CFMA Memo at 23 to 28. Dean Kloner, "The Commodity Futures Modernization Act of 2000"Archived 2009-11-23 at the Wayback Machine, 29 Securities Regulation Law Journal 286 (2001) ("Kloner CFMA") at 289 to 290. Markham CF Law Treatise at pages 27-88 to 89. Johnson/Hazen Derivatives Regulation at 330-333. For the PWG Report's recommendation, see PWG Report at 17 ("insofar as transactions are subject to regulated clearing, the exclusion should not prohibit fungibility of contracts or require that creditworthiness be a material consideration.")
Thomas LOC Summary and Status Page for H.R. 4541Archived 2008-11-27 at the Wayback Machine and Thomas LOC Committee Page for H.R. 4541. Aside from implementing and expanding on the PWG Report's recommendations, H.R. 4541 and S. 2697 would "reauthorize" the CFTC. Under the CEA as amended in 1974 to create the CFTC, the Commission was only "authorized" for five years. Since 1974, the "reauthorization" of the CFTC has served as the occasion for "reconsideration" of the provisions of the CEA, most dramatically in 1999 to 2000 with the CFMA. Such "reauthorization" has not always occurred on a timely basis, so that the CFTC has continued in existence on an interim basis, when (as on September 30, 2000) its "authorization" has expired. Markham CF Law Treatise at pages 28-13 to 28-20. For a description of each "reauthorization" see GAO 1999 CFTC Reauthorization Report at 55 to 60.
Rob Garver, "In Brief: Swaps Measure Delayed as Agencies Argue"[permanent dead link], American Banker, May 12, 2000, ( In describing Rep. Ewing's plan to offer legislation concerning swaps, the article noted Senators Lugar and Gramm "had been expected to introduce similar legislation in the Senate on Thursday, but a debate between the Securities and Exchange Commission and the Commodity Futures Trading Commission over other regulatory matters in the bill has held it up.") For Senate Committee Chair Lugar's remarks, see June 21, 2000, Joint Senate Committee Hearing at 2 to 3 and at 37 ("it should have been apparent to the two of you [the CFTC and SEC Chairmen] that we are intent upon passing a bill...why the two of you are not equally arduous"). For House Subcommittee Chair Ewing's remarks, see Hearing before House Subcommittee on Risk Management, Research, and Specialty Crops, June 19, 2000, ("June 19, 2000, House Agriculture Subcommittee Hearing") at 10 (for the tight legislative calendar) and at 43 to 55 (for extended "single stock futures" questions). For Commerce Committee Chair Bliley's remarks, see Hearing before the Subcommittee on Finance and Hazardous Materials on H.R. 4541, July 12, 2000, (" July 12, 2000, House Commerce Subcommittee Hearing") at 4. For Ranking Member LaFalce's statement see Hearing before House Committee on Banking and Financial Services on H.R. 4541, July 19, 2000, ("July 19, 2000, House Banking Committee Hearing") at 14 ("it is unfortunate that we are getting this bill referral that says we have to report it out by September 6th, which means we have to report it out next week.") See also Committee Chair Leach at 91 ("my own sense is one of great frustration working within the constraints of this Act"). Rep. Leach had introduced on April 6, 2000, his own bill H.R. 4203 to implement, separate from CFTC reauthorization, portions of the PWG Report applicable to OTC derivatives. As the Thomas LOC All Congressional Action Page for H.R. 4203Archived 2016-07-04 at the Wayback Machine shows, this bill did not proceed past the Committee referral stage.
"Accord Ends Dispute Between Regulators", The New York Times, September 15, 2000. Remarks by Treasury Under Secretary Gary Gensler to the American Bankers Association Government Relations Council, September 19, 2000Archived August 31, 2009, at the Wayback Machine (after describing the previous week's agreement between the SEC and CFTC to permit single stock futures trading and how that opened the way to enactment of the CFMA, Under Secretary Gensler stated "With this historic agreement, the Congress has a tremendous opportunity to complete this important legislation. We should not miss this opportunity to modernize the regulatory structure of our derivatives markets, reduce systemic risk, and promote the competitiveness of our markets.") Remarks by Treasury Assistant Secretary Lewis A. Sachs, Alexander Hamilton Awards New York, NY, September 26, 2000Archived August 31, 2009, at the Wayback Machine (after describing the OTC derivatives market, Assistant Secretary Sachs promoted the OTC derivatives legislation in Congress because "this legislation would allow the electronic trading and centralized clearing of derivatives, thereby helping to: reduce counterparty risk; promote innovation; make our markets more competitive, transparent, and efficient; and reduce the costs of hedging risk and reducing exposure to other markets. It is important that Congress enact such legislation this year.")
Extended Remarks of Representative Thomas Ewing (R-IL), Congressional Record, E2181-2182 (December 14, 2000) introducing H.R. 5660 (the bill "contains the major provisions of the House passed H.R. 4541. These provisions are in Titles I and II of the legislation... "). H.R. 4541 as passed by the House. H.R. 5660 as introduced in the House and enacted into law through H.R. 4577 The two differences between Title I in the two bills that are apparent from the tables of contents (see page 2 for each bill) are that H.R. 5660 eliminated the "Rules of Construction" that were in Section 128 of H.R. 4541 and inserted H.R. 4541's Section 107 dealing with "Swap transactions" into Section 105 as Section 105(b) of H.R. 5660. The first change led to the colloquy between Reps. Bliley and Combest described in note 69 below, in which they confirmed nothing in the CFMA granted a bank any additional power to own equity securities (which was previously covered by Section 128 of H.R. 4541). The second change lead to an overall "re-lettering" of language in Title I, because the swaps "exclusion" became Section 2(g) rather than 2(h) of the CEA. This meant the CFMA's exclusions were consecutively "lettered" as 2(c)-(g) with Section 2(h) the "exemptions." Under H.R. 4541, Section 2(g) would have been the new "exemptions" and Section 2(h) would have been the final "exclusion." The new Section 2(g) was also modified from H.R. 4541 in its definition of "swap agreement" to require "individual negotiation" but not "individual negotiation" of "each material term" (other than price and quantity) and in adding a Section 105(c) requirement for a PWG study of "retail swaps." The last change addressed an issue raised by Republican Representatives in the House Floor debate of H.R. 4541 (as described in note 58 below). The PWG issued its "Joint Report on Retail Swaps"Archived 2009-08-31 at the Wayback Machine in December 2001 and found (at page 9) it was not "necessary at this time to recommend legislative action for swap agreements offered to persons other than ECPs." Aside from these two changes and various typographical or stylistic corrections, the changes to Title I were: (1) the definition of "hybrid instrument" was expanded to permit delivery of a commodity and the H.R. 4541 definition of "deposit instrument" was replaced by the new Title IV's definition of "identified banking product" contained in Section 402(b) of H.R. 5660, which did not include the limitations for foreign and other deposits listed in H.R. 4541's exclusions for subparagraphs (A), (B), and (C) of Section 3(l) of the Federal Deposit Insurance Act (compare pages 21 and 252-253 of H.R. 5660 with pages 20-21 of H.R. 4541); (2) the new Title IV exclusions from the CEA were added to the list of excluded transactions in several parts of Title I (compare the definition of "security future" at 28 of each bill, the description of the application of the CEA in Section 107 (at 50) of H.R. 5660 and in Section 108 (at 48) of H.R. 4541, the description of transactions permitted to be cleared by a Derivatives Clearing Organization ("DCO") in Section 112 (at 88-9) of H.R. 5660 and in Section 113 (at 86) of H.R. 4541, the preemption of state law in Section 117 (at 105) in H.R. 5660 and in Section 118 (at 101-2) of H.R. 4541, and the contract enforcement provision in Section 120 (at 108) of H.R. 5660 and in Section 121 (at 105-6) in H.R. 4541); (3) the definition of "trading facility" was revised to clarify the listed "exclusions" did not require CFTC confirmation of that status (compare pages 29-31 of H.R. 5660 with pages 28-30 of H.R. 4541); (4) the definition of "excluded electronic trading facility" was expanded to expressly permit submission of transactions to a DCO for clearance without thereby becoming a "trading facility" (compare pages 37-38 of H.R. 5660 with pages 36-37 of H.R. 4541); and (5) a "Derivatives Transaction Execution Facility ("DTEF") that delegated any duties was given an explicit obligation to address non-compliance with the delegated function (compare Section 113 (at 97) of H.R. 5660 with Section 114 (at 94-5) of H.R. 4541.
