A staff report of a Senate subcommittee has characterized the Commodity Futures Trading Commission (CFTC) as a crippled agency in its oversight of the energy commodity markets due to a gap in its authority to monitor over-the-counter (OTC) electronic energy trading and its failure to keep track of U.S. energy trades on foreign exchanges.
While the CFTC oversees energy futures that are traded on regulated exchanges, such as the New York Mercantile Exchange (Nymex), it does not regulate the trading of energy commodities on the OTC electronic exchanges as a result of a loophole in the Commodity Futures Modernization Act of 2000 that Enron Corp and other large energy traders lobbied for and won. As a result, there has been “tremendous growth” in the trading of unregulated OTC contracts in recent years, said a 60-page staff report by the Senate Permanent Subcommittee on Investigations.
“The CFTC’s ability to monitor the U.S. energy commodity markets was further eroded in January when the CFTC permitted Intercontinental Exchange (ICE), a leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of U.S. crude oil futures on the ICE futures exchange in London — called ‘ICE Futures,'” according to the report, which was released Monday.
“Despite the use by U.S. traders of trading terminals within the United States to trade U.S. oil, gasoline and heating oil futures contracts, the CFTC has not asserted any jurisdiction over the trading of these contracts. Persons within the United States seeking to trade key U.S. energy commodities…now can avoid all U.S. market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the Nymex in New York,” the report noted.
The CFTC requires traders of energy commodities on Nymex to keep records of all trades and to report large trades to the agency, the so-called Large Trader Reports. But the CFTC does not require this of OTC energy traders or of persons trading U.S. energy commodities on foreign exchanges .
“As an increasing number of U.S. energy trades occurs on unregulated, OTC electronic exchanges or through foreign exchanges, the CFTC’s large trading reporting system becomes less and less accurate, the trading data becomes less and less useful, and its market oversight program becomes less comprehensive.” The dearth of large trader information from the electronic exchanges “makes it more difficult for the CFTC to monitor speculative activity and to detect and prevent price manipulation,” the report said.
“Extending the CFTC’s large trader reporting system to require all U.S. traders of energy futures or futures-like contracts to keep records and report large trades to the CFTC, regardless of where the trade takes place — on the Nymex, on an unregulated OTC electronic exchange or on a foreign exchange — will eliminate the gaps in large trader reporting requirements. This action is necessary to preserve the CFTC’s ability to oversee energy futures markets in order to detect and prevent price manipulation and excessive speculation,” it noted.
The staff report called on Congress to:
“It’s time to put the cop back on the beat in our major energy markets,” said Sen. Carl Levin of Michigan, the ranking Democrat on the subcommittee. “More and more trading is being conducted by oil and gas traders on electronic markets where there is no oversight.”
The Senate subcommittee noted that it has conducted a number of investigations over the past five years into the pricing of energy commodities, including gasoline, crude oil and natural gas. It said it has uncovered “substantial evidence” that a large amount of speculation in the current market has ‘significantly increased” energy commodity prices.
“Reports indicated that, in the past couple of year, some speculators have made tens and perhaps hundreds of millions of dollars in profits in trading commodities” both on Nymex and the OTC markets, the report said. “At the same time that there has been a huge influx of speculative dollars in energy commodities [$60 billion in the regulated U.S. oil futures market alone], the CFTC’s ability to monitor the nature, extent and effect of this speculation has been diminishing.”
Market “speculation has contributed to rising U.S. energy prices, but gaps in available market data currently impede analysis of the specific amount of speculation, the commodity trades involved, the markets affected and the extent of price impacts,” the report concluded.
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