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CFTC Inspector General Asked to Probe Speculation Report

Four Democratic senators have called for an investigation of the Commodity Futures Trading Commission's (CFTC) release in mid-July of an interim report absolving futures market speculators of blame in the run-up of oil prices, when the CFTC allegedly knew the report's data was flawed. The report was issued just days before a Senate vote to curb speculation was blocked.

The CFTC denied the senators' claims, with a spokesman saying that the report contained "as accurate and up-to-date information" as was available on July 22 when the report was issued.

The charges center around a growing dispute as to whether institutional investors, such as pension funds trading in the futures market, should be classified as speculators since they do not trade physical natural gas as do commercial traders, which use the futures market to hedge their physical positions. The senators asked for an investigation by the CFTC's inspector general.

"We are greatly disturbed that although CFTC staff obviously knew that underlying data used to prepare the interim report was seriously flawed, the interim report was nonetheless publicly released" on July 22, as the Senate was debating anti-speculation legislation, wrote Sens. Ron Wyden of Oregon, Byron Dorgan of North Dakota, Maria Cantwell of Washington and Bill Nelson of Florida in a letter Thursday to CFTC Inspector General A. Roy Lavik.

"We also request that you investigate the suspicious timing of the interim report. The unannounced interim report was released just a few days before a key Senate vote on a pending bill related to speculation in the oil markets. The report...appears to have been created and released to influence that Senate vote..."

<>The interim report, prepared by the Interagency Task Force on Commodity Markets, which the CFTC chairs, found that fundamental supply and demand factors were largely the cause of escalating oil prices in the futures market, not the "excessive" energy speculation that Senate and House Democrats suspected (see NGI, July 28).

The interim report analyzed daily price changes and position changes by various trader groups and combinations of trader groups between January 2003 and June 2008, saying there was little evidence that daily position changes by any of the trader subcategories, including swaps dealers and hedge funds, systematically preceded price changes.

The senators contend the report's conclusion was based on incorrect data about the role of noncommercial traders in the futures market. "On July 18, just days before the interim report was issued, the CFTC staff issued a special announcement revealing that speculative investors played a larger role in oil trading than the CFTC staff realized. In fact, speculative, noncommercial trading [by managed funds, pension funds and other institutional investors, for example] accounted for nearly half of the oil trading on the New York Mercantile Exchange (Nymex)," they told the CFTC inspector general.

"In short, CFTC staff determined that based upon additional data obtained as a result of a special data call to select market participants, it had been incorrectly classifying a significant number of noncommercial trades carried out by a single large trader as commercial. This 'reclassification,' which represented approximately 10% of the Nymex crude oil futures and options positions, essentially raises the percent of Nymex oil trades official attributable to speculative investors to 48% from 38%."

The interim report issued in July did not reflect this reclassification, according to the senators. But a CFTC spokesman said the report "contained all of the reclassified data."

The timing of the task force report was five days before a Democratic bill to rein in energy speculation was blocked in the Senate by Republicans (S. 3268). The Senate's 50-43 vote was short of the 60 affirmative votes (three-fifths of the 100 senators) required to close debate and move forward on the bill (see NGI, July 28).

The report carried extra weight because the other members of the task force include staff from the departments of Agriculture, Energy, and the Treasury, the board of governors of the Federal Reserve System, the Federal Trade Commission and the Securities and Exchange Commission.

The senators called on the CFTC inspector generation to "investigate the process by which the interim report was prepared and released, including but not limited to the decision on timing of the public release, the decision to characterize the information contained in the report not only as accurate, but as the best available data, and to identify the individuals involved in making these decisions," they said.

Because analysis of the commodity markets is of the "greatest national concern," they requested that the matter be given the "highest priority," and that the findings be reported to Congress by no later than Sept. 12. The final task force report on speculation in energy commodity markets is due to be released in mid-September.

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