Even before House passage of H.R. 4541, press reports and statements by Republicans in the Congressional Record indicated Republican unhappiness with the "compromise" reached on H.R. 4541. Dean Anason, "In Brief: Swaps Bill Getting Slim Odds in Senate"[permanent dead link], American Banker, October 19, 2000; "In Brief: House Backs Swaps Bill; Senate in Doubt", American Banker, October 23, 2000; Michelle Heller, "In Brief: Bank Legislation Faces Election Deadline"[permanent dead link], American Banker, November 1, 2000; William Roberts (Bloomberg News) and Michele Heller, "Congress Likely to Get Election Timeout", American Banker, November 2, 2000; "Legislative Update"[permanent dead link], American Banker, November 9, 2000. While the October 2000 Congressional Record statements of Democrats referenced in note 54 above showed unhappiness with the "process" by which they were excluded from negotiations, with late input leading to an acceptable bill, October 19, 2000, Congressional Record statements by Republican Representatives (in the discussion at H10416-10449 cited and linked in note 54 above) expressed unhappiness the bill did not contain broader "protections." Rep. Jim Leach (at H10444 and again in "extended remarks" at Congressional Record E1877-8, October 23, 2000 expressed the wish "more could have been done" but said "progressive strides had been made." Representative Richard A. Baker (R-LA) (at H10448) bemoaned the "compromise" that had stripped the bill of "protections for swaps" He went on to announce he expected to work with Sen. Gramm "because it is evident these problems will not be solved on the House side." Although Representative Patrick J. Toomey (R-PA) stated that it was "a good bill" he said it was not a "perfect bill" and that he hoped "the other body will eliminate the remaining legal uncertainty that will still shadow the use of these transactions by retail customers. I hope that they will allow greater flexibility in the electronic trading of the over-the-counter derivatives." In the "rule suspension" discussion at H10411-15 (cited and linked in note 54 above) a "bipartisan" discontent was expressed by Representatives Sue Wilkins Myrick (R-NC) (at H10411) and Melvin Watt (D-NC) (at H10414-15) who criticized the removal of provisions in the House Banking Committee version of the bill that they thought better "protected" electronic trading platforms. This had special significance for the North Carolina based D&I Holdings (as explained by Rep. Watt at H10414). At this time, Enron emails continued to report Sen. Gramm was the obstacle to H.R. 4541 being enacted into law. Lipton Enron Article (quoting an October 25, 2000, email from Kenneth M. Raisler to Tom Briggs of Enron, "explaining how Senator Gramm is holding up the legislation" and an October 27, 2000, email also from Mr. Raisler to Enron executives describing how "Senator Gramm is activiely engaged and his issues are being aggressively negotiated" after Gramm had "been contacted by a number of people including members of our Energy Group and Alan Greenspan urging passage of the bill.") See also the October 20, 2000, email from Cynthia Sandherr of Enron to Mark Palmer of EnronArchived February 7, 2009, at the Wayback Machine ("The last deal which needs to be cut is with Senator Gramm (he is the only obstacle to enactment in the Senate.)...it is other issues which do not directly affect Enron which are being negotiated.")
Rob Garver, "Legislators Racing to Get Pro-Bank Swaps Bill Passed"[permanent dead link], American Banker, December 11, 2000; Miriam Eljas, "In Brief: Treasury Engaged in Talks on Swaps Bill"[permanent dead link], American Banker, December 12, 2000; "Legislative Update"[permanent dead link], American Banker, December 14, 2000, ("Attempts to jump-start negotiations between the administration and congressional Republicans on the Commodity Futures Modernization Act appear to be failing...Democrats charge that under that plan [i.e. the Republican Senate plan to bar the CFTC from regulating "bank products"] futures exchanges could escape Futures Commission oversight by merging with a bank. The Treasury Department, the lead for the Clinton Administration on this issue, countered late Monday with draft legislation of its own. A Senate Banking Committee spokeswoman described the Treasury offer as a step backwards.") In the Enron email, however, a December 11, 2000, email from Allison Navin to Mark Haedicke of Enron and othersArchived February 7, 2009, at the Wayback Machine enclosed a December 9, 2000, Congressional Quarterly report that the "commodity laws rewrite" was "alive" after representatives of the "big commodity exchanges" met with "the Senator who has been blocking the bill" with the Senator identified as Sen. Gramm). Lipton Enron Article (which describes December 12, 2000, emails from Stacy Cary of ISDA showing "Mr. Gramm is being pressured to give in and sign off on the legislation, but he is still pushing for certain changes" and from Chris Long showing "Mr. Gramm was able to persuade the players to accept some modest amendments to the legislation, including a change that will further protect swaps from regulation, as he had long sought-a change that would benefit Enron." It is unclear what Mr. Long means in his email when he describes his "understanding from Treasury that the swap exemption is expanded slightly to say that if you are trading on a facility (MTF) and you are trading on principle-to-principle [sic] basis among eligible contract participants you are no longer subject anti-fraud and anti-manipulation as contained in Sec. 107 of the House passed legislation." As described in note 57 above and note 74 below, Section 107 of H.R. 4541 contained the same Section 2(h)(1) "bilateral swaps" exemption as Section 106 of H.R. 5660. Both applied the CEA's anti-fraud and anti-manipulation provisions to "eligible contract participants", but not the anti-fraud provisions to "principal to principal" transactions between "eligible commercial entities." Perhaps (1) an intervening draft of the legislation would have changed the Section 2(h)(1) provision from that in H.R. 4541, (2) the provision was further changed back to that in H.R. 4541 after Mr. Long's conversation, or (3) Mr. Long misunderstood what the Treasury Department told him.
