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GasMart 2009: Mocek Sees Stiff Commodities Regulation Ahead

New regulations coming to the commodities markets near you are likely to drive more transactions onto electronic trading platforms for clearing and provide the public with more aggregated data on market movements, a former Commodity Futures Trading Commission (CFTC) official told the 450 attendees at GasMart 2009 in Chicago. In Washington "there is a significant amount of momentum going into modifying every aspect of the way the OTC markets operate."

Natural gas traders "are the victims in a market you didn't create," said Greg Mocek, partner in the Washington office of McDermott, Will & Emery (MWE).

"Over the last year the credit default markets have taken all the deregulatory air out of over-the-counter (OTC) trading, literally. The congressional vacuum cleaner that's going on in Washington is literally not only sucking the air out of that deregulation, it's sucking the lint, it's sucking the stains, and it's essentially removing the carpet, the whole landscape is changed, and it's going to be changed for awhile and probably permanently."

It's all about who's in charge. The most powerful single person is Treasury Secretary Timothy Geithner, who has declared he wants to bring all the OTC markets under regulation. Bankers are no longer the most powerful lobbyists in town. That status now goes to populist interest groups "who think volatile markets and high energy prices are to blame for America's woes. The most powerful lobbyists are those on the left who think that the derivatives market and derivatives in general are a bad word."

Mocek, who for the last seven years had been director of enforcement for the CFTC, said MWE's energy and derivatives practice has identified about 60 different pieces of legislation before the Congress. It's hard to know exactly what will be enacted or when, but Mocek said the drive is pointing toward having all OTC markets, standard or unstandard, cleared. If it is not possible to clear customized products in the natural gas market, it is likely parties will be forced to report trades, which would be collected by a repository licensed by the CFTC.

Record-keeping requirements are likely to be expanded, and Mocek said there very well could be a requirement for audio taping of traders' phone conversations. This is because the main regulator in the United Kingdom requires audio taping, and there is a move by governments toward getting regulations in sync around the world.

While new requirements will include collection and aggregation of much more data, which will be available to the public and traders, Mocek questioned how the CFTC could handle it all. It can't even handle all the data it takes in now, and although the CFTC's budget is being expanded it is not likely to be enough. It will take an agency the size of the Securities and Exchange Commission (SEC), which has 4,000 employees, to process information. Currently the CFTC has 500 employees.

The former CFTC official expects more trades to move onto platforms and exchanges that will provide clearing functions and audit trails. And while Geithner has pledged to work with regulators overseas on providing similar rules, there is no guarantee that some trading won't migrate. "Getting everyone on board is hard to do." There are so many venues and the possibility that more could be created.

Mocek said it is not likely there will be increased margin and capital requirements imposed on commodities trading; the exchange industry is expected to push back hard against that.

As to trader liability, the CFTC now has the authority to police the possibility of fraud involving a sophisticated trader and a municipal or other government entity. So far it has not used that authority, but Mocek expects to see some cases prosecuted.

Rules already in place could affect trading of natural gas at illiquid locations. A large trader who dominates the market with large orders at an illiquid location could be liable to prosecution if it is determined that trader has an undue influence on the closing price. Mocek said he did not know how that could be avoided at some locations, but suggested that companies advise their traders to have no communications of any kind in that type of situation.

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