The head of the New York Mercantile Exchange (Nymex) told commodity regulators last Tuesday that the no-action letter process has been successful in both the United States and overseas in keeping energy traders in check.
The no-action letter process "has worked very, very well" in both markets, said Nymex President James Newcome during the Commodity Futures Trading Commission's (CFTC) first meeting of its Energy Markets Advisory Committee in Washington, DC. Some in Congress have advocated revoking no-action letters for foreign boards of trade, but "I think that that's the worst thing that could happen. I do think that there's an appropriate middle ground," he said.
"The reason that people [foreign traders] come in for the no-action letter is because they want access to that customer. And I think that's a big stick for the Commission to have without requiring registration," Newsome said.
In a no-action letter, the CFTC staff or the agency's Office of General Counsel assures either a U.S. or foreign energy trader that it will not recommend that the CFTC begin enforcement action for failure to comply with a specific provision of the Commodity Exchange Act or agency regulation. The letter is binding only with respect to specific facts.
"I would contend that those no-action letters could be conditioned to say, 'OK we're happy giving you access to U.S. customers,'" but in exchange for that access, "we're going to require large trader reports" and position accountability, Newsome said.
The fear at the CFTC is that "if you get too strict with regard to requiring the foreign boards of trade to come in from a regulatory standpoint, the U.S. exchanges open themselves to retribution from some other...jurisdictions and [it makes] it more difficult for us to access their customers."
Generally, "that is not a path that we want to go down because right now it's a very open marketplace with all the different exchanges having access to global customers," he said.
Acting CFTC Chairman Walter Lukken agreed with Newsome. "My concern is that by shutting off that type of a program, we may lose access to all those markets. And I'm not sure that we can really control the flow of money to those markets even if we decide to turn it off," he said.
Lukken said a key priority for him is to make sure energy traders "[are] not gaming one market against another."
In light of the increase in the prices for crude oil, natural gas and other commodities, as well as the influx of new investors into the commodity futures markets, the CFTC announced last Tuesday that it has formed an interagency task force to evaluate the developments in the commodity markets. The task force -- which includes representatives from the CFTC, the Federal Reserve, Treasury Department, the Securities and Exchange Commission, Energy Department and the Agriculture Department -- will review investor practices, fundamental supply and demand factors, as well as study the role of speculators and index traders in the commodity markets.
The task force will try to complete its work as quickly as possible and will make its results public, according to the CFTC.
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