"Statement by Treasury Secretary Lawrence H. Summers"Archived 2009-08-31 at the Wayback Machine ("We are pleased with the agreement reached last night on over-the-counter derivatives. We hope that Congress will now pass this important legislation that will allow the United States to maintain its competitive position in this rapidly growing sector by providing legal certainty and promoting innovation, transparency and efficiency in our financial markets.") "Treasury Under Secretary for Domestic Finance Gary Gensler Remarks to the Bond Market Association, New York, New York"Archived 2009-08-27 at the Wayback Machine ("As the markets turn increasingly to swaps to take on some of the functions played by Treasury securities, it is ever more important to provide legal certainty for these OTC derivatives. We have worked vigorously to pass legislation providing legal certainty for swaps under the Commodity Exchange Act. I am very pleased to announce that we reached agreement late last night with Congress on such legislation, the Commodity Futures Modernization Act of 2000. This legislation, if enacted, will provide legal certainty, promote innovation, and enhance the competitiveness of U.S. financial markets.") Michael Schroeder, "Treasury Officials, GOP Reach Accord on Commodities", The Wall Street Journal, December 15, 2000 (Eastern Edition) at 1 ("Treasury officials and senior Republican lawmakers agreed on a bill to overhaul commodities regulation. The GOP leaders hoped for passage as early as today as part of a year-end budget bill. But last night, the appropriations committees were resisting inclusion of the complex measure...Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary Lawrence Summers have said the legislation is critical to the nation's $80 trillion derivatives industry. Large banks and major corporations use derivatives to hedge risk. The measure exempts the over-the-counter financial contracts from regulation, settling an important derivatives-contract legality issue...After yearlong negotiations, proponents overcame partisan wrangling and a regulatory turf battle between the CFTC and Securities and Exchange Commission. Lifting a ban on futures contracts pegged to a company's stock was among the most contentious issues. In October, the House overwhelmingly passed a version of the bill. In the Senate, Banking Committee Chairman Phil Gramm (R., Texas) objected to certain provisions. The administration adamantly opposed his insistence on including swaps sellable to individual investors. In the compromise, he dropped his support for including retail swaps.")
Thomas LOC All Congressional Actions Page for H.R. 5660Archived 2016-07-05 at the Wayback Machine ("H.R. 5660 All Actions Page"). Rep. Ewing's remarks introducing the bill (at E2181-2 of the December 14, 2000 Congressional Record) were inserted into the Congressional Record as "extensions of remarks", not actual statements made on the House Floor. They demonstrate this "latest version of the legislation", although formally assigned to four committees as shown on the H.R. 5660 All Actions Page, was "the final package" reflecting the "many hours working through this language to reach agreement" among the Administration, Treasury, the CFTC, the SEC and the Senate. Charles W. Edwards, J.D., James Hamilton, J.D., L.L.M., Heather Montgomery, J.D., Commodity Futures Modernization Act of 2000: Law and Explanation (CCH Incorporated 2000) (ISBN0-8080-0600-2) ("CCH CFMA Guide") at 15 ("After an arduous effort, the 106th Congress passed the Commodity Futures Modernization Act of 2000, H.R. 5660, Public Law 106-554, as Section 1(a)(5) of H.R. 4577, the Consolidated Appropriations Act of 2001. It was signed by President Clinton on December 21, 2000, without change, as introduced on December 14, 2000 in the House of Representatives.")
CRS 2003 CFMA Report at 6 ("identical bills H.R. 5660 and S. 3282 [sic] were introduced"). Thomas LOC All Congressional Actions Page for S. 3283Archived 2016-07-05 at the Wayback Machine Sen. Lugar's introduction of the bill at S11924-6 of the December 15, 2000, Senate bill introductions in Congressional Record, S11918-11930, December 15, 2000 states (at S11924) H.R. 5660 would be the legislation "which will be enacted as part of the final appropriations package today." Sen. Gramm states (at S11926) "We are introducing the bill today as the finished product of years of work involving half a dozen committees in both Houses of Congress, and as many agencies of the Federal government. This bill is identical to, and is the Senate companion to, H.R. 5660, introduced yesterday in the House and which will be approved by the House and the Senate today. We introduce this bill in the Senate to demonstrate the bicameral authorship and support for this important legislation.")
In the House, Representative John LaFalce (D-NY), Ranking Member of the House Banking Committee, was a co-sponsor of H.R. 5660Archived 2016-07-05 at the Wayback Machine. The House proposed the order to consider the H.R. 4577 Conference Report at Congressional Record, H12441, December 15, 2000, and proceeded to debate it at H12442-12501 (as cited and linked at the end of note 66 above). Representative Charles Stenholm (D-TX), Ranking Member of the House Agriculture Committee, spoke in favor of H.R. 5660 at H12491. Representative John Dingell (D-MI), Ranking Member of the House Commerce Committee, spoke at length in support of H.R. 5660 at H12497-8 . Representative Sheila Jackson-Lee (D-TX) spoke at H12495. Among Republicans, Rep. Ewing, the bill's sponsor, had introduced H.R. 5660 (as described in note 64 above) and spoke in support at H12485 and H12488-9. Rep. Leach spoke in support at H12498-9. Representative Thomas Bliley (R-VA), Chair of the House Commerce Committee, (at H12501) and Representative Larry Combest (R-TX), Chair of the full Agriculture Committee (at H12497) exchanged "statutory interpretation" remarks agreeing that nothing in Title II of the CFMA would give banks increased powers to own securities.
In the Senate the two Ranking Members of the Agriculture and Banking Committees introduced letters from the PWG confirming its unanimous "strong support" for H.R. 5660. Senator Thomas Harkin (D-IA), Ranking Member of the Senate Agriculture Committee and a co-sponsor of the equivalent S.3283Archived 2016-07-05 at the Wayback Machine, was the only Democrat who entered a statement about the bill on December 15, which appears at Congressional Record, S11896-7. Sen. Harkin noted (at S11896) he had worked to eliminate "an outright exclusion" for energy, preferring to continue "the substantial exemption" already provided by the CFTC, but that "further negotiations" brought "the provisions on this subject that are in this bill." He recognized "the need for compromise" given "the overall importance and positive features of this legislation." He also noted (at S11896) he had worked with Senator Lugar on the legislation and that Senators Gramm and Sarbanes had cooperated "in completing this bill." At S11897 he concluded by complementing Sen. Lugar, Rep. Ewing and "all staff involved for their outstanding work in making this important legislation a reality." Senator Paul Sarbanes (D-MD) did not speak on December 15, but when Congress returned on January 2, he noted the PWG's strong support for H.R. 5660 and introduced the version of the PWG letter addressed to him. Congressional Record, S11946, January 2, 2001. During the actual Senate "consideration" of H.R. 4577 (at Congressional Record, S11855-11878, December 15, 2000), Republican Senator Gramm (at S11926) was the only Senator to speak in support of H.R. 5660. In added remarks at Congressional Record, S11878-11885, December 15, 2000 Senator Peter Fitzgerald (R-IL) spoke (at S11878-9) in support of the CFMA. In the December 15, 2000 statements on introduced bills at S11918-11930 Sen. Lugar (at S11924-6) in introducing S. 3283 as the equivalent of H.R. 5660 spoke in support of H.R. 5660. The only change to H.R. 4577 made during the House and Senate consideration of the H.R. 4577 conference report was an amendment to H.R. 5666 made by joint resolution of the two Houses. See amendment as introducedas enacted, and as enrolled. This shows in section 1(a)(4) of H.R. 4577 as enacted into law as Public Law 106-554.
