HR 4066 - Close the Enron Loophole Act

HR 4066

110th CONGRESS
1st Session

H. R. 4066

To amend the Commodity Exchange Act to close the Enron loophole, prevent price manipulation and excessive speculation in the trading of energy commodities, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

November 1, 2007

Mr. WELCH of Vermont (for himself and Mr. ANDREWS) introduced the following bill; which was referred to the Committee on Agriculture

A BILL

To amend the Commodity Exchange Act to close the Enron loophole, prevent price manipulation and excessive speculation in the trading of energy commodities, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Close the Enron Loophole Act'.

SEC. 2. ENERGY TRADING FACILITIES.

(a) Definitions- Section 1a of the Commodity Exchange Act (7 U.S.C. 1a) is amended by redesignating paragraphs (13) through (33) as paragraphs (15) through (35), respectively, and by inserting after paragraph (12) the following:

`(13) ENERGY COMMODITY- The term `energy commodity' means a commodity (other than an excluded commodity, a metal, or an agricultural commodity) that--

`(A) is used as a source of energy, including but not limited to--

`(i) crude oil;

`(ii) gasoline, diesel fuel, heating oil, and any other product derived or refined from crude oil;

`(iii) natural gas, including methane, propane, and any other gas or liquid derived from natural gas; and

`(iv) electricity; or

`(B) results from the burning of fossil fuels to produce energy, including but not limited to carbon dioxide and sulfur dioxide.

`(14) ENERGY TRADING FACILITY- The term `energy trading facility' means a trading facility that--

`(A) is not a designated contract market; and

`(B) facilitates the execution or trading of agreements, contracts, or transactions in an energy commodity that are not spot sales of a cash commodity or sales of a cash commodity for deferred shipment or delivery, and that are entered into on a principal-to-principal basis solely between persons that are eligible commercial entities at the time the persons enter into the agreement, contract, or transaction; and

`(i) facilitates the clearance and settlement of such agreements, contracts, or transactions; or

`(ii) the Commission determines performs a significant price discovery function in relation to an energy commodity listed for trading on a trading facility or in the cash market for the energy commodity. In making a determination whether a trading facility performs a significant price discovery function the Commission may consider, as appropriate--

`(I) the extent to which the price of an agreement, contract, or transaction traded or executed on the trading facility is derived from or linked to the price of a contract in an energy commodity listed for trading on a designated contract market;

`(II) the extent to which cash market bids, offers, or transactions in an energy commodity are directly based on, or quoted at a differential to, the prices generated by agreements, contracts, or transactions in the same energy commodity being traded or executed on the trading facility;

`(III) the volume of agreements, contracts, or transactions in the energy commodity being traded on the trading facility;

`(IV) the extent to which data regarding completed transactions are posted, disseminated, or made available immediately after completion of such transactions, with or without a fee, to other market participants and other persons;

`(V) the extent to which an arbitrage market exists between the agreements, contracts, or transactions traded or executed on the trading facility and a contract in an energy commodity listed for trading on a designated contract market; and

`(VI) such other factors as the Commission determines appropriate.'.

(b) Commission Oversight of Energy Trading Facilities- Section 2(h) of such Act (7 U.S.C. 2(h)) is amended--

(1) in paragraph (3)(B) after `an electronic trading facility' by inserting `that is not an energy trading facility'; and

(2) by adding at the end the following:

`(7) ENERGY TRADING FACILITIES- Notwithstanding any other provision of this Act, an energy trading facility shall be subject to section 2(j).'.

(c) Standards Applicable to Energy Trading Facilities- Section 2 of such Act (7 U.S.C. 2) is amended by adding at the end the following:

`(j) Registration of Energy Trading Facilities-

`(1) IN GENERAL- It shall be unlawful for any person to enter into an agreement, contract, or transaction for future delivery of an energy commodity that is not a spot sale of a cash commodity or a sale of a cash commodity for deferred shipment or delivery, on or through an energy trading facility unless such facility is registered with the Commission as an energy trading facility.

