Obama Calls for Closing Part of Enron Loophole Left Open by Farm Bill

In a major development, Senator Barack Obama has endorsed efforts to fully close the Enron Loophole that many believe was partially left open by the recent fix embodied in the Farm Bill. The Enron loophole was inserted at the last minute into the Commodity Futures Modernization Act of 2000 and passed in the waning hours of the 106th Congress. This loophole, which exempted from federal oversight the electronic trading of energy commodities by large traders, helped foster the explosive growth of trading on unregulated electronic energy exchanges.

A measure reauthorizing the CFTC and closing the Enron loophole was included in the massive Farm Bill. Provisions in the Food, Conservation and Energy Act (HR 2419) ended the Enron-inspired exemption from federal oversight provided to electronic energy trading markets set up for large traders. It ensures the ability of the CFTC to police all US energy exchanges to prevent price manipulation and excessive speculation.

But The Farm Bill did not close the foreign board of trade exemption, which allowed speculative energy trades by US traders on the London Exchange. A bill to cure this oversight and ensure that energy commodities traded on foreign exchanges using trading terminals located within the US are subject to the same speculative trading limits and reporting requirements as energy commodities traded on U.S. exchanges has been introduced by Senators Carl Levin and Dianne Feinstein. The Oil Trading Transparency Act (S 2995) would close a loophole allowing speculative energy trades by US traders on the London Exchange by requiring that foreign boards of trade operating US trading terminals comply with US trading limits and reporting requirements.

Senator Obama appears to have put his full weight behind the Levin-Feinstein bill or at least the idea the measure embodies. The senator fears that not completely closing the Enron loophole would render the CFTC unable to fully oversee the oil futures market and investigate cases where excessive speculation may be driving up oil prices. More broadly, he described the regulatory gap as dangerous because the absence of oversight has the potential to facilitate abusive trading or price manipulation; and the failure of a large derivatives dealer could trigger disruptions of supplies and prices in energy markets.

As President, Senator Obama vowed to go beyond the changes in the Farm Bill and fully close the Enron loophole by requiring that U.S. energy futures trade on regulated exchanges. Moreover, the senator also called for new, disaggregated data on index fund and other passive investments to increase transparency and oversight of the growing number of institutional investors participating in commodities futures markets. More generally, he pledged to support legislation directing the CFTC to investigate whether additional regulation is necessary to eliminate excessive speculation in U.S. commodities markets, including higher margin requirements and position limits for institutional

Noting the cross-border nature of today’s markets, the senator also urged US financial regulators to work globally to establish uniform approaches to avoiding excessive speculation in commodities futures markets. As President, he vowed to work through the International Organization of Securities Commissioners (IOSCO) to harmonize regulations in order to ensure that U.S. efforts to enhance oversight and transparency in U.S. exchanges are not undermined.