CCH CFMA Guide at 15. CRS 2003 CFMA Report at 6. See H.R. 4577 All Action Page for the December 21, 2000, signing into law. After the CFMA became law, early descriptions continued to describe how the law was enacted after Sen. Gramm's objections were overcome. CCH CFMA Guide at 15 (after describing House passage of H.R. 4541 "However, Senator Phil Gramm, among others, still expressed concern about the legal certainty of derivatives markets, especially with respect to the banking industry. While many thought these concerns greatly diminished the likelihood of the Commodity Exchange Act being reauthorized in the 106th Congress, the revamped CFMA, in the form of H.R. 5660, emerged out of closed-door negotiations with new Titles III and IV added.") Cadwalader, Wickersham & Taft, "Memorandum: Commodity Futures Modernization Act of 2000"Archived December 13, 2007, at the Wayback Machine ("Cadwalader CFMA Memo") at 3 (describes how the Shad-Johnson Accord repeal "debate held up the proposed CEA amendments until the PWG was able to produce a satisfactory resolution in September, 2000. Once that was settled, the last hurdle was Chairman Phil Gramm of the Senate Banking Committee, who finally allowed the bill to move forward after it was peppered with stronger prohibitions against CFTC involvement in bank-related activity.") See also CRS 2003 CFMA Report at 6 ("On December 14, 2000, [sic] identical bills H.R. 5660 and S. 3282 [sic] were introduced, after negotiations among House and Senate committees, regulators, and executive branch agencies."). By December 2001, however, a different narrative of events emerged that has become widespread. Audio and NPR Transcript for Terry Gross Interview of Frank Partnoy, "Fresh Air," March 25, 2009 ("Partnoy Fresh Air Interview") (at 19'30" into the audio Professor Partnoy describes the CFMA by stating "Phil Gramm added the provision in the evening, just hours before the Christmas break. It was never debated in the House. It was never debated in the Senate. It was shoved into an 11,000 page omnibus budget bill."); Audio and NPR Transcript Terry Gross Interview of Antonia Juhasz,"Fresh Air", October 7, 2008 ("Juhasz Fresh Air Interview"); Peter S. Goodman, "Taking Hard New Look at a Greenspan Legacy", The New York Times, October 9, 2008 ("The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.'s authority to an 11,000-page appropriations bill."); David Corn,"Foreclosure Phil", Mother Jones, May 28, 2008); Michael Greenberger, Testimony before the U.S. Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs regarding Excessive Speculation in the Natural Gas Futures Market, June 25, 2007, at 5 (referring to the "Enron Loophole" discussed below in Section 4, "The loophole was added at the last minute to a 262 page bill, which was itself belatedly and quite suddenly attached in a lame duck session on the Senate floor by then Senate Finance Chairman Gramm to an 11,000 page consolidated appropriations bill for FY 2001."); Michael Greenberger, Senate Democratic Policy Committee Hearing, "Lessons from Enron: An Oversight Hearing on Gas Prices and Energy Trading", May 8, 2006, at 6. (the CFMA "was an over 262 page bill added at the last minute on the Senate Floor by then Senate Finance Chairman Gramm to an over 11,000 page consolidated appropriations bill for FY 2001."); Sean Gonsalves, Opinion, "Enron Exemplifies 'Genius of Capitalism'", Seattle Post-Intelligencer, January 22, 2002, at B5 (quoting from the James Ridgeway article cited next, it describes how the CFMA passed "without undergoing the usual committee hearings and committee votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later.") and available on-line in the same form as published in the January 22, 2002, Cape Cod TimesArchived October 10, 2008, at the Wayback Machine; James Ridgeway, "Phil Gramm's Enron Favor", Village Voice, January 15, 2002, (after quoting Blind Faith, as cited next, describes how S. 2697 "never made it to the floor" but on December 15, 2000, "Gramm curiously turned up as co-sponsor of a bill with the same name...which, without undergoing the usual committee hearing and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill."); Blind Faith (this study, referenced and linked at the end of note 13 above, is the source for the narration of the CFMA's legislative history for the Ridgeway and Gonsalves articles. It describes (1) S. 2697 as a bill that "languished in the Senate, too controversial to get a committee hearing" (compare the hearing transcript and Senate Agriculture Committee Report in note 50 above); (2) H.R. 4541 as a bill passed in the evening in a House where "minority members" have less authority to alter legislation (compare the House proceedings described in notes 54 and 58 above, the lead up to those proceedings described throughout notes 54-58 above, and Rep. Maloney's call to not provide the 2/3 vote needed to consider H.R. 4541 under a "rule suspension" as described in note 74 below); (3) H.R. 4541 as held up in "the more deliberative Senate" until Sen. Gramm "ensured the bill would not be subject to floor debate" (compare the descriptions of Sen. Gramm activities in notes 53, 54, 58, and 60-63 above); and (4) the CFMA as the "same bill" re-introduced by Sen. Gramm on December 15 in "coordinated trickery" with Rep. Ewing "to get the entire bill attached to the appropriations bill" (compare with the lead up to the CFMA detailed in notes 58-63 above and the PWG letters and Congressional statements in note 69 above). While Sean Gonsalves and James Ridgeway relied on Blind Faith for the factual background they provided, the later cited references do not cite source materials other than David Corn citing a "congressional aide" in the quoted language from his article (compare that with the Congressional statements and other sources in notes 58-69 above) and Professor Greenberger citing Mr. Gonsalves in both of his referenced testimonies. Professor Greenberger also cites a 2002 Supplement to the predecessor edition of Johnson/Hazen Derivatives Regulation. That citation supports the description of the CFMA as 262 page legislation. The 2002 Supplement at 3 (as cited by Greenberger) states "The Commodity Futures Modernization Act (CFMA) is a large document spanning 262 pages in bill form." The 2002 Supplement is out of print. Johnson/Hazen Derivatives Regulation incorporates into its description of the CFMA most of the language of the 38 pages of description of the CFMA contained in the 2002 Supplement (which description begins on page 3 and ends on page 41 of the 2002 Supplement. Pages 43 through 155 contain the text of the CFMA, and pages 157 through 228 contain proposed CFTC rules to implement the trading facility provisions of the CFMA, as published at 66 Federal Register 14262 (March 9, 2001)). Johnson/Hazen Derivatives Regulation at 314 states "The Commodity Futures Modernization Act (CFMA) is a large document consuming 262 pages." Sen. Gramm is not mentioned in either the 2002 Supplement or the description of the CFMA in Johnson/Hazen Derivatives Regulation. For 2008 media reports that present a description of events leading to passage of the CFMA more consistent with 2000 and early 2001 sources, see the Enron emails described in Lipton Enron Article and Anthony Faiola, Ellen Nakashima and Jill Drew "What Went Wrong?", The Washington Post, October 14, 2008 ("The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading... Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power. On the night of Dec. 15...the act passed as a rider to an omnibus spending bill.") Similarly, in Infectious Greedat 295 Professor Partnoy gives a broader depiction of the CFMA's origins than in the Partnoy Fresh Air Interview, as he mentions former SEC Chair Levitt's role in "overseeing" enactment of the CFMA. In Antonia Juhasz, The Tyranny of Oil, (HarperCollins 2008) at 147-8, Antonia Juhasz states "Without any congressional hearings or debate, or any public notice, on December 12, 2000, Phil Gramm slipped what would forever be referred to as the "Enron Loophole" into the 262-page Commodity Futures Modernization Act, of which he was a sponsor. The act was then belatedly but quite suddenly attached to the 11,000-page omnibus appropriations bill that was passed into law by Congress and signed by President Clinton.") Although she provides no source for this information, other than the added detail that the "Enron Loophole" was added to the CFMA by Sen. Gramm on December 12, 2000, this account by Antonia Juhasz is consistent with the Juhasz Fresh Air Interview, the Blind Faith account, and the accounts that relied on Blind Faith.
