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Derivatives

Congressional Debate On CFTC Could Impact OTC Market

The reauthorization of the Commodity Futures Trading Commission started last week and market players expect the regulator's jurisdiction over the OTC derivatives market to be a hot topic.

The reauthorization of the Commodity Futures Trading Commission started last week and market players expect the regulator's jurisdiction over the OTC derivatives market to be a hot topic. The three areas likely to get the most attention are a copycat version of Senator Dianne Feinstein's failed energy bill, the impact of a failed fraud case the commission brought against Michael Zelener, president of British Capital Group, in the summer and a greater role in curbing speculation in the natural gas market.

A revised form of Feinstein's legislation, which the California senator proposed around the time of Enron's collapse and which sought to broaden CFTC jurisdiction over OTC energy derivatives, is likely to be advocated. "The basic thrust would be to make OTC dealers register and report," said Mark Jickling, a specialist in public finance with the Congressional Research Service in Washington, D.C. "The questions is, would the CFTC really gain any effective authority?" he asked.

High volatility in natural gas futures contracts has led the Industrial Energy Consumers of America to request greater oversight by the CFTC, specifically to curb high volumes of speculative natural gas futures trades executed on by hedge funds. Jickling said, "The question is, does speculative trading cause volatility, or does volatility bring speculation?"

Acting Chair Sharon Brown-Hruska, however, doesn't want the CFTC to extend its remit into the over-the-counter energy derivatives. She has made several speeches saying there would be little benefit of extending the CFTC's remit to OTC derivatives and that benefit would come at a high price.

The CFTC was told it didn't have the authority to prosecute Zelener for fraud because the U.S. Seventh Circuit Court deemed the contracts forwards, not futures. This aggravated the commission because the instruments were futures in almost every respect. The Solicitor General denied a request from the regulator to file a petition with the U.S. Supreme Court last week.

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