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CFTC Increases Transparency of Markets, Investigating Oil Trading

The Commodity Futures Trading Commission (CFTC), prompted by dramatic increases in the price of crude oil traded on futures exchanges, announced a number of initiatives that it said "will improve oversight of energy futures markets to ensure they reflect fundamental economic forces of supply and demand, free of manipulation and fraud," and said it has been investigating U.S. oil markets since December.

"All Americans are significantly affected by high energy prices, whether it's paying more at the pump, or higher costs for farmers and entrepreneurs," acting CFTC chairman Walt Lukken and commissioners Michael Dunn, Jill Sommers and Bart Chilton said in a jointly released statement. "Today, the commission is taking important steps to ensure that the U.S. energy futures markets function properly and operate free from manipulation and abuse. With these initiatives, we are improving our oversight capabilities and bringing greater sunshine to these markets."

The commission announced three steps it will take to gather additional information from energy futures markets:

"As total contract volume on U.S. futures markets has increased in recent years, all classes of market participants have grown," Lukken said. "However, index trading is relatively new to the futures markets, and the commission believes increased transparency of such trading activity may help the CFTC determine whether adjustments to trader reporting or classification are required."

The CFTC also took the unusual step of disclosing that its Division of Enforcement has been investigating since December practices surrounding the purchase, transportation, storage and trading of crude oil and related derivative contracts. While the specifics of the ongoing investigation remain confidential, the commission acknowledged the investigation "because of today's unprecedented market conditions."

In addition, the CFTC said it has reached an agreement with the United Kingdom Financial Services Authority (FSA) and ICE Futures Europe for expanded information-sharing for surveillance of energy commodity contracts with U.S. delivery points, including the West Texas Intermediate (WTI) crude oil futures contracts that trade on both the New York Mercantile Exchange (Nymex) and ICE Futures Europe in London. While the ICE Futures Europe WTI contract is a cash-settled contract that does not require physical delivery of oil in the U.S., its price is linked to the settlement price of the Nymex crude oil contract. The CFTC currently conducts surveillance of the crude oil markets, in part, using detailed trading data provided by the FSA under a 2006 information-sharing pact. The new agreement will enhance the amount and quality of the information the CFTC receives regarding crude oil trading in the UK and will enhance the agency's surveillance activity, CFTC said.

IntercontinentalExchange (ICE) CEO Jeffery C. Sprecher said the expanded information sharing agreement was initiated by ICE.

"We believe today's agreement will bring even greater visibility and oversight to the global energy markets, and we are confident the enhanced information will demonstrate that both ICE and our participants already operate in a manner consistent with existing U.S. regulations," Sprecher said. "Prudent regulatory information sharing and cooperation, rather than enactment of onerous and duplicative regulatory schemes, will ensure that these vital markets remain transparent and do not move offshore...Changes such as those agreed to today can increase transparency without impeding price discovery or artificially muting supply and demand fundamentals, which could result from mandated, arbitrary margin adjustments.

"In the past year, margin requirements for the ICE WTI contract have risen over 140%, yet crude oil prices continue to rise. Margin requirements are, and should continue to be, used solely to ensure prudent risk management via a clearing house and not to attempt to establish artificial price controls. Markets have demonstrated over time that such efforts are ineffective," Sprecher said.

Nymex CEO James Newsome said his exchange "has advocated for greater transparency of futures activity linked to U.S. exchanges occurring on markets regulated by foreign regulators. I applaud the initiatives put forward today, which can only enhance the CFTC's regulatory mission."

Sen. Jeff Bingaman (D-NM), chairman of the Senate Energy and Natural Resources Committee, said he welcomed the CFTC's initiatives.

"The steps announced today by the commission should help it answer the detailed questions I sent to the acting chairman earlier this week on oil trading in dark markets, regulatory loopholes for swap dealers, and lack of transparency requirements," Bingaman said.

CFTC's announcement came one week after President Bush signed into law legislation temporarily suspending deliveries of crude oil to the Strategic Petroleum Reserve (SPR) in an attempt to ease gasoline prices (see NGI, May 26). The president's action came only days after Congress overwhelmingly passed the bill (see NGI, May 19).

In April Sen. Maria Cantwell and Rep. Jay Inslee, both from Washington State, called for the creation of a Department of Justice oil and gas market fraud task force to investigate potential fraud and manipulation in the energy markets (see NGI, April 28).

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