In the Dinallo FT Opinion former Insurance Superintendent Dinallo argues (1) "the fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money" and (2) banks bought credit default swaps from AIG covering "investments" held by the banks "to avoid regulation" because it allowed them to claim "they no longer had the risk of a default of the bond." It is difficult to understand how this applies to AIG (which is the company mentioned in the Dinallo FT Opinion) or what the "regulatory arbitrage" credit default swaps ("CDS") of AIG had to do with the CFMA. AIG Financial Products ("AIGFP"), before 2000 and after the CFMA became law, was located in London. Gretchen Morgenson, "Behind Insurer's Crisis, Blind Eye to a Web of Risk", The New York Times, September 28, 2008 ("Morgenson Article") (which dates the establishment of London based AIGFP to 1987); Peter Koeing, "AIG Trail Leads to London Casino", Telegraph, October 18, 2008; "AIG Blames its London Office"Forbes, March 13, 2009. If US-based CDS counterparties of AIGFP were also internationally active (as the Morgenson Article suggests in noting the "'global swath' of top-notch entities" that" were counterparties to AIGFP CDS), they likely would have been able to book their CDS transactions with AIGFP through their own non-US offices to avoid the application of the CEA if the CFMA had not been enacted. See notes 23, 37, and 79 (Summers response to Harkin question at Senate Agriculture PWG Report Hearing) above for the issue of "offshore" booking of OTC derivatives. More clearly, the seller of AIG's "regulatory arbitrage" credit default swaps was Banque AIG, not an insurance company. See pages 133-134 of AIG's 2008 Form 10-K Report ("AIG 2008 10-K"). This is noted in the Morgenson Article. ("the London-based units...trades were routed through Banque A.I.G., a French institution"). As explained on page 133 of the AIG 2008 10-K, Banque AIG is a French bank regulated under French banking law. As also explained on page 133 of the AIG 2008 10-K, the "regulatory arbitrage" from those CDS was not because they were credit default swaps, but because they operated as guarantees from a bank in an OECD country (i.e. France). See also Daniel K. Tarullo, Banking on Basel: the future of international financial regulation (Peterson Institute 2008) for an explanation (at 57–60) of how the Basel I Accord (as described in the AIG 2008 10-K) established "generic" risk categories so "all loans to nonbanking corporations were risk-weighted at 100 percent" but all "claims on, or guaranteed by, banks incorporated in the OECD" were risk-weighted at 20%. In 1999 U.S. banking regulators reviewed multiple transaction structures similar to the AIGFP "regulatory arbitrage" CDS transactions and concluded a "super senior" exposure held by a bank that was guaranteed by the Banque AIG CDS (as depicted on page 133 of the AIG 2008 10-K) could receive a 20% "risk weighting" without being supported by a bank issued CDS or other form of bank guarantee if certain "stringent" conditions were met. Federal Reserve Board and Office of the Comptroller of the Currency, "Capital Interpretations, Synthetic Collateralized Loan Obligations, November 15, 1999", Federal Reserve Board Supervisory Release 99-32Archived May 14, 2009, at the Wayback Machine. ("US Synthetic CLO Interpretation"). To the extent the "stringent minimum requirements" described at pages 6-7 of the US Synthetic CLO Interpretation were met, this would eliminate the need to acquire such CDS. Under the US Synthetic CLO Interpretation, one important element was that an outside investor acquire an interest in the relevant loan pool that would be subordinate to the "super senior" exposure but still be rated AAA. This requirement is why the bank retained exposure is considered "super senior." As depicted on page 133 of the AIG 2008 10-K, this is the type of "super senior" exposure covered by the AIG "regulatory arbitrage" CDS. As the AIG 2008 10-K also explains at page 133 the implementation of Basel II eliminates the need for the Banque AIG "regulatory" CDS, because Basel II recognizes the low risk nature of the "super senior" exposure and requires corresponding capital, not a flat 8% requirement based on a "generic" capital requirement. U.S. banking regulators described in 1996 when CDS or other credit derivatives would operate as bank guarantees for purposes of capital rules and how the bank providing such a guarantee would be required to hold regulatory capital equal to that required if it directly held the guaranteed bond or other obligation. Federal Reserve Board Division of Banking Supervision and Regulation, "Supervisory Guidance for Credit Derivatives"Archived 2009-05-12 at the Wayback Machine, SR 96-17 (GEN), August 12, 1996. Nevertheless, similar to the Dinallo FT Opinion, Joe Nocera, "Propping Up a House of Cards", The New York Times, February 28, 2009, describes AIG's "regulatory arbitrage" CDS by stating (1) it allowed "banks to make their balance sheet look safer than they really were" because of AIG's AAA rating (when the European banks acquiring the CDS protection received reduced regulatory capital requirements because the CDS represented an OECD country bank guarantee, regardless of the rating of that bank); (2) because the CDS "were not even categorized as a traditional insurance product, A.I.G. didn't have to put anything aside for losses" (when the regulatory capital requirement for the CDS would be determined by French banking law, not any insurance regulator, and the US banking regulators would have required regulatory capital equal to that required for the underlying exposure); (3) that this was only possible because a "misguided set of international rules that took hold toward the end of the 1990s" permitted banks "to use their own internal risk measurements to set their capital requirements" (when those "misguided" rules, known as Basel II, are what is ending the need for the "regulatory arbitrage" provided by the Banque AIG CDS, as described on page 133 of the 2008 AIG 10-K, and only the earlier Basel I standards provided the "generic" 20% risk-weighting for bank obligations, including bank guarantees.) For the location of General Re's derivatives dealer in London and the difficulties incurred by Berkshire Hathaway in winding down that dealer after it acquired General Re, see "General Re Securities Limited", Business Week, Snapshot (click on Detailed Description for the 1991 UK incorporation) and Ari Weinberg, "The Great Derivatives Smackdown", Forbes, May 9, 2003, which contrasts the Alan Greenspan and Warren Buffett views of derivatives, mentions the shuttering of General Re Securities with a remaining derivatives book, and curiously refers to AIG's "extensive disclosures" and lists AIG FP's credit derivative disclosures.
