S 2058
110th CONGRESS
1st Session
S. 2058
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 SENATE OF THE UNITED STATES
September 17, 2007
Mr. LEVIN introduced the following bill; which was read twice and referred
to the Committee on Agriculture, Nutrition, and Forestry
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 is--
`(A) used as a source of energy, including but not limited to--
`(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
`(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 the Commodity Exchange 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 the provisions
of section 2(j) of this Act.'.
(c) Standards Applicable to Energy Trading Facilities- Section 2 of
the Commodity Exchange Act (7 U.S.C. 2) is amended by adding the following
new subsection:
`(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 on or through a designated contract market,
an energy trading facility, an exempt commercial markets operating
pursuant to sections 2(h)(3) through paragraph (5) of this Act,
an exempt board of trade operating pursuant to section 5d of this
Act, a derivative transaction execution facility, a foreign board
of trade, over-the-counter pursuant to sections 2(g), or 2(h)(1)
and (2) of this Act, and in the cash market for the commodity. 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. 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.
`(D) 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 the Commodity Exchange Act (7 U.S.C. 2(h)(5)(B))
is amended by adding the following new clause:
`(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 new paragraph:
`(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 paragraph 29 of section 1a (7 U.S.C. 1a)--
(A) in subparagraph (C) by deleting `and';
(B) in subparagraph (D) by deleting the period and inserting `;
and'; and
(C) by adding at the end the following:
`(E) an energy trading facility registered under section 2(j).';
(2) in subsection (a) of section 4 (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 (2) by inserting `or energy trading facility' after
`derivatives transaction execution facility';
(3) in subsection (c) of section 4 (7 U.S.C. 6(c)), by inserting `registered
energy trading facility or' in the parenthetical after `including
any';
(4) in subsection (a) of section 4a (7 U.S.C. 6a)--
(A) in the first sentence by inserting `or energy trading facilities'
after `derivatives transaction execution facilities'; and
(B) in the second sentence by inserting `or energy trading facility'
after `derivatives transaction execution facility';
(5) in subsection (b) of section 4a (7 U.S.C. 6a), by inserting `or
energy trading facility' after `derivatives transaction execution
facility' wherever it appears;
(6) in subsection (e) of section 4a (7 U.S.C. 6a)--
(A) in the first sentence--
(i) by inserting `or by any energy trading facility' after `registered
by the Commission';
(ii) by inserting `or energy trading facility' after `derivatives
transaction execution facility' the second time it appears; and
(iii) by inserting `energy trading facility' before `or such board
of trade' each time it appears; and
(B) in the second sentence, by inserting `or energy trading facility'
after `registered by the Commission';
(7) in section 4e (7 U.S.C. 6e), by inserting `or energy trading facility'
after `or derivatives transaction execution facility';
(8) in section 4i (7 U.S.C. 6i), by inserting `or energy trading facility'
after `derivatives transaction execution facility';
(9) in section 4l (7 U.S.C. 6l), by inserting `or energy trading facilities'
after `derivatives transaction execution facilities' wherever it appears
in paragraphs (2) and (3);
(10) in section 5c(b) (7 U.S.C. 7a-2(b)), by inserting `or energy
trading facility' after `derivatives transaction execution facility'
wherever it appears in paragraphs (1), (2), and (3);
(11) in section 6(b) (7 U.S.C. 8(b))--
(A) by inserting `or energy trading facility' after `derivatives
transaction execution facility' wherever it appears; and
(B) by inserting `section 2(j) or' before `sections 5 through 5b';
and
(12) 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 U.S. ENERGY TRADES.
Section 2 of the Commodity Exchange Act (7 U.S.C. 1a) 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 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 the date of enactment of this Act, shall
issue a final rule.
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 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 of this Act
shall take effect 180 days after the date of the enactment of this Act.
END
