Jan:

Please print the attachments for me.

Thanks,

Mark
---------------------- Forwarded by Mark - ECT Legal Taylor/HOU/ECT on 
12/21/98 09:15 AM ---------------------------
   
	Enron Capital & Trade Resources Corp.
	
	From:  Jeffrey Keeler @ ENRON                           12/18/98 10:55 AM
	

To: Mark E Haedicke/HOU/ECT@ECT, Kevin P Hannon/HOU/ECT@ECT, Mark - ECT Legal 
Taylor/HOU/ECT@ECT, Cynthia Sandherr/Corp/Enron@Enron, Joe 
Hillings/Corp/Enron@Enron, Steven J Kean/HOU/EES@EES
cc:  
Subject: Sen. Agriculture Hearing on OTC derivatives/CFTC

The Senate Agriculture Committee on Wednesday, December 16 held a hearing on 
OTC Derivatives and the almost-demise of Long Term Capital Management (LTCM) 
hedge fund.

Witnesses included:

Panel One:  CFTC Commissioners
Brooksley Born, Chair
John Tull
Barbara Holum
David Spears
James Newsome

Panel Two:  Presidents Working Group on Financial Markets, Staff
Roger Anderson, Treasury
Patrick Parkinson, Fed
Richard Lindsey, SEC
Daniel Waldman, CFTC

Panel Three:  Former CFTC Chairs
Susan Phillips
Wendy Gramm
William Albrecht
Martin Mayer

The only members of the Committee present were Chairman Richard Lugar (R-IN) 
and Ranking Member Tom Harkin (D-IA).  Thad Cochran (R-MS) stayed only to 
make a brief opening statement.

In his opening statement, Lugar announced that the Committee would hold 
hearings and "seminars" in 1999 on OTC Derivatives issues as part of 
Commodity Exchange Act re-authorization.  Lugar also announced that he would 
be releasing a set of questions for the Committee to consider in advance of 
next year's hearing.  (I will forward the questions as soon as I am able to 
obtain a copy from the Committee.)

CFTC PANEL:

1)  Chairperson Born - her testimony was essentially no different than what 
she's been saying since May when the Concept Release was published.  She 
focused her testimony mostly on the LTCM meltdown and did not really speak to 
the issue of the appropriateness of derivatives regulation by the CFTC.  She 
only continued to assert that the Concept Release raised necessary questions 
about the OTC market, and its issuance does not officially mean the CFTC will 
regulate, but was completely justified and did not cause legal uncertainty or 
risk in OTC markets.   

She said that the LTCM situation arose because of the use of derivatives in 
"highly speculative" activities.  LTCM had excessive margin obligations to 
futures exchanges, derivatives positions of $1.25 trillion (1000 times its 
capital), and carried excessive debt.   Born said that the Concept Release 
raises questions that go to the heart of the LTCM problem:  lack of 
transparency, excessive leverage, and (most notably) the lack of controls and 
reporting requirements that allow firms to take positions that jeopardise 
markets and avoid appropriate regulation.

She indicated a hope that the President's Working Group would complete its 
studies on OTC derivatives and on hedge funds early in 1999, and that the 
CFTC would work closely with other agencies toward that end.

2)  Commissioner Tull - echoed Born's testimony, saying that the LTCM 
situation raises questions about transparency, leverage, over-lending, 
disclosure, and systemic risk.  He said the Concept Release questions don't 
mean that regulation is required -- the responses will be important to the 
CFTC in dealing with situations like LTCM.

3)  Commissioner Holum - indicated that the CFTC should definitely not act 
until the President's Working Group (PWG) completes its studies on 
derivatives and hedge funds AND until Congress has evaluated the results of 
those studies and considered the issue fully in CEA re-authorization 
hearings.  She said CEA legislation is the appropriate forum for 
re-examination of OTC regulation.  She added that regulators shouldn't be 
able to hide behind interpretations of static old regulation, regulations 
must evolve with the markets.

Holum said the LTCM situation occurred due to excessive leverage, arising 
from a bad investment strategy and over-extension of credit by lenders.  The 
CFTC should not jump to regulation because of one firm's poor management, 
this could drive business offshore.   She also said that regulation of 
on-exchange markets should be examined along with OTC markets.

4)  Commissioner Spears - said that while the Concept Release was purported 
to be a "fact-finding" exercise, it shouldn't have been done in a "vacuum" 
without participation from the rest of the PWG agencies.  Congress should 
have a major role in the debate -- as such Spears and Commissioner Newsome 
have formally indicated that they will not vote for any new regulation until 
Congress has considered that matter, at least through September 1999.

