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Nymex's Newsome Argues Against Narrow Price Limits on Derivatives Trading

Responding to critics of energy market volatility, James Newsome, president of the New York Mercantile Exchange, told a Senate committee attempts to decrease energy prices or volatility by installing narrow price limits on trading would be unsuccessful, and in fact, could work in the opposite direction.

"The role of markets is to discover the true price," Newsome said in testimony before a Senate committee, and to do that the markets have to be able to move. Putting price limits on Nymex would do nothing to lessen volatility in the physical market, and would simply drive transactions to the over-the-counter or unregulated markets outside the purview of the Commodity Futures Trading Commission (CFTC).

Newsome, formerly chairman of the CFTC, said the federal courts have thrown some uncertainty over the CFTC's enforcement authority recently. Reauthorization of the Commodity Futures Modernization Act (CFMA) could include a clarification of the CFTC's authority over fraud, he suggested.

Senator Mike Crapo (R-ID) heading up a hearing of the Senate Subcommittee on International Trade and Finance last week, said Congress is exploring whether there should be a straight reauthorization of the CFMA or whether it should be modified, noting that a number of options have been proposed. The senator said, however, he believed the "public needs to understand derivatives more and the policy questions as to how you regulate, hopefully not over-regulate" the derivatives market.

Newsome said that proposals offered by some members of Congress for artificial price limits, a price limit that triggers an investigation of the market by the CFTC, or prior CFTC approval for Nymex rule changes that expand price limits beyond 8% of the prior day's settlement price, would inhibit market flexibility and price discovery. "The price is going to be reached by the world economy; neither this committee, nor the CFTC can change that," Crapo said.

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