Erik Sirri, Director, Division of Trading and Markets, U.S. Securities and Exchange Commission ("Sirri"), Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, November 20, 2008; Sirri, Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture, October 15, 2008; Dechert LLP, "Derivatives Developments: Tackling the $50 Trillion Credit Default Swap Market and Beyond"Archived 2010-01-31 at the Wayback Machine, December 2008; Pillsbury Winthrop Shaw Pittman LLP, "SEC Seeks to Regulate Credit Default Swaps"Archived 2011-07-15 at the Wayback Machine, November 10, 2008. The pre-CFMA status of swaps as "securities" under the securities laws is discussed in Johnson/Hazen Derivatives Regulation at 12 to 13 ("Most commodities, and hence futures contracts, do not fall within the definition of security....In contrast to the typical raw material or bullion contract, if the underlying commodity is itself a security, such as with government bonds, the securities laws, on their face, would seem to apply."); Markham CF Law Treatise at 28-27 to 28-28 (describing a federal district court ruling finding an "equity swap" not to be a "security", which was overruled by a federal circuit court finding it was); James Hamilton, J.D., L.L.M., Kenneth R. Benson, J.D., Matthew W. Lisle, J.D., A Guide To Federal Regulation of Derivatives, (Commerce Clearing House 1998) at 49 to 50 (describing how the "risk shifting" function of derivatives has been viewed as not meeting the "common enterprise and expectation of profits from the efforts of others" requirements established for defining "securities" given their "capital raising" function). ISDA CFMA Memo at 9-10 and 40-43 (describing at 41 how the CFMA provisions "effectively end any confusion about the status of swaps under the U.S. securities laws" and at 9-10 how the security law description of swaps adopted the new definition that the "material terms (other than price and quantity) are subject to individual negotiation" rather than the less stringent Gramm-Leach-Bliley Act definition that the swap be subject to individual negotiation, as described in notes 57 and 76 above). For the post-CFMA view of then SEC Commissioner Annette Nazareth, who was SEC Director. Division of Trading and Markets, at the time the CFMA was debated and passed by Congress, see "SEC Historical Society Interview with Annette Nazareth Conducted on November 4, 2005, by Kenneth Durr" (at 19 to 22 describing the SEC's involvement with the CFMA and at 19 stating "while the whole package was quite deregulatory, there was some additional certainty that we were able to achieve with respect to derivatives that were securities-based swaps—securities-based swaps were subject to anti-fraud provisions. We thought it was clear but it was awfully good to get it in the legislation.")
For the removal of the exempt commercial market language from the Senate bill, see the Senate Agriculture S. 2697 Report at 9 ("although this exemption is limited to transactions between eligible contract participants that occur off a trading facility, the CFTC is encouraged to use its current exemptive authority, as appropriate and consistent with the public interest, under Section 4(c) of the CEA to exempt transactions between eligible contract participants that occur on an electronic trading facility.") The revised Senate Agriculture Committee Section 2(h)(1) language, which provided a broader exemption than the CFMA in not requiring that eligible contract participants ("ECPs") act as "principals", is at page 42 of the Senate Agriculture S. 2697 Report and at pages 159 to 161 of the reported version of S. 2697, as Section 9. Section 5 of S. 2697 as introduced in the Senate would have excluded from most CEA provisions electronic trading of all energy commodities (which, along with financial commodities, were defined as "Exclusion Eligible Commodities") by ECPs acting as principals . See pages 23 to 25 of the Senate Agriculture S. 2697 Report or pages 23 to 25 of S. 2697 as introduced in the Senate. For the later Senate Agriculture Committee recriminations concerning the "source" for Section 2(h)(3), see Hearing before the Senate Committee on Agriculture, Nutrition, and Forestry, "CFTC Regulation and Oversight of Derivatives", July 10, 2002Archived May 4, 2009, at the Wayback Machine ("July 10, 2002, Senate Agriculture Hearing") at 2 (Senator Tom Harkin: "The final version of the legislation included in the omnibus appropriations bill differed from our committee bill regarding energy and metals derivatives markets. I supported the CFMA, although I had some concerns about its treatment of energy and metals. There is a statement I gave on the floor to which I would refer you that is in the Congressional Record regarding that, because I thought at the time it had a number of very positive features. On the whole, I thought it was a good bill, and I still think it is." As described in note 69 above, Sen. Harkin had entered a statement in the December 15, 2000, Congressional Record in support of H.R. 5660. He had noted his misgivings about its treatment of energy derivatives, but had recognized "the need to compromise." Although, as described in note 69 above, they had entered in the Congressional Record statements in support of H.R. 5660, Senators Fitzgerald and Lugar had not stated any misgivings about the bill's treatment of energy derivatives. At the July 10, 2002, hearing they joined Sen. Harkin in expressing dismay over the energy provisions of the CFMA (Sen. Fitzgerald at 9: "somehow, somewhere in the process, somebody slipped in this mysterious exemption for energy and metals trading" and at 58: "As we had it in Committee, it did not have that special carve-out and somehow... special carve-out came and it does not seem to have a father. No one can figure out who did it." Sen. Lugar at 11: "Somebody in the process of that conference talked about exemption of bilateral trade on electronic platforms, precisely the sort of thing that Enron was to be involved in...We all should have been brighter, perhaps, in reading the type, but nevertheless, that is the one that already occurred and that is why it is here.") None of Senators Harkin, Fitzgerald, or Lugar discussed at the hearing whether they thought S. 2697, which had never been voted on in the Senate and which was organized differently from H.R. 4541 and H.R. 5660, was the source for H.R. 5660, rather than H.R. 4541, which had passed the House and contained the same Section 2(h)(3) trading facility exemption as the CFMA. As described in note 78 below, CFTC Commissioner Thomas Erickson, who had been a critic of the CFMA back in 2000, explained Section 2(h) was not the "Enron Loophole" used by EnronOnline. At the January 29, 2002, Hearing before the Senate Committee on Energy and Natural Resources to Receive Testimony Concerning the Impact of the Enron Collapse on Energy Markets("January 29, 2002, Senate Energy Hearing") the prepared testimony of Vincent Viola, Chairman of NYMEX, which had "lobbied" against Section 2(h)(3) for exempting from the CEA energy and metals "futures contracts traded on electronic trading platforms from nearly all federal regulatory oversight", recounted (at 37) that lobbying effort and explained "Thankfully, Mr. Chairman [i.e. Senator Jeff Bingaman (D-NM)], you, Senator Charles Schumer, and Senators Richard Lugar and Tom Harkin (Attachment 3) with the Senate Agriculture Committee, as well as number of members of congress including Congresswoman Carolyn Maloney, Congressmen Peter King, John Dingell, and others recognized the serious policy flaws with this extreme deregulatory