The Senate last Thursday approved a bipartisan measure that would increase federal oversight authority of trading on currently unregulated electronic energy platforms, such as Atlanta-based IntercontinentalExchange (ICE). The proposal is part of the reauthorization of the Commodity Futures Modernization Act, which was folded into the $288 billion farm bill (HR 2419) that was passed Friday.
The measure, offered by Sens. Dianne Feinstein (D-CA), Carl Levin (D-MI) and Olympia Snowe (R-ME), would close the so-called "Enron loophole" to the Commodity Exchange Act, which exempts electronic energy trading platforms from full Commodity Futures Trading Commission (CFTC) oversight. It would bring ICE and others under the same regulation as the New York Mercantile Exchange (Nymex).
The initiative is supported by the CFTC, ICE, Nymex, the Chicago Mercantile Exchange (CME) and the President's Working Group on Financial Markets, according to Feinstein.
Under the proposal, 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 the CME, she said. It would require electronic energy exchanges to monitor trading to prevent 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 will review all electronic contracts to identify which are significant in determining market prices and should be regulated, Feinstein said. Factors to be considered include: 1) if the contract is traded in significant volumes; 2) if the contract is used by traders to help determine the price of subsequent contracts; and 3) if the contract is equivalent to a regulated contract and used the same way by traders.
Feinstein has been trying to pass legislation to heighten the CFTC oversight of electronic energy trading exchanges since 2002 (see NGI, July 15, 2002). She was successful Thursday because the tide appears to have shifted in the wake of charges against failed hedge fund Amaranth Advisors LLC and Energy Transfer Partners for manipulation of the natural gas markets. In addition, "suddenly you got a major business force on our side" -- Nymex and ICE, Levin said earlier this year.
On the House side, the Agriculture Committee last Wednesday passed by voice vote CFTC reauthorization legislation, which included several similar CFTC recommendations to give the agency heightened oversight authority over certain lightly regulated contracts in exempt commercial markets that perform significant price discovery for commodities in interstate commerce. It also would increase the CFTC's penalty authority.
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