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How the CFTC got power in financial regulation bill

Section: Daily Dispatches

By Michael R. Crittenden and Victoria McGrane
The Wall Street Journal
Thursday, July 15, 2010

WASHINGTON -- With the Senate poised to approve the most significant overhaul in financial regulations in decades, the Commodity Futures Trading Commission is emerging as a winner.

The legislation likely to pass the Senate on Thursday would make the relatively small agency -- it employs only 600 -- the top cop for the $300 trillion U.S. derivatives market. CFTC Chairman Gary Gensler tenaciously lobbied for the agency, which was fighting for its life not long ago, and successfully tapped the CFTC's congressional overseers for their support.

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The agency won a variety of items on its "wish list," including power to combat disruptive trading practices and more leeway to pay whistle-blowers. Most important, perhaps, lawmakers gave the agency freedom to interpret many of the rules it is charged with writing.

"They were the big winners," said Sen. Judd Gregg (R., N.H.), a member of the Senate Banking Committee.

The CFTC's new authority and Mr. Gensler's vision for derivatives regulation is causing anxiety for corporations. Critics are predicting higher costs for commercial firms and less liquidity in the swaps market.

Lawmakers, aides, and lobbyists involved in the bill say Mr. Gensler played an outsize role in shaping the new regime and was a constant presence during key moments in the legislative process.

During a grueling 20-plus hour negotiating session in late June, he hovered just behind lawmakers, and could be seen whispering to staff and negotiators as the House and Senate sought to iron out the 2,300-plus page bill.

Rep. Michael McMahon (D., N.Y.) said it was "a little unusual" to see Mr. Gensler conferring with lawmakers. But it wasn't new: Earlier this year, Mr. Gensler was on hand during a key Senate agriculture meeting to draft the derivatives bill.

"He was able to be on the Hill and explain it in layman's terms to lawmakers," said CFTC Commissioner Bart Chilton. "It was really helpful to have him up there, not just for meetings, but to be on call 24/7."

His influence was facilitated by the heads of the two agriculture panels, Sen. Blanche Lincoln (D., Ark.) and Rep. Collin Peterson (D., Minn.).

Mr. Gensler wanted to expand his agency's influence to deal with derivatives, one cause of the financial crisis. A higher-profile CFTC, meanwhile, would give Ms. Lincoln and Mr. Peterson an increased ability to influence financial policy and secure Wall Street campaign contributions. The agriculture committees have jurisdiction because of the heavy use of derivatives in agriculture.

"Once you have that power, the last thing you want to do is give it up," especially if it's a money maker for campaigns, said Meredith McGehee, policy director at the Campaign Legal Center, a nonpartisan campaign-finance advocacy group.

Ms. Lincoln's office said the CFTC is the agency best equipped to oversee derivatives. Mr. Gensler said that comprehensive regulation of the derivatives market is "essential to protecting the American public." Mr. Peterson's office didn't return a request for comment.

Mr. Peterson early on resisted colleagues' efforts to narrow the agency's scope. Both he and Ms. Lincoln argued that the CFTC, unlike other regulators, hasn't been tagged with failures in the run-up to the crisis.

Mr. Peterson, at a dinner last June with Treasury Secretary Timothy Geithner, said he opposed a CFTC-SEC merger.

Days later, the White House released its formal proposal that avoided the issue, proposing instead to "harmonize" regulation instead.

The effort to empower the CFTC continued up to the closing moments of negotiations. At the last minute, Ms. Lincoln sought to expand the range of firms the CFTC could oversee. A top Lincoln staffer, with Mr. Gensler standing over his shoulder, told lawmakers the senator was seeking a technical change. Her Senate colleagues were wary of a power-grab benefiting the agency.

"We're going to end up giving the CFTC broader jurisdiction than we intended to," countered an aide for Sen. Richard Shelby (R., Ala.), who sits on the Banking Committee.

Senate negotiators voted against her change, leading a visibly angered Ms. Lincoln and her staff to swarm Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and his aides. "It was agreed to," Ms. Lincoln exclaimed to a top Dodd staffer, before threatening to blow up the fragile agreement.

"She doesn't want to sign the conference report," the banking-committee chief of staff told Mr. Dodd. "Oh, come on," Mr. Dodd groaned, burying his head in his hands.

At an impasse, staff from the Federal Reserve, SEC, CFTC and other top agencies trooped into a nearby Senate room to resolve the dispute. Minutes later, they agreed to alter the changes Ms. Lincoln had sought, giving her some but not all of what she wanted.

"The agency comes out in good shape," Mr. Chilton said. "We really have a lot to do in these markets -- and I think that's good because they gave us the tools to do that."

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Prophecy to Become Coal Producer This Year
with 1.5 Billion Tonnes of Resource

Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen.

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