Opening Statement of Chairman Gary Gensler on Meeting to Discuss Significant Price Discovery Contracts

April 27, 2010

Good morning. I call to order this public meeting of the Commodity Futures Trading Commission (CFTC) to consider whether 24 specific contracts offered for trading on the IntercontinentalExchange, Inc. (ICE), the Natural Gas Exchange, Inc. (NGX) or the Chicago Climate Exchange, Inc. (CCX) perform significant price discovery functions.

I would like to start by thanking my fellow Commissioners and our staff for being here today. This is our third public meeting this year, and I hope to continue holding more of these meetings out in the open.

Though over-the-counter derivatives have not been regulated in the United States or elsewhere, Congress took a significant step with the 2008 Farm Bill toward closing the Enron loophole that allowed for trading in energy markets outside of regulation. That legislation required the CFTC to determine whether certain contracts traded on exempt commercial markets (ECMs) – markets that in the past were not regulated – served significant price discovery functions in either the regulated futures markets or the cash markets. If the CFTC makes such determinations, those markets are subject to core principles and self-regulatory functions to protect the public from fraud, manipulation and other abuses.

It is essential that Congress build upon this important work by enacting broad reform to cover the entire unregulated marketplace. The Senate Agriculture Committee and Banking Committee have been working toward that end and have proposed a package to bring all over-the-counter derivatives into comprehensive regulation. I support their strong legislation. It would regulate derivatives dealers with capital and margin requirements, business conduct standards and recordkeeping and reporting requirements. It would promote transparency in the marketplace by moving standardized transactions to regulated exchanges and swap execution facilities. Lastly, it would lower risk to the American public by moving standardized derivatives into well-regulated clearinghouses. This would reduce interconnectedness in the system and the need for future taxpayer bailouts.

Today we are considering whether 24 contracts traded on ECMs perform significant price discovery functions. Each of these proposed contracts was listed in the Federal Register, and I thank the public for submitting comments on our proposed determinations. In addition to those on the calendar today, staff continues to consider 17 additional contracts that were also released for public comment. The Commission will make final determinations on the remaining contracts in the coming months.

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The 2008 Farm Bill’s significant price discovery contracts provision closed a loophole enacted into statute a decade ago. That loophole, commonly referred to as the Enron loophole, excluded the CFTC from regulating trading in certain energy markets. Congress recognized the danger such a loophole posed to the American public and closed it in the Farm Bill.

Two years later, as Congress debates essential reform of the over-the-counter derivatives marketplace, we must ensure that we do not make a similar mistake. Once again, certain parties have sought exemptions from regulation in the energy markets, and particularly in the natural gas and electricity markets. But the American Public needs us to be diligent and learn from past lessons that we should resist Wall Street or industry pressure to exempt specific classes of contracts from reform.

History demonstrates that bright-line statutory exemptions granted at one point in time can have unintended consequences later on. Markets evolve rapidly. What may seem like a carefully crafted exclusion today can become a significant and problem-filled loophole tomorrow. We learned the lesson from Enron and the 2008 financial crisis that we should not leave loopholes for tomorrow’s Congresses to fill.

The CFTC first determined that a contract traded on an ECM served a significant price discovery function in July of last year, when it exercised its new authority to apply additional regulations to the IntercontinentalExchange’s Henry Financial Fixed Price Contract. Today, we will consider 23 additional natural gas contracts and one contract for trading carbon emissions.

Staff has recommended that seven contracts be identified as significant price discovery contracts and 17 not be, including the carbon financial instrument. I look forward to hearing a presentation from our General Counsel, Dan Berkovitz, on our statutory authority and one from our Director of Market Oversight, Rick Shilts, on the staff’s recommendations.

Before staff presentations, I will turn to my fellow Commissioners for their opening statements.

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Last Updated: January 24, 2011