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The Enron Loophole , Record No.: RS22912, Date: July 07, 2008 (Derivatives) 1 (July 7, 2008)

handle is hein.tera/crser0091 and id is 1 raw text is: Order Code RS22912 July 7, 2008 CRS Repo for Congress The Enron Loophole Mark Jickling Specialist in Financial Economics Government and Finance Division Summary The Commodity Exchange Act exempts certain energy derivatives contracts from regulation by the Commodity Futures Trading Commission (CFTC). These exemptions are popularly known as the Enron loophole. Soaring energy prices have raised concerns about whether the CFTC has enough information about these unregulated markets to monitor energy trading in a comprehensive manner. The Farm Bill (P.L. 110-234) established a more stringent regulatory regime for electronic trading facilities that offer contracts that play a significant role in setting energy prices. A number of other bills in the I 10 Congress would impose new reporting or regulatory requirements on the bilateral energy swaps market, which was not addressed by the Farm Bill. This report will be updated as legislative developments warrant. Background In 2000, Congress passed the Commodity Futures Modernization Act (CFMA, P.L. 106-554), whose central purpose was to set out the conditions under which derivative financial contracts - instruments like futures, options, or swaps, whose value is linked to the price of some underlying commodity - could be legally traded in the over-the- counter (OTC) market, that is, off the futures exchanges that are regulated by the Commodity Futures Trading Commission (CFTC). The CFMA established three categories of commodities and made them subject to varying degrees of regulation: financial commodities (such as interest rates, currency prices, or stock indexes) were defined as excluded commodities. Excluded commodities can be traded in the OTC market with minimal CFTC oversight, provided that small public investors are not allowed to trade. A second category is agricultural commodities; here, because of concerns about price manipulation, the law specifies that all derivatives based on farm commodities must be traded on a CFTC-regulated exchange, unless the CFTC issues a specific exemption after finding that a proposed OTC agricultural contract would be consistent with the public interest.1 Finally, there is a third all-other category- exempt commodities which includes whatever is neither financial nor agricultural. In today's markets, this means primarily metals and energy commodities. The statutory exemption This exemptive authority is in Section 4(c) of the Commodity Exchange Act. Congressional Research Service The Library of Congress Prepared for Members and Committees of Congress

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