Pending Senate legislation reauthorizing the Commodity Futures Trading Commission (CFTC) comes up short because it fails to give the agency the authority to oversee over-the-counter (OTC) natural gas trades, including forward contracts, swaps and options, an industrial energy consumers group told Senate leaders who crafted the bill.
The CFTC's existing jurisdictional gas market oversight applies only to trades on the New York Mercantile Exchange (Nymex), while an estimated two-thirds of the gas volumes traded in the market are not subject to agency oversight, notably gas trades on the IntercontinentalExchange (ICE), the largest OTC online trading exchange in the energy business and in the derivatives market, said Paul N. Cicio, president of the Industrial Energy Consumers of America (IECA), in a letter last Wednesday to Senate Agriculture Committee Chairman Saxby Chambliss (R-GA) and Sen. Tom Harkin of Iowa, the ranking Democrat on the agriculture panel.
The IECA wants the "same oversight" that currently exists on Nymex to apply to the two-thirds of trading volumes with no CFTC jurisdictional oversight, Cicio said. The group also urged Congress to give the CFTC "preemptive" authority to prevent "Enron-type or natural gas manipulation meltdowns." But the bill, which is awaiting action on the Senate floor, does not close this "oversight gap," he told lawmakers.
The full Senate is likely to take up the measure after its two-week Easter recess, at which time Sen. Dianne Feinstein (D-CA) is expected to offer an amendment seeking CFTC oversight of the largely unregulated online trading platforms. A Feinstein spokesman declined to provide details of the senator's proposal. Feinstein has tried twice to obtain CFTC oversight of the loosely regulated OTC market, but failed both times.
"For the record, IECA does not know if market manipulation is occurring and it is our belief the CFTC or FERC does not know either. A supply constrained market without government oversight and transparency is a market waiting for manipulation," he noted. "Unless the CFTC knows what positions (volumes of natural gas) large traders hold, it has no way of knowing if market manipulation is occurring or not. Today only Nymex is required to report large trader volumes to the CFTC, which leaves two-thirds of the volume unaccounted for," Cicio said.
"The two-thirds of unaccounted volume is an estimate based on various industry sources. In fact, no one knows how much of the market volume does not have CFTC oversight, not even the CFTC."
The IECA does not advocate government regulation of markets or prices, but "we believe markets work better when players know there is strong government oversight and monitoring that has the ability to catch and severely penalize market manipulation," Cicio said.
Recent remarks by CFTC Commissioner Sharon Brown-Hruska "implied that it may be too difficult to collect volume information from the non-Nymex natural gas markets," he noted. "The fact is, every company that trades natural gas does a 'market-to-market' report at the end of each trading day that lists every short and long position it holds in all of its accounts. Given this reality, there is no excuse for not establishing a 'large trader report' for all non-Nymex natural gas markets."
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