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Bill Bolstering CFTC Oversight Sent to President

Congress forwarded legislation to President Bush last Thursday that closes the "Enron Loophole," which has allowed large electronic trading platforms to circumvent the full oversight of the Commodity Futures Trading Commission (CFTC) for years.

The Senate passed the conference report on the $290 billion farm bill, containing the CFTC-related provisions, by 81-15 Thursday, one day after it cleared the House of Representatives by a vote of 318-106. Bush has threatened to veto the measure when it crosses his desk, but the support for the bill is strong in Congress, with both chambers passing the bill by more than the two-thirds majority needed to override a veto.

"This bill is really our best bet to deter unscrupulous traders from manipulating energy prices and engaging in excessive speculation. This has been a long, hard road -- and this is a major legislative victory," said Sen. Dianne Feinstein (D-CA), who has campaigned for several years to close the trading gap in the Commodity Exchange Act.

Bipartisan Senate sponsors of the CFTC provisions included Feinstein, Carl Levin of Michigan, Olympia Snowe of Maine, Maria Cantwell of Washington, Susan Collins of Maine, Byron Dorgan of North Dakota, Ron Wyden of Oregon and Charles Schumer of New York. The provisions were part of the CFTC Reauthorization Act of 2008, which was folded into the mammoth farm bill.

"The provisions in the farm bill closing the Enron loophole are the culmination of five years of work to put the cop back on the beat in energy markets that have for too long escaped federal oversight and regulation," Levin agreed.

"We have taken an important first step... But we have more work to do to stomp out potential manipulation in energy commodity markets," Cantwell said. Wyden, an ardent critic of the energy industry, added that "today we begin peeling back the cloak of secrecy that Enron and other energy traders got eight years ago."

The measure would bring leading energy trading platforms, such as Atlanta-based IntercontinentalExchange (ICE), under the same regulation as the New York Mercantile Exchange (Nymex) and Chicago Mercantile Exchange (CME).

The bill, if enacted, would boost federal oversight authority to detect and prevent manipulation and limit speculation in U.S. electronic energy markets. It would increase transparency, create an audit trail, impose firm speculation limits and establish stiff financial penalties in cases of market manipulation and excessive speculation.

For Feinstein the victory was long in coming. She has been trying to pass legislation to heighten the CFTC oversight of electronic energy trading exchanges since 2002 (see NGI, July 15, 2002). She and her colleagues were successful this time because the tide appears to have shifted in the wake of two recent instances of alleged attempted manipulation of natural gas markets. One of these resulted in charges against failed hedge fund Amaranth Advisors LLC and another resulted in charges against Energy Transfer Partners (see NGI, July 30, 2007). In addition, "suddenly you got a major business force on our side" -- Nymex and ICE -- Levin said last year.

ICE gave Congress high marks for the CFTC-related provision in the farm bill. "The farm bill...places an appropriate level of regulation on contracts that serve a significant price discovery function and will further enhance market transparency," said ICE, a leading operator of global exchanges and over-the-counter markets, in a statement..

Under the provision, the CFTC would require electronic exchanges to provide strict oversight of contracts that are significant in determining commodity market prices, similar to what currently takes place on regulated markets like Nymex and CME. It would require electronic energy exchanges to monitor trading to deter manipulation and price distortion, collect information on trading activity, supply large trader reports to the CFTC and publish price, trading volume and other trading data on a daily basis.

The CFTC would review all electronic contracts to identify which are significant in determining market prices and should be regulated. Factors to be considered include whether the contract is traded in significant volumes; whether the contract is used by traders to help determine the price of subsequent contracts; and whether the contract is equivalent to a regulated contract and used the same way by traders.

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