`(2) APPLICATIONS- Any trading facility applying to the Commission for registration as an energy trading facility shall submit an application to the Commission that includes any relevant materials and records, consistent with the Act, that the Commission may require.

`(3) COMMISSION ACTION- The Commission shall make a determination whether to approve an application for registration as an energy trading facility within 120 days after such application is submitted.

`(4) CRITERIA FOR REGISTRATION- To be registered as an energy trading facility, the applicant shall demonstrate to the Commission that the trading facility meets the criteria specified in this paragraph.

`(A) PREVENTION OF PRICE MANIPULATION AND EXCESSIVE SPECULATION- The trading facility shall have the capacity to prevent price manipulation, excessive speculation, price distortion, and disruption of the delivery or cash-settlement process through market surveillance, compliance, and enforcement practices and procedures, including methods for conducting real-time monitoring of trading and comprehensive and accurate trade reconstructions.

`(B) MONITORING OF TRADING- The trading facility shall monitor trading to prevent price manipulation, excessive speculation, price distortion, and disruption of the delivery or cash-settlement process.

`(C) CONTRACTS NOT READILY SUSCEPTIBLE TO MANIPULATION- The trading facility shall list for trading only contracts that are not readily susceptible to manipulation.

`(D) FINANCIAL INTEGRITY OF TRANSACTIONS- A trading facility that facilitates the clearance and settlement of agreements, contracts, or transactions by a derivatives clearing organization shall establish and enforce rules and procedures for ensuring the financial integrity of such agreements, contracts, and transactions.

`(E) ABILITY TO OBTAIN INFORMATION- The trading facility shall establish and enforce rules that will allow the trading facility to obtain any necessary information to perform any of the functions described in this subsection, including the capacity to carry out such international information-sharing agreements as the Commission may require.

`(F) POSITION LIMITS OR ACCOUNTABILITY LEVELS- To reduce the threat of price manipulation, excessive speculation, price distortion, or disruption of the delivery or cash-settlement process, the trading facility shall adopt position limits or position accountability levels for speculators, where necessary and appropriate.

`(G) EMERGENCY AUTHORITY- The trading facility shall adopt rules to provide for the exercise of emergency authority, in consultation and cooperation with the Commission, where necessary and appropriate, including the authority to--

`(i) liquidate open positions in any contract;

`(ii) suspend or curtail trading in any contract; and

`(iii) require market participants in any contract to meet special margin requirements.

`(H) DAILY PUBLICATION OF TRADING INFORMATION- The trading facility shall make public daily information on settlement prices, volume, open interest, and opening and closing ranges for actively traded contracts on the facility.

`(I) DETERRENCE OF ABUSES- The trading facility shall establish and enforce trading and participation rules that will deter abuses and shall have the capacity to detect, investigate violations of, and enforce those rules, including means to--

`(i) obtain information necessary to perform the functions required under this section; or

`(ii) use technological means to capture information that may be used in establishing whether rule violations have occurred.

`(J) TRADE INFORMATION- The trading facility shall maintain rules and procedures to provide for the recording and safe storage of all identifying trade information in a manner that enables the facility to use the information for the purposes of assisting in the prevention of price manipulation, excessive speculation, price distortion, or disruption of the delivery or cash-settlement process, and providing evidence of any violations of the rules of the facility.

`(K) TRADING PROCEDURES- The trading facility shall establish and enforce rules or terms and conditions defining, or specifications detailing, trading procedures to be used in entering and executing orders traded on the facility, including procedures to provide participants with impartial access to the trading facility.

`(L) COMPLIANCE WITH RULES- The trading facility shall monitor and enforce the rules of the facility, including any terms and conditions of any contracts traded on or through the facility and any limitations on access to the facility.

