While some members of Congress want to hand the Commodity Futures Trading Commission more oversight of natural gas markets, at least one CFTC commissioner says expanded powers are unnecessary and could harm the industry.
Further, Commissioner Sharon Brown-Hruska told a Houston audience Thursday that high prices are not the result of market manipulation but rather industry fundamentals.
"As economic fundamentals change, markets reflect the changes through price movements, and there is never a shortage of individuals or interests that believe that such movement reflects market abuse or manipulative behavior," Brown-Hruska told attendees at the University of Houston Global Energy Management Institute Energy Trading & Marketing Conference.
Brown-Hruska referred to House bill HR 4473, passed by the House in December (see Daily GPI, Dec. 27, 2995), which would require greater CFTC scrutiny of energy markets through increased surveillance and reporting requirements. She referenced a section of the bill on natural gas price transparency that would expand CFTC surveillance authority to include all contracts for natural gas, not just the futures and options markets.
Brown-Hruska said that some believe the bill's provisions only enforce the status quo, but she maintained that it goes beyond that. "This [natural gas] provision goes beyond the treatment of every other commodity. It applies only to natural gas. It mandates reviews of the market under specified circumstances, and it appears to give the commission authority to collect information on commercial activity in markets on a regular and continuous basis, which it currently does not have the authority to do."
CFTC oversight of over the counter (OTC) and cash markets is unnecessary for a number of reasons, Brown-Hruska said. In a media briefing following her presentation she explained that the futures market can tip off the CFTC to "untoward" activity in the OTC and cash markets.
"In some sense we know a lot about those markets [OTC and cash] because a lot of that information makes its way into the centralized marketplace, the futures. Those same OTC dealers and cash market players are also significant users of the more transparent futures markets. And when we see again large traders in the futures markets taking price-moving positions or significant positions, we have the authority, which I call special call authority, to call them up, to get information from them regarding their OTC and cash market activities.
"We're fairly confident that the markets are linked enough so that we would see, we would get a sense of untoward activity in our futures markets. And we often see indications when there is something going on in the cash markets or someone is trying to corner supply. I just looked at a case last week where someone had in fact -- I'm not going to say any particular commodity -- but a market participant had a large portion of the supply. We're going after them. That's what we do. The key thing is we have a mechanism to get that information, and it's usually evident to us through tips and the futures markets that we directly supervise."
While the futures market can cast light on manipulation in the OTC and cash markets, the players in these markets are far less likely to need the protection of a regulator, Brown-Hruska said. "When you look at the OTC markets, that's primarily commercial market participants in the business of buying and selling. Their business line is oil or is natural gas, and there's always a buyer and always a seller. To say that the buyer is manipulating the seller when the seller is Exxon or the seller is Royal Dutch Shell... is that sophisticated counterparty really going to allow themselves to be manipulated?"
Brown-Hruska dismissed assertions that hedge funds or speculative traders are unduly influencing the natural gas market and cited a CFTC study, which found that money managers tend to react to the trading of hedgers and that their trading did not drive markets.
"The supply and demand fundamentals are more at work here than any particular trader or any particular class of traders. We don't see any pervasive manipulative activity or or any excess speculation. I'm not even sure I know what that means."
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