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CFTC Considers Expanded ECM Oversight

The Commodity Futures Trading Commission (CFTC) is seeking comments on proposed rules and rule amendments that would heighten oversight authority of certain lightly regulated contracts in exempt commercial markets (ECM) that perform significant price discovery for commodities in interstate commerce.

The proposed rules were published in the Federal Register Friday (Dec. 12), and comments are due at the agency on or before Feb. 10.

The CFTC Reauthorization Act of 2008, which was enacted into law earlier this year, called for the CFTC to issue proposed rules that would "significantly expand" the agency's regulatory authority over ECMs, which have heretofore operated largely outside of the CFTC's regulatory reach, by creating a new regulatory category -- ECMs with significant price discovery contracts (SPDCs).

"The proposed rules provide the Commission with a clear window and robust tools to oversee these exempt commodity swap markets, allowing the Commission to better protect the integrity of the price discovery function of regulated futures exchanges," said CFTC Acting Chairman Walter Lukken. He noted that the proposed rules are the culmination of 18 months of work by the CFTC and Congress.

The proposed rules would establish a level playing field between designated contract markets -- regulated exchanges such as the New York Mercantile Exchange -- and ECMs. ECMs are lesser-regulated electronic trading systems that permit institutional participants to trade exempt over-the-counter commodities, including energy products, metals, chemicals, air emission allowances and paper pulp. Atlanta-based IntercontinentalExchange is essentially unregulated as an ECM, according to the CFTC.

The new reauthorization law closed the "Enron loophole," which had allowed some electronic trading platforms to circumvent the full oversight of the CFTC for years (see NGI, May 19). It expanded federal oversight authority to detect and prevent manipulation and limit speculation in U.S. electronic energy markets. It also increased transparency, created an audit trail, imposed firm speculation limits and established stiff financial penalties in cases of market manipulation and excessive speculation.

At a September 2007 hearing, the CFTC unanimously found that when an ECM contract begins to serve a significant price discovery function for a commodity in interstate commerce, the contract warrants increased oversight to deter and prevent price manipulation or other disruptions to market integrity. The CFTC subsequently urged Congress to take action giving it that authority.

The proposed rules would revise the information-submission requirements for ECMs; establish procedures and standards by which the CFTC will determine that an ECM contract performs a significant price discovery function; provide guidance with respect to compliance with nine core principles for ECMs with SPDC; and amend existing regulations for registered entities in order to clarify that such regulations are now applicable to ECMs with SPDCs.

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