The legislative game of ping pong over energy speculation continued on Sept. 18 when the House of Representatives passed H.R. 6604, The Commodity Markets Transparency and Accountability Act of 2008, which aims to prevent manipulation and excessive speculation in energy markets. The bill was narrowly defeated in July under a rule that required a two-thirds vote to pass. This time the bill only required a simple majority, and passed 283-133.
The bill amends the Commodity Exchange Act and requires foreign boards of trade to adopt position limits, requires the Commodity Futures Trading Commission (CFTC) to make public on a weekly basis the number of positions and total value of index funds and other passive, long-only and short only positions and requires detailed reporting from index traders and swap dealers. The legislation will give the CFTC 100 additional staff people and will provide more transparency and disclosure from investors.
Ironically the bill was passed shortly after the CFTC released its much anticipated report on commodity swap dealers and index traders, which basically disputed the underlying assumptions justifying the bill. The report noted that for the period beginning Dec. 31, 2007 and ending June 30, 2008, the “aggregate long positions of commodity index participants in Nymex crude oil declined by approximately 45,000 contracts” or 11%. During this period, the front month crude oil contract on the New York Mercantile Exchange (Nymex) rallied from $95.98 to $140.
The bill does not address this apparent anomaly with its underlying assumption that speculative trading activity was responsible for the spike in crude prices.
On Sept. 25, Sens. Carl Levin (D-Mich.), Jeff Bingaman (D-NM) and Tom Harkin (D-IA) introduced a similar piece of legislation called the Prevent Excessive Speculation Act. This legislation would require the CFTC to set limits on the holdings of traders in all energy and agricultural futures markets, authorize the CFTC to set spec limits in OTC energy and agricultural markets, and require that foreign exchanges that want to trade in the U.S. impose comparable trading limits and reporting requirements.
In a letter to House Speaker Nancy Pelosi, Futures Industry Association President John Damgard said H.R. 6604 “would encourage traders to move overseas, lead to distortions in price discovery and undermine international regulatory cooperation.”
H.R. 6604 now heads to the Senate, but its passage looks unlikely until at least 2009. The White House still strongly opposes the bill, saying in a statement that it would “hurt the competitiveness of American futures markets” and that the president would likely veto it in its current form. The question now is whether Congress will continue to try to pass speculation legislation after the new Administration takes office. “The Commodity Futures Modernization Act of 2000 was ‘dead’ 20 times but, like any bad idea, did not go away and was enacted with no one being sure what was in it. Same could happen here but, because it is pro-regulation, [the] industry should be resistant. If commodity prices settle down, this thing will go away,” says Philip McBride Johnson, former CFTC chairman and pioneer in the development of financial futures.
Industry leaders still say that this type of legislation comes from a fundamental lack of understanding by Congress about how markets work. “To blame speculators for price rises or price declines is disingenuous. Freely traded markets depend on speculators. If it were not for speculators, you would have incredibly wild swings in commodity prices,” says Tom Alexander of Alexander Trading. Alexander thinks Congress will keep trying to pass similar legislation in 2009. “Congress feels compelled to respond to something that they don’t understand but that their constituents are screaming about. The general public doesn’t understand how markets work and politicians just pander to the lowest common denominator,” he says.