FOR IMMEDIATE RELEASE Contact: Seth Boffeli

July 10, 2002 202-224-9482

OPENING STATEMENT OF CHAIRMAN TOM HARKIN

SENATE AGRICULTURE COMMITTEE HEARING ON

CFTC OVERSIGHT OF DERIVATIVE MARKETS

"This morning I am pleased to welcome everyone to our Committee for a hearing on regulation of markets in over-the-counter derivatives and the CFTC's oversight role. The main focus of this hearing will be the regulatory treatment of derivatives based on "exempt commodities," such as energy and metals, following passage of the Commodity Futures Modernization Act of 2000. During this hearing, the Committee intends to examine the scope of the CFTC's authority and its exercise of its authority to insure market transparency, prevent and punish fraud and manipulation, and restore confidence in these markets. The impact of OTC derivatives markets reaches well beyond the immediate parties to the transactions. The integrity of these markets and confidence in them are critically important to shareholders, investors, consumers and the broader economy.

"The OTC derivatives markets have assumed an increasingly large role in the U.S. economy. A recent conservative estimate put the size of the global OTC derivatives market at $111 trillion. The U.S. share of that market is estimated to be at least two-thirds. Derivatives based on "exempt commodities," such as energy and metals, make up a small percentage - probably no more than 2% - of the total OTC derivatives market. However, derivatives play an increasingly important role in energy and metals markets, which are in turn critical to our overall economy.

"When the CFMA was enacted in December 2000, one of its primary goals was to insure legal certainty for OTC derivatives. For the most part, the CFMA was based on the recommendations of the President's Working Group on Financial Markets issued in 1999.

The President's Working Group recommended that certain transactions involving financial derivatives be excluded from the CFTC's jurisdiction. The President's Working Group did not recommend a similar exclusion for transactions involving energy and metals derivatives.

"During development of legislation in the Senate, there was discussion of the issue of oversight of energy and metals derivatives markets, and Sen. Lugar and I both supported, in this Committee, a version of the legislation that was consistent with the recommendations of the President's Working Group, and excluded only financial derivatives - not energy and metals derivatives - from the CFTC's jurisdiction. The bill codified an exemption, with specific safeguards, for certain commodities such as energy and metals.

"The final version of the legislation included in the omnibus appropriations bill differed from our Committee bill regarding energy and metals derivatives markets. I supported the CFMA, although I had some concerns about its treatment of energy and metals products, because I thought it had a number of very positive features, and on the whole was a good bill. I still think so. It is important that we not undermine the legal certainty this legislation brought to the OTC derivatives markets. However, if there are unaddressed problems with some types of derivatives that could give a black eye to all OTC derivatives.

"Although the CFTC is currently investigating allegations of fraud and manipulation in the western energy markets, some have suggested that the CFTC does not, following passage of CFMA, have sufficient authority to effectively and successfully investigate and punish fraud and manipulation in derivatives markets for exempt commodities - particularly energy and metals. Questions have also been raised about the CFTC's ability to prevent fraud and manipulation in the first place. Today's hearing will focus on these issues, and I hope it will help answer some of these questions.

"We also expect to discuss possible legislative solutions to any problems identified in the existing regulatory framework for OTC derivatives based on exempt commodities. Senator Feinstein has proposed legislation to increase transparency in the energy and metals derivatives markets, and to clarify and strengthen the CFTC's authority to investigate and punish fraud and manipulation in those markets. Senator Feinstein is here with us today, and I look forward to hearing her statement."

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