There is no evidence that the Commodity Futures Trading Commission (CFTC) acted in a potentially criminal manner when establishing its position limits rule to curb speculation in energy markets, according to a report of a preliminary investigation conducted by the agency’s Office of Inspector General (OIG).
“We found no evidence to sustain a preliminary finding of wrongdoing by any individual connected with position limits and large swaps trader rulemakings. No witness presented evidence of corruption or violations of law in connection with the drafting of the position limits rule by the team lead or any other person who worked on the rule,” the OIG report said.
The CFTC OIG initiated the investigation after it received two anonymous communications last August alleging misconduct in connection with the speculative position limits rule, which the agency issued last October. It establishes limits on traders’ speculative positions in 28 core physical commodity contracts, four of which are energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and Nymex New York Harbor Heating Oil. (see NGI, Oct. 24, 2011).
“The allegations were that the team leader for the position limits rulemaking ‘sneakily’ got himself appointed team lead and thereafter removed from the team the most experienced members in order to use only newer CFTC employees that he could manipulate (presumably in order to improperly influence the substance of the rule). The team leader was also alleged to have engaged in improper communications with external entities while working on the rule,” the report said.
The anonymous sources also alleged that the position limits rule would be “unworkable” because it was not compatible with the large trader reporting rule. “While vague, the allegations encompassed potentially criminal activity in a recent mission-critical undertaking required under the Dodd-Frank Act because they generally alleged dishonest conduct and corruption.”
However, the CFTC OIG dismissed the allegations after conducting interviews with 14 original members of the large swaps trader and position limits rulemaking team and with a member who later joined the team.
“Due to the uniform quality of information received from CFTC employees and management, we did not take steps to refer this matter for further investigation,” the OIG report said.
In other action related to position limits, Capitol Hill lawmakers are calling on the CFTC to “immediately enact strong position limits” to curb excessive speculation in oil markets.
“As the cost for American people to fill their gas tanks continues to skyrocket, the CFTC continues to drag its feet on imposing strict speculation limits to eliminate, prevent or diminish excessive oil speculation as required by the Dodd-Frank Act,” wrote nearly 70 House and Senate lawmakers, led by Sen. Bernie Sanders (I-VT), in a letter to the FTC.
“Although the CFTC has adopted initial position limits, they are not strong enough and not yet in force owing to industry opposition, delays in swaps oversight and data collection. This is simply unacceptable and must change,” they said.
They called on the Commission to use its existing authorities to keep energy prices in check. “This would entail promulgation of rules only with regard to currently regulated exchange markets. Swaps rules would also be implemented immediately, but even so, waiting for swaps rules to trigger all position limits is simply not adequate to protect consumers. We urge you to develop alternative methods of moving forward and to do so as swiftly and expeditiously as possible.”
At the agency’s Feb. 26 meeting, Commissioner Bart Chilton similarly recommended that the agency use its existing authority to curb speculation in the futures and positions markets, while addressing the swaps market at a later date (see NGI, Feb. 27).
“The Dodd-Frank Act mandated that your agency promulgate and enforce such limits no later than Jan. 17, 2011. We are disappointed that, more than a year later, the Commission has not fulfilled this important regulatory duty. It is one of your primary duties — indeed, perhaps your most important — to ensure that the prices Americans pay for gasoline and heating oil are fair, and that the markets in which prices are discovered operate free from fraud, abuse and manipulation,” the Democratic lawmakers said.
On a different subject, the CFTC declined to comment on reports that said it may raise the threshold used to identify the biggest swaps market traders to $3 billion. “The proposal involving the threshold still is circulating among the Commissioners. [The threshold level] has not been nailed down yet,” a spokesman told NGI.
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