5)  Commissioner Newsome -  he echoed Spears' remarks, saying that he 
wouldn't vote for any new regulation of OTC markets until Congress has fully 
considered the matter and the PWG has concluded its review and studies.  
(NOTE:  I had a chance to talk to Commissioner Newsome after the hearing, and 
he indicated that he would like to take Mark Haedicke up on his offer to 
visit the Enron Trading Floor.)

Questions and Answers:

-- Lugar indicated that the CFTC had information about LTCM's problems well 
before the September collapse (this was reported in the Washington Post).  He 
asked why they did not share this information with the PWG agencies or act 
sooner.  Born responded that LTCM (as a Commodity Pooling Organization - CPO) 
filed audited financial statements and satisfied all reporting requirements 
in filing the information that the CFTC received before September.  She said 
the commissioners never saw the information -- staff determined LTCM was OK 
at that point.  She also said other agencies had some of the same information 
at the same time.

--  Harkin asked the size of the OTC market -- his point being that it is 
unknown due to lack of transparency.  All commissioners indicated they had no 
formal answer, but the guess was around $30 trillion.   Harkin asked if there 
was double-counting going on based on the underlying assets on which 
derivatives are formed.  Born responded that there is not even necessarily an 
underlying asset involved, but yes, there could be multiple-counting.  
Harkin's comment was that this seemed to him like a "pyramid scheme," and 
raises serious questions about safety and soundness.  Harking then asked Born 
if imposing reporting requirements were within the CFTC's exemptive authority 
under the 1993 CEA?  Born replied simply, yes.

-- Lugar asked what expertise the CFTC has in analyzing the OTC market.  Born 
indicated that CFTC economists and attorneys "try to keep up with" OTC 
developments, but don't devote a lot of resources in that area because they 
have made so many exemptions for the OTC market.

PWG PANEL:

Testimony of all witnesses focused mainly on the relevance of the LTCM 
collapse in their two studies on derivatives and hedge funds.  They all 
indicated that the PWG was using a consensus process in their review -- no 
agency's view will be allowed to dominate the studies.  They also stressed 
the importance of looking at OTC markets as international markets, and 
coordinating with international regulatory bodies.

FORMER CFTC CHAIRS PANEL:

1)  Susan Phillips - Said that financial derivatives are easier to regulate 
than commodity derivatives.  (Note:  She seemed to assume in her testimony 
that the main participants in OTC markets were banks and financial services 
firms)  She said that the CEA gives the CFTC very broad authority to 
regulate, and Congress may want to take a fresh look at this.  She also said 
that, in addition to greater market discipline, the best way to deal with 
"unregulated" participants in OTC markets would be more adequate disclosure 
requirements.

2)  Wendy Gramm - was a superstar witness, advocating no further role for the 
CFTC or any other agency in OTC market regulation.  She said that by the 
CFTC's merely asking questions in 1987, the commodity swap market moved 
overseas and did not return until the CFTC issued more friendly policy 
statement and clarifications.  She introduced 2 articles into the record, one 
that focuses on the CFTC's creating legal uncertainty by asking questions 
about OTC markets, and another that says that regulators shouldn't use events 
such as LTCM to advance their own regulatory agenda.  She said that any 
purported regulations need strict review by Congress and cost/benefit 
analysis.

3)  William Albrecht - said there is no role for the CFTC in OTC markets.  He 
said that the CFTC shouldn't use the LTCM situation to stretch its regulatory 
authority to hedge funds.  He reluctantly proposed that the CFTC and SEC be 
merged, because functional regulation no longer appears to work well due to 
diversity of participants in the financial markets.

4)  Martin Mayer - said the CFTC should re-assert its role in derivatives 
regulation due to the recent LTCM situation.  He believes that any financial 
instrument that is a "bet" is a derivative - futures included.

Questions and Answers:

Chairman Lugar asked if OTC market regulation by the CFTC is appropriate.  
-- Phillips replied No, there may be a need for additional disclosure 
requirements, and may be an expanded role for the SEC in doing so.
-- Gramm replied No, and there is no need for nay expanded regulation -- the 
authority should not move to another agency, institutional regulation is 
sufficient.
-- Albrecht replied No, it is too complex and difficult to structure 
functional regulation of derivatives under the CEA.
-- Mayer replied Yes.

Attached to this document is the testimony of Senator Lugar and each witness, 
except Commissioner Tull and Daniel Waldman who did not submit testimony.   
(For Lotus Notes - double click on attachment and choose "Launch";  cc-mail, 
choose "Launch Attachment" from the attachments menu)  If you have trouble 
opening these files, please let me know and I will have hard-copies sent to 
you by mail.   Any questions, please call me at 202/466-9157.



CFTC PANEL

PWG PANEL

FORMER CFTC CHAIRS PANEL