Bill Seeks Curbs on Derivatives

By SARAH N. LYNCH

WASHINGTON -- Representative Bart Stupak (D., Mich.) said Friday he has introduced a sweeping new bill in Congress that would empower the federal commodities regulator to oversee all over-the-counter and carbon derivatives, rein in excessive energy speculation and ban the trading of naked credit-default swaps.
The bill, which is a beefed-up version of one that was introduced twice in recent years, comes just a few days after the Obama administration unveiled a detailed plan to bring over-the-counter derivatives, such as energy and credit-default swaps, under the tent of federal regulation.

It also comes about a week before the House Energy and Commerce Committee, of which Rep. Stupak is a member, prepares to put the final touches on a climate bill. That bill would allow for the development of a massive new carbon-derivatives market by creating a system that would cap greenhouse-gas emissions and create a market for companies to buy and sell the right to pollute.
Currently, that bill gives the Federal Energy Regulatory Commission the right to oversee a carbon cash market, but it doesn't explicitly give the Commodity Futures Trading Commission the authority to regulate a future carbon-derivatives market.
Rep. Stupak's bill in part serves to clarify the CFTC's jurisdiction over carbon trading and it would prohibit the creation of an over-the-counter carbon-trading market -- a move that would be highly controversial among big banks such as J.P. Morgan Chase & Co., who say over-the-counter carbon transactions would be vital.
Rep. Stupak indicated Friday he might be deterred from voting on the climate bill next week if it doesn't include regulatory framework for the carbon market like the one outlined in his bill.
"It will be very difficult for me to vote for a piece of legislation if it does not have strong framework," said Rep. Stupak, who chairs the Energy Committee's Subcommittee on Oversight and Investigations. "I want to see a climate bill, but I also want to see strong regulatory framework in place," he said.
The bill also goes much further than the regulatory framework outlined by the Obama administration this week.
The Obama plan, for instance, doesn't seek to ban any types of contracts.
Rep. Stupak's bill would ban trading of so-called naked credit-default swaps, which are insurance-like contracts in which traders don't have any underlying interest in the bonds.
Such transactions, Rep. Stupak said, create a "morale hazard" by "incentivizing economic loss."
The bill also would put aggregate speculative position limits for energy speculators across all markets -- a move in response to the drastic spike in energy prices that occurred last year.
Write to Sarah N. Lynch at sarah.lynch@dowjones.com