`(M) DISCLOSURE OF GENERAL INFORMATION- The trading facility shall disclose publicly and to the Commission information concerning--

`(i) contract terms and conditions;

`(ii) trading conventions, mechanisms, and practices;

`(iii) financial integrity protections; and

`(iv) other information relevant to participation in trading on the facility.

`(N) FITNESS STANDARDS- The trading facility shall establish and enforce appropriate fitness standards for directors, members of any disciplinary committee, and any other persons with direct access to the facility, including any parties affiliated with any of the persons described in this paragraph.

`(O) CONFLICTS OF INTEREST- The trading facility shall establish and enforce rules to minimize conflicts of interest in the decision making process of the facility and establish a process for resolving such conflicts of interest.

`(P) RECORDKEEPING- The trading facility shall maintain records of all activities related to the business of the facility in a form and manner acceptable to the Commission for a period of 5 years.

`(Q) ANTITRUST CONSIDERATIONS- Unless necessary or appropriate to achieve the purposes of this Act, the trading facility shall endeavor to avoid--

`(i) adopting any rules or taking any actions that result in any unreasonable restraint of trade; or

`(ii) imposing any material anticompetitive burden on trading on the facility.

`(5) CRITERIA FOR ENERGY TRADING FACILITIES- To maintain the registration as an energy trading facility, the trading facility shall comply with all of the criteria in paragraph (4). Failure to comply with any of these criteria shall constitute a violation of this Act. The trading facility shall have reasonable discretion in establishing the manner in which it complies with the criteria in paragraph (4).

`(6) POSITION LIMITS AND ACCOUNTABILITY LEVELS-

`(A) DUTY OF COMMISSION- The Commission shall ensure that the position limits and accountability levels applicable to contracts in an energy commodity listed for trading on a designated contract market and the position limits and accountability levels applicable to similar contracts in the same energy commodity listed for trading on an energy trading facility--

`(i) appropriately prevent price manipulation, excessive speculation, price distortion, and disruption of the delivery or cash-settlement process; and

`(ii) are on a parity with each other and applied in a functionally equivalent manner.

`(B) COMMISSION REVIEW- Upon learning that a person has exceeded an applicable position limit or accountability level in an energy commodity, the Commission shall obtain such information as it determines to be necessary and appropriate regarding all of the positions held by such person in such energy commodity and take such action as may be necessary and appropriate, in addition to any action taken by an energy trading facility or a designated contract market, to require, or direct an energy trading facility or a designated contract market to require, such person to limit, reduce, or liquidate any position to prevent or reduce the threat of price manipulation, excessive speculation, price distortion, or disruption of the delivery or cash-settlement process.

`(C) INFORMATION TO COMMISSION- In order to make any determination required under this section, the Commission may request all relevant information regarding all of the positions held by any person in the energy commodity for which the person has exceeded a position limit or accountability level, including positions held or controlled or transactions executed--

`(i) on or through--

`(I) a designated contract market;

`(II) an energy trading facility;

`(III) an electronic trading facility operating pursuant to paragraphs (3) through (5) of section 2(h);

`(IV) an exempt board of trade operating pursuant to section 5d;

`(V) a derivative transaction execution facility; or

`(VI) a foreign board of trade;

`(ii) within the scope of section 2(g), or paragraphs (1) and (2) of section 2(h); or

`(iii) in the cash market for the commodity.

`(D) REQUIREMENT TO RETAIN AND PROVIDE POSITION INFORMATION-

`(i) IN GENERAL- Any person entering into or executing an agreement, contract, or transaction with respect to an energy commodity on a designated contract market or on an energy trading facility shall retain such books and records as the Commission may require in order to provide such information upon request, and upon request shall promptly provide such information to the Commission or the Department of Justice.

`(ii) ALTERNATE MEANS OF OBTAINING POSITION INFORMATION- Notwithstanding this requirement to retain and provide position information, the Commission may alternatively choose to obtain any of the position information specified in this paragraph from the trading facility at which such positions are maintained.