measure, and quite courageously challenged Enron and others, preventing it from becoming law in its most draconian form." In his prepared testimony for the same hearing (at 63), Senator Charles Schumer (D-NY) recalled that effort and stated "During the debate regarding the CFMA, I was greatly concerned about the similar effects that granting electronic trading facilities an exclusion from CFTC oversight would have had on the market, and fought hard against such an exclusion...There would have been no anti-market manipulation rules, among others, to protect the markets. Those of us who were concerned about the ramifications of an ETF exemption fought that provision and won." In Sen. Schumer's questioning (at 63-4) he elicited from NYMEX Chairman Viola (at 64) the statement "I think clearly the last minute efforts at sort of not having complete deregulation and exemption occur in the CFMA helped greatly in keeping markets stable..." As described above, at the July 10, 2002 Senate Agriculture Hearing, this Congressional involvement with Section 2(h)(3) was forgotten. Instead, in Sen. Fitzgerald's words, the "loophole' had "no father." In the House considerations of H.R. 4541, the Section 2(h) exemptions for "exempt commodities" was criticized by the CFTC at all three hearings on the bill and by House Floor statements of Representative Carolyn Maloney (D-NY) and, at E1879 of his "extended remarks" cited and linked in note 41 above, by Rep. Markey ("I also have some concerns with the breadth of the exemption in section 106 of this bill, and its potential anticompetitive and anticonsumer effects. There may be less anticompetitive ways to address an energy swaps exemption in a way that provides for fair competition and adequate consumer protections in this market. Such a result would be in the public interest. What is currently in the bill is not, and I would hope that it could be fixed as this bill moves forward.") On September 28, 2000, at H8436, Congressional Record, September 28, 2000, Rep. Maloney called upon the House to block consideration of H.R. 4541 by refusing the necessary 2/3 vote for a rule "suspension" if the "energy provisions" were not given a "full hearing." She entered into the record on the same page a letter she had received from CFTC Chair William Rainer describing CFTC opposition to the provision expressed at all four Congressional hearings on H.R. 4541 and S. 2697. On October 19, 2000, in supporting the required "rule suspension", Rep. Maloney stated (at Congressional Record, H10412, October 19, 2000) that her concerns "had been addressed at least in part" but that "the provision could be further improved by deleting language that favors electronic trading facilities over traditional exchanges." Rep. Maloney's statements came after Rep. Leach entered (at Congressional Record, H10365, October 19, 2000) a "Supplemental Report" from the House Banking Committee that showed as an "errata" to the Committee's earlier report a Committee vote of 20-12 defeating an amendment proposed by Rep. Maloney "to delete the provision providing a partial exclusion from the CEA for exempt commodities entered into solely between eligible contract participants and executed on an electronic trading facility." For the supplemental report see House of Representative Report 106-711, Part 4.
See House Banking Committee Report at 13 for Section 110, which would have added a new Section 2(i) to the CEA as the exclusion for "Swap Transactions" (defined to require that "the material economic terms" be "subject to individual negotiation.") See H.R. 4541 as passed by the House at 47 for Section 107, which would have added a new Section 2(h) to the CEA as the exclusion for "Swap Transactions." See the CFMAArchived 2009-03-20 at the Wayback Machine at 40 for Section 105(b), which created Section 2(g) of the CEA. See the Gramm-Leach-Bliley Act at 58 for Section 206(b), which defines "swap agreement" to be "individually negotiated." For CEA Section 2(g)'s use of the Gramm-Leach-Bliley definition, see ISDA CFMA Memo at 27 to 28 and 39. Kloner CFMA at 292.
At the July 10, 2002, Senate Agriculture Hearing, CFTC Commissioner Thomas Erickson, who had been a critic of the CFMA in 2000, explained Section 2(h)(3) was not the "Enron Loophole" used by EnronOnline. He suggested (at 17 to 18, 22 to 23, 25, 26, and 30 to 31) that the bulk of the OTC derivatives market used the 2(g) exclusion for "swaps" and that this was available to EnronOnline. See also Sen. Fitzgerald at 25 ("Enron Online and Intercontinental Exchange are just exempt by statute here with Section 2(g)") and page 48 for Professor Coffee's view. While the differences between Commissioner Erickson and CFTC Chair Newsome at the hearing (at 17 and at 30-31) were characterized as a "disagreement" over whether Section 2(g) "trumped" Section 2(h), Chairman Newsome states (at 17-18) that "swap transactions were excluded from our jurisdiction prior to the CFMA by administrative action of the CFTC and they were excluded after the CFMA by codification of Congress." He goes on to state Section 2(h) is not "trumped by the swap's exclusion for transactions in energy products that are not deemed to be swaps transactions." Thus, Chairman Newsome acknowledged Section 2(g) did "trump" Section 2(h) for swap transactions. While the 1993 swaps exemption exempted swaps from the CEA, as described in note 19 above, it did not exempt such transactions from the fraud and anti-manipulation provisions of the CEA to the extent the transactions were "futures" under the CEA. The CFMA granted an exclusion from such provisions. Further testimony at the July 10, 2002, Senate Agriculture Hearing (at 57) explained the Section 2(g) exclusion would apply to "online" transactions in which after agreeing to price the parties would "go offline" and "negotiate the credit terms." This type of transaction would be eligible for the Section 2(g) exclusion if it dealt with either an excluded or an exempt commodity. The Section 2(h)(1) exemption for "bilateral swaps" would be available if the two parties completed their "private" transaction online without "individual negotiation" but without both the offer and acceptance being available to multiple parties. This is the way Enron OnLine is usually described as having operated, because Enron was always a party to each transaction. Infectious Greed at 320 ('its trades were judged to be 'bilateral contracts' between the two parties trading on Enron's website"). At the January 29, 2002 Senate Energy Hearing, Chairman Bingaman explained (at 1 to 2) "EnronOnline did not match buyers and sellers. It contracted with each separately, so that Enron was on the other side of every deal." See also the prepared statement of Patrick Woods, III, Chairman, Fedederal Energy Regulatory Commission, at 14 ("EnronOnline uses a one-to-many trading format, where an Enron affiliate is always on one side of each energy transaction, either as a seller or a buyer. The price of a commodity or derivative on EnronOnline is determined when a buyer or a seller accepts an offer or bid price posted by an Enron trader." In contrast, Chairman Woods describes the Intercontinental Exchange ("ICE") as a "many-to-many platform." A December 16, 2000, email from Chris Long of EnronArchived February 7, 2009, at the Wayback Machine indicated Enron was aware it would need to change EnronOnline to have Section 2(h)(3) apply to it. (in describing Section 2(f) the email states "This exemption could facilitate expansion of EnronOnline to allow for multi-party transactions, however certain legal requirements will have to be met.").
