Top regulators denounce attempt to resurrect OTC energy bill

The four most senior financial regulators in the United States have joined forces to express concern at legislative proposals to expand regulation of over-the-counter energy derivatives.

The move comes as Senate agriculture chairman Tom Harkin, a democrat from Iowa, and republican senator Richard Lugar, from Indiana, are drafting legislation that would expand upon Californian democrat senator Dianne Feinstein’s OTC energy regulation proposals that were defeated in February on a routine procedural vote.

Federal Reserve chairman, Alan Greenspan; Treasury Secretary, Paul O'Neill; Securities and Exchange Commission chairman, Harvey Pitt; and Commodity Futures Trading Commission (CFTC) chairman, James Newsome, said in a letter that the Harkin and Lugar proposal to subject market participants to disclosure of proprietary trading information is unwarranted.

In their letter to Idaho republican senator Michael Crapo and senator Zell Miller, a democrat from Georgia, the four regulators, who make up the President's Working Group on Financial Markets, said: “[The] OTC derivatives markets in question have been a major contributor to our economy’s ability to respond to the stresses and challenges of the last two years.” Both Crapo and Miller sit on the US Senate Committee on Agriculture, Nutrition and Forestry alongside Harkin and Lugar.

“Public disclosure of pricing data for customised OTC transactions would not improve the overall price discovery process, and may lead to confusion as to the appropriate pricing for other transactions, as terms and conditions can vary by contract,” the letter continued. “The trading of these instruments arbitrages away inefficiencies that exist in all financial and commodities markets.”

The regulators said that if dealers had to divulge promptly proprietary details and pricing of derivatives instruments, the incentive to allocate capital to developing and finding markets for these highly complex instruments would be lessened.

Inspired by Enron's bankruptcy, Harkin and Lugar want to expand the powers of the CFTC, authorising it to draft capital requirements for non-bank derivatives traders and to give the CFTC oversight in setting price disclosure and notification requirements for traders. The two senators are also petitioning for the establishment of a self-regulatory organisation for the energy trading industry.

The International Swaps and Derivatives Association, which has voiced continual concern about attempts to regulate OTC energy trading, said it welcomed the show of support from the four regulators.