`(E) CRITERIA FOR COMMISSION DETERMINATION- In making any determination to require a limitation, reduction, or liquidation of any position with respect to an energy commodity, the Commission may consider, as appropriate--

`(i) the person's open interest in a contract, agreement, or transaction involving an energy commodity relative to the total open interest in such contracts, agreements, or transactions;

`(ii) the daily volume of trading in such contracts, agreements or transactions;

`(iii) the person's overall position in related contracts, including options, and the overall open interest or liquidity in such related contracts and options;

`(iv) the potential for such positions to cause or allow price manipulation, excessive speculation, price distortion, or disruption of the delivery or cash-settlement process;

`(v) the person's record of compliance with rules, regulations, and orders of the Commission, a designated contract market, or an energy trading facility, as appropriate;

`(vi) the person's financial ability to support such positions on an ongoing basis;

`(vii) any justification provided by the person for such positions; and

`(viii) other such factors determined to be appropriate by the Commission.'.

(d) Information for Price Discovery Determination-

(1) Section 2(h)(5)(B) of such Act (7 U.S.C. 2(h)(5)(B)) is amended--

(A) by striking `and' at the end of clause (ii)(II);

(B) by adding `and' at the end of clause (iii)(III); and

`(iv) to the extent that the electronic trading facility provides for the trading of agreements, contracts, or transactions in an energy commodity, provide the Commission with such information as the Commission determines necessary to evaluate whether the energy trading facility performs a significant price discovery function in relation to a contract in an energy commodity listed for trading on a trading facility or in the cash market for the energy commodity, including the provision of such requested information on a continuous basis;'.

(2) Section 5a(b) of the Commodity Exchange Act (7 U.S.C. 7a(b)) is amended by adding the following:

`(5) PRICE DISCOVERY FOR ENERGY COMMODITY- A registered derivatives transaction execution facility shall, to the extent that it provides for the trading of any contract of sale of a commodity for future delivery (or option on such contract) based on an energy commodity, provide the Commission with such information as the Commission determines necessary to evaluate whether the registered derivatives transaction execution facility performs a significant price discovery function in relation to a contract in an energy commodity listed for trading on a trading facility or in the cash market for the energy commodity, including the provision of such requested information on a continuous basis.'.

(e) Conforming Amendments- The Commodity Exchange Act is amended--

(1) in section 1a(29) (7 U.S.C. 1a(29))--

(A) in subparagraph (C), by striking `and';

(B) in subparagraph (D), by striking the period and inserting `; and'; and

`(E) an energy trading facility registered under section 2(j).';

(2) in section 4(a) (7 U.S.C. 6(a))--

(A) in paragraph (1), by inserting `registered energy trading facility or a' after `subject to the rules of a'; and

(B) in paragraph (3), by striking `or derivatives transaction execution facility' and inserting `, derivatives transaction execution facility, or energy trading facility';

(3) in section 4(c) (7 U.S.C. 6(c)), by inserting `registered energy trading facility or' in the parenthetical after `including any';

(4) in section 4a(a) (7 U.S.C. 6a(a))--

(A) in the 1st sentence, by striking `or derivatives transaction execution facilities' and inserting `, derivatives transaction execution facilities, or energy trading facilities'; and

(B) in the 2nd sentence, by striking `or derivatives transaction execution facility' and inserting `, derivatives transaction execution facility, or energy trading facility';

(5) in section 4a(b) (7 U.S.C. 6a(b))--

(A) in paragraph (1), by striking `or derivatives transaction execution facility or facilities' and inserting `derivatives transaction execution facility or facilities, or energy trading facility or facilities';

(B) in paragraph (2), by striking `or derivatives transaction execution facility' and inserting `, derivatives transaction execution facility, or energy trading facility';

(6) in section 4a(e) (7 U.S.C. 6a(e))--

(A) in the 1st sentence--

(i) by inserting `or by any energy trading facility' after `registered by the Commission';