Alison Veshkin, "House Passes Rules for Wall Street Over Objections", Bloomberg, December 11, 2009. Roll Call 968 on House enactment of H.R. 4173. The OTC derivatives legislation is in various amendments to H.R. 4173 contained in House Report 111-370. The largest portion of OTC derivatives legislation, including the repeals of CFMA provisions noted above, is in Amendment 3 offered by Representative Colin Peterson (D-MN) as the Derivative Markets Transparency and Accountability Act, Title III to H.R. 4173, which begins at page 103 of House Report 111-370. This amendment was adopted by voice vote on December 10, 2009, as noted on pages H14708-14709 of the House consideration of H.R. 4173 contained in Congressional Record, H14496-H14728, December 10, 2009. Pages H14682-H14705 repeat the text of Amendment 3 and pages H14705-14709 contain the House discussion of Amendment 3. House Agriculture News Release "House Passes Peterson-Frank Amendment to Strengthen Regulation of Over-the-Counter Derivatives"Archived 2010-01-06 at the Wayback Machine, December 10, 2009. For a description of pending Senate legislation to regulate over-the-counter derivatives, as part of broader financial regulation reform, see page 6 of "Summary: Restoring American Financial Stability: Committee Print"Archived 2009-12-02 at the Wayback Machine, issued by Senator Christopher Dodd (D-CT), as Chairman of the Senate Banking Committee.
wikileaks.org
Before the FTPA exemptions were issued, the elements required by the CFTC policy statement were (1) individually negotiated (not "standardized") terms, (2) no "offset" or other termination except as privately agreed, (3) credit exposure between the parties (i.e., no intervening "clearing facility" or full margin requirement guaranteeing against defaults), (4) contracting only in connection with a line of business (including "financial intermediation" for banks and other dealers) or financing such a business, and (5) no marketing to the public. CFTC. "Policy Statement Concerning Swap Transactions", 54 Federal Register 30694 (July 21, 1989). GAO CEA Issues Report at 12 to 13. PWG Report at 10. Markham CF Law Treatise at page 27-23. Johnson/Hazen Derivatives Regulation Treatise at 43. The exemptions under the FTPA required that the transaction (1) be between "eligible swap participants" (defined as businesses, government entities, investment pools, and high-net-worth individuals), (2) not be standardized in material economic terms, (3) subject each party to the credit risk of the other, (4) and not be traded on a "multilateral transaction execution facility" on which multiple parties could offer and accept transactions. CFTC, "Exemption for Certain Swap Agreements", 58 Federal Register 5587 (January 22, 1993). GAO CEA Issues Report at 14 to 16. PWG Report at 10 to 12. Markham CF Law Treatise at pages 27-25 to 26. Johnson/Hazen Derivatives Regulation Treatise at 43 to 44 and 47 to 49 (which notes, at 44, that the swaps exemption retained for qualifying swaps that might still be "futures" the "antifraud and antimanipulation provisions" of the CEA). GAO 1999 CFTC Reauthorization Report at 10 to 11. The FTPA exemption, therefore, more broadly permitted "speculators" in the swaps market and tailored the exemption to the financial "sophistication" of the parties and the absence of both exchange style "netting" of exposures and public availability of offers. For the role of "speculators" in OTC derivatives markets, see Mark Jickling and Lynn J. Cunningham, "Speculation and Energy Prices: Legislative Responses", RL 34555, CRS Report for CongressArchived 2009-02-12 at the Wayback Machine, updated August 6, 2008. The requirements for "hybrid instruments" under the 1990 "statutory interpretation" and the 1993 exemption were similar. Both required that the instrument be a security or bank deposit, the commodity dependent value of the instrument be limited, the instrument not be marketed as a commodity option or futures contract, and the instrument not be subject to settlement through a delivery instrument specified by a regulated exchange. While there were further requirements for each, the 1993 exemption moved towards criteria later included in the CFMA in requiring that the instrument be regulated by the SEC or banking regulators and that the issuer receive full payment at the time of sale and not receive future payments from the holder. CFTC, "Statutory Interpretation Concerning Certain Hybrid Instruments", 55 Federal Register 13582 (April 11, 1990) (for the hybrid instrument statutory interpretation). CFTC, "Regulation of Hybrid Instruments", 58 Federal Register 5580 (January 22, 1993) (for the hybrid instrument exemption). PWG Report at 28. Johnson/Hazen Derivatives Regulation at 59 to 60. The 1990 "forward transaction" statutory interpretation and 1993 exemption were similar in requiring that the transaction be between "commercial" parties able to make or take delivery of the energy product, that the agreement be subject to individual negotiation between the two parties, and that the contract create binding obligations to make and take delivery, with no automatic right to make cash settlement. CFTC, "Statutory Interpretation Concerning Forward Transactions", 55 Federal Register 39188 (September 25, 1990). CFTC, "Exemption for Certain Contracts Involving Energy Products", 58 Federal Register 21286 (April 20, 1993) (issued April 13, 1993, with Acting Chairman Albrecht and Commissioner Dial concurring, and Commissioner Bair dissenting, as noted at 58 Federal Register 21294). GAO 1999 CFTC Reauthorization Report at 38 to 39. Johnson/Hazen Derivatives Regulation at 68 to 69. For the controversy that arose from the 1993 order's exemption of energy contracts from the CEA's fraud provisions, see the April 28, 1993, Hearing before the Subcommittee on Environment, Credit, and Rural Development of the House Committee on Agriculture ("1993 House Hearing"). For an influential account of the 1993 House Hearing and of the entire 1992-3 exemption process, which describes former CFTC Chair Wendy Gramm as having cast the deciding vote on the energy contracts exemption and as being the target of criticism by Representative Glenn English (D-OK) at the April 28, 1993, hearing, even though the account also notes she resigned from the CFTC on January 20, 1993, well before the 2-1 vote on the exemption order was taken and the hearing was held, see Public Citizen, "Blind Faith: How Deregulation and Enron's Influence over Government Looted Billions from Americans" ("Blind Faith") at 9 to 12. The statement of Rep. English quoted at 12 of Blind Faith is at 45 to 46 at the end of the testimony in the 1993 House Hearing. For the influence of Blind Faith on accounts of the CFMA see note 70 below.
PWG Report at 15 to 16. CRS Derivatives Regulation Report at CRS-7 to 8. Consistent with the Greenspan and Summers testimony described in note 34 above, the analysis was centered around "sophisticated parties" and "susceptibility to manipulation" with points (1) and (2) dealing with the former and points (3) and (4) dealing with the latter. In his testimony at the Senate Agriculture PWG Report Hearing, however, CFTC Chair William Rainer distinguished (at 15) between protecting "price discovery" and protecting against "price manipulation", concluding that Congress "identified the overarching public mission of the CFTC as that of preventing price manipulation and ensuring price transparency." Mark Jickling, "The Commodity Futures Modernization Act (P.L. 106-554)", RS20560Archived 2009-02-11 at the Wayback Machine, February 3, 2003 ("CRS 2003 CFMA Report") at 1 ("Apart from its substance, the Working Group's report was remarkable in that the four agencies, which had a history of jurisdictional quarrels, unanimously agreed on a redrawing of the regulatory lines.")
