US Senate panel blasts CFTC on foreign trade of US oil contracts

US Senate panel blasts CFTC on foreign trade of US oil contracts

Washington (Platts)--26Jun2006

A US Senate panel Monday took the US Commodity Futures Trading Commission
to task for allowing foreign electronic exchanges, particularly the
London-based ICE Futures exchange, to trade US energy commodities.
The Senate Permanent Subcommittee on Investigations said the CFTC's move
to allow such trade has rendered the commission's market monitoring program
ineffective and could be leading to higher oil and gas prices.
The highly critical report, written by staff of the Republican-led
subcommittee, comes on the eve of a CFTC-hosted hearing on the issue of US
energy trading on foreign exchanges to be held Tuesday in Washington
The CFTC has failed to assert jurisdiction over the trading of US crude
and products contracts by foreign electronic exchanges, even when those trades
can be done by traders within the US, thus falling short of its responsibility
to monitor speculative activity, according to the Investigations Subcommittee
report.
The report was particularly critical of the CFTC's decision to allow ICE
Futures, regulated by the UK's Financial Services Authority, to list West
Texas Intermediate crude contracts on its system.
Until its February launch of a WTI contract, ICE Futures had previously
only listed European energy commodities. ICE Futures is owned by the
Atlanta-based Intercontinental Exchange.
The Intercontinental Exchange had originally planned to allow only non-US
traders to trade WTI on ICE Futures, but later told the CFTC it would permit
traders in the US to use ICE terminals in the US to trade the contract.
In September, ICE Futures similarly allowed US traders to trade New York
Harbor gasoline and heating oil futures on the London exchange.
"Persons within the US seeking to trade key US energy commodities ? US
crude oil, gasoline, and heating oil futures -- now can avoid all US market
oversight or reporting requirements by routing their trades through the ICE
Futures exchange in London instead of [NYMEX] in New York." the Investigations
Subcommittee pointed out in its report.
NYMEX and lawmakers from New York have protested the CFTC's hands-off
approach, saying that it gives ICE Futures an unfair advantage over NYMEX.
The subcommittee report also recommended the CFTC work more closely with
the UK commodity regulator "to ensure it has information about all large
trades in US energy commodities on the ICE Futures exchange in London."

REPORT CITES SPECULATIVE PRICE GROWTH
The report recommends Congress enact legislation to ensure all traders of
US energy commodities on foreign exchanges are subject to the CFTC's
requirements for its weekly Commitments of Traders report. This report gives
the public and the CFTC a picture of trader positions and allows the regulator
to monitor speculative activity and to detect and prevent price manipulation.
The Investigations Subcommittee also wants Congress to close the
so-called "Enron loophole" -- termed because Enron and other large energy
traders successfully lobbied Congress for inclusion of the provision in the
Commodity Futures Modernization Act of 2000 -- which limits CFTC oversight of
over-the-counter electronic exchanges. The report also recommends that
Congress require all energy futures "look-alike" contracts on OTC electronic
exchanges to be subject to CFTC's large trader reporting requirements.
"As an increasing number of US energy trades occur 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 Investigations Subcommittee said in its report.
The Investigations Subcommittee found that energy speculation rose
dramatically in US markets in the past few years. Some analysts say that
speculative purchases of oil futures may have added as much as $20-$25/barrel
to the current price of oil, but other analysts dismiss the effect of
speculation on the market, saying speculation has little to no price impact.
The influx of tens of billions of speculative dollars into the US crude
oil market has altered the relationship between price and inventory, according
to report, causing both high inventories and high prices.
Speculative trading can be useful by bringing greater liquidity to the
futures market, and to some extent, helping to finance the production and
storage of the underlying commodity to meet future demand, the Investigations
Subcommittee said in its report.
But speculation also has its negative effects, and may "distort the
market signals regarding supply and demand in the physical market or lead to
excessive price volatility, either of which can cause a cascade of
consequences detrimental to the overall economy," the report added.
--Cathy Landry, cathy_landry@platts.com

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