(ii) by striking `or derivatives transaction execution facility' and inserting `, derivatives transaction execution facility, or energy trading facility'; and

(iii) by inserting `energy trading facility,' before `or such board of trade' each time it appears; and

(B) in the 2nd sentence, by inserting `or energy trading facility' after `registered by the Commission';

(7) in each of sections 4e, 4i, paragraphs (1), (2), and (3) of section 5c(b), and 6(b) (7 U.S.C. 6e, 6i, 7a-2(b)(1), (2), and (3), and 8(b)), by striking `or derivatives transaction execution facility' and inserting `, derivatives transaction execution facility, or energy trading facility' each place it appears;

(8) in each of paragraphs (2) and (3) of section 4l (7 U.S.C. 6l(2) and (3)), by striking `or derivatives transaction execution facilities' and inserting `derivatives transaction execution facilities, or energy trading facilities';

(9) in section 6(b) (7 U.S.C. 8(b)), by striking `sections 5 through 5b' and inserting `section 2(j), sections 5 through 5b,'; and

(10) in section 6d(1) (7 U.S.C. 13a-2(1)), by inserting `energy trading facility,' after `derivatives transaction execution facility,'.

SEC. 3. REPORTING OF UNITED STATES ENERGY TRADES.

Section 2 of the Commodity Exchange Act (7 U.S.C. 1a), as amended by section 2(c) of this Act, is amended by adding at the end the following:

`(k) Domestic Energy Trades on a Foreign Board of Trade-

`(1) DEFINITIONS- In this subsection:

`(A) DOMESTIC TERMINAL- The term `domestic terminal' means a technology, software, or other means of providing electronic access within the United States to a contract, agreement, or transaction traded on a foreign board of trade.

`(B) REPORTABLE CONTRACT- The term `reportable contract' means a contract, agreement, or transaction for future delivery of an energy commodity (or option thereon), or an option on an energy commodity, for which the underlying commodity has a physical delivery point within the United States and that is executed through a domestic terminal.

`(2) RECORD KEEPING- The Commission, by rule, shall require any person holding, maintaining, or controlling any position in any reportable contract under this section--

`(A) to maintain such records as directed by the Commission for a period of 5 years, or longer, if directed by the Commission; and

`(B) to provide such records upon request to the Commission or the Department of Justice.

`(3) REPORTING- The Commission shall prescribe rules requiring such regular or continuous reporting of positions in a reportable contract in accordance with such requirements regarding size limits for reportable contracts and the form, timing, and manner of filing such reports under this paragraph, as the Commission shall determine.

`(4) EQUIVALENT MEANS OF OBTAINING INFORMATION- The Commission may waive the requirement under paragraph (3) if the Commission determines that the foreign board of trade is providing the Commission with equivalent information in a usable format pursuant to an agreement between the Commission and the foreign board of trade or a foreign futures authority, department or agency of a foreign government, or political subdivision thereof.

`(5) OTHER RULES NOT AFFECTED-

`(A) IN GENERAL- Except as provided in clause (ii), this paragraph does not prohibit or impair the adoption by any board of trade or energy trading facility licensed, designated, or registered by the Commission of any bylaw, rule, regulation, or resolution requiring reports of positions in any agreement, contract, or transaction for future delivery of an energy commodity (or option thereon), or option on an energy commodity, including any bylaw, rule, regulation, or resolution pertaining to filing or recordkeeping, which may be held by any person subject to the rules of the board of trade or energy trading facility.

`(B) EXCEPTION- Any bylaw, rule, regulation, or resolution established by a board of trade or energy trading facility described in clause (i) shall not be inconsistent with any requirement prescribed by the Commission under this paragraph.'.

SEC. 4. ANTIFRAUD AUTHORITY.

