As a congressional committee zeroed in on skyrocketing oil prices, leveling accusations of excessive speculation, the Commodity Futures Trading Commission (CFTC) last week announced that its staff has amended the "no-action relief letter" under which ICE Futures Europe is permitted direct access to U.S. customers. The change requires the adoption of equivalent U.S. position limits and accountability levels on its West Texas Intermediate (WTI) crude oil contract, which is linked to the Nymex crude oil contract.
In addition, the CFTC said, ICE Futures Europe, a subsidiary of Atlanta-based IntercontinentalExchange Inc. (ICE), will follow similar U.S. hedge exemption requirements and will report violations of any such provisions to the CFTC. This action also formalizes the recently announced information-sharing arrangement between the CFTC and its United Kingdom counterpart, the Financial Services Authority (FSA), by requiring ICE Futures Europe to provide the CFTC with detailed market information (equivalent to U.S. standards) for surveillance purposes, as a condition of direct access to U.S. customers.
The CFTC will incorporate the foreign exchange's data directly into the CFTC's weekly Commitments of Traders report. The CFTC staff intends to apply these new foreign access conditions to any future requests for direct foreign access to U.S. customers for contracts that cash settle against those listed on any U.S. exchange. The revised commission staff foreign access conditions, which essentially will subject WTI futures contract traders to the same rules as those who trade on Nymex, must be satisfied by ICE Futures Europe within 120 days.
ICE said it plans to comply with the amended no-action letter subject to acceptance by the UK-based FSA, noting that it already has been cooperating with CFTC information requests. In 2006 the CFTC and the FSA entered into a memorandum of understanding (MOU) regarding information sharing for U.S. oil contracts listed by ICE Futures Europe. On May 29 ICE, the FSA and the CFTC expanded the information to be disclosed to the CFTC under the existing MOU and added U.S.-style accountability limits, ICE said. The planned amendments to the no-action letter would codify this agreement and add further requirements related to contracts that settle against any price of a contract listed on a designated contract market or derivatives transaction execution facility, or a contract listed on an exempt commercial market that serves a significant price discovery function.
The CFTC action came as ICE President Chuck Vice was among those testifying before a joint Senate committee, exploring the runaway commodities market (see related story). Vice defended the CFTC practice of granting no-action letters to global exchanges supervised by other countries, such as the ICE Futures Europe subsidiary, a self-regulated exchange with many of the market monitoring mechanisms of U.S.-based exchanges. The no-action letters are part of the mutual recognition system that is "now a backbone in the global regulatory network," Vice said.
"It is important to recognize that there is no single agency today that can police all global markets; thus we must rely on foreign regulators if the U.S. is to remain part of the international marketplace."
Vice said ICE Futures Europe has only 15% of the WTI futures open interest, so its activities are unlikely to have a major influence on the overall market. He warned against a host of unintended consequences that would accompany any legislative mandates to increase margin levels in the futures market and noted that "margin rates for ICE Futures Europe's crude oil contracts have already been raised 300% in the last year due to increased volatility, with no real effect on either the composition of the market or the price of oil."
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