Section 4b of the Commodity Exchange Act (7 U.S.C. 6b) is amended--

(1) by redesignating subsections (b) and (c) as subsections (c) and (d), respectively; and

(2) by striking `sec. 4b.' and all that follows through the end of subsection (a) and inserting the following:

`SEC. 4b. CONTRACTS DESIGNED TO DEFRAUD OR MISLEAD.

`(a) Unlawful Actions- It shall be unlawful--

`(1) for any person, in or in connection with any order to make, or the making of, any contract of sale of any commodity in interstate commerce or for future delivery that is made, or to be made, on or subject to the rules of a designated contract market, for or on behalf of any other person; or

`(2) for any person, in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery, or other agreement, contract, or transaction subject to paragraphs (1) and (2) of section 5a(g), that is made, or to be made, for or on behalf of, or with, any other person, other than on or subject to the rules of a designated contract market--

`(A) to cheat or defraud or attempt to cheat or defraud the other person;

`(B) willfully to make or cause to be made to the other person any false report or statement or willfully to enter or cause to be entered for the other person any false record;

`(C) willfully to deceive or attempt to deceive the other person by any means whatsoever in regard to any order or contract or the disposition or execution of any order or contract, or in regard to any act of agency performed, with respect to any order or contract for or, in the case of paragraph (2), with the other person; or

`(D)(i) to bucket an order if the order is represented by the person as an order to be executed, or is required to be executed, on or subject to the rules of a designated contract market; or

`(ii) to fill an order by offset against the order or orders of any other person, or willfully and knowingly and without the prior consent of the other person to become the buyer in respect to any selling order of the other person, or become the seller in respect to any buying order of the other person, if the order is represented by the person as an order to be executed, or is required to be executed, on or subject to the rules of a designated contract market unless the order is executed in accordance with the rules of the designated contract market.

`(b) Clarification- Subsection (a)(2) of this section shall not obligate any person, in or in connection with a transaction in a contract of sale of a commodity for future delivery, or other agreement, contract or transaction subject to paragraphs (1) and (2) of section 5a(g), with another person, to disclose to the other person nonpublic information that may be material to the market price, rate, or level of the commodity or transaction, except as necessary to make any statement made to the other person in or in connection with the transaction, not misleading in any material respect.'.

SEC. 5. COMMISSION RULEMAKING.

Not later than 180 days after the date of the enactment of this Act, the Commission shall issue a proposed rule regarding the requirements for an application for registration for an energy trading facility, and not later than 270 days after such date of enactment, shall issue a final rule regarding the requirements.

SEC. 6. EFFECTIVE DATE.

(a) In General- Except as provided in this section, this Act shall become effective immediately upon enactment.

(b) Trading Facilities- With respect to any trading facility operating on the date of enactment of this Act in reliance upon the exemption set forth in section 2(h)(3) of the Commodity Exchange Act with respect to an energy commodity, the prohibition in section 2(j)(1) of the Commodity Exchange Act, as added by this Act, shall not apply, if the trading facility submits an application to the Commodity Futures Trading Commission (in this section referred to as the `Commission') for registration as an energy trading facility within 180 days after the Commission promulgates a final rule regarding the requirements for an application for registration for an energy trading facility, prior to a determination by the Commission on whether to approve such application.

(c) Extensions- (1) At the time the Commission approves an application by a trading facility operating on the date of enactment of this Act in reliance on the exemption set forth in section 2(h)(3) of the Commodity Exchange Act for registration as an energy trading facility, the Commission shall, upon the written request of the facility, grant an extension of up to 180 days to fully implement a requirement applicable under this Act to an energy trading facility.

(2) The Commission may in its discretion, upon the written request of the facility and for good cause, grant an additional extension of up to 6 months to fully implement a requirement for which an initial extension has been granted under paragraph (1).

(3) The Commission may not grant any extension under paragraphs (1) or (2) for any information reporting or recordkeeping requirement.

(d) Domestic Trading on Foreign Boards of Trade- Section 3 shall take effect 180 days after the date of the enactment of this Act.

END