Two times in the last week, I've been on some sort of broadcast interview where another person was touting the repeal in the US of the so-called Enron Loophole, and implying strongly that its existence was a reason why oil prices are high.
The Enron Loophole is a very clever title given to a waiver that Enron sought, and received, from Commodity Futures Trading Commission regulation of its online trading platform, Enron Online. Enron Online, like its parent, has gone the way of the dodo bird, but the exemption for trading platforms very much lives on for the Intercontinental Exchange. Not surprisingly, its highly-regulated competitor, the New York Mercantile Exchange, has aggressively pushed for the exemption to be repealed, and online exchanges to be regulated like those with a physical floor, such as NYMEX.
Given that the open outcry floors are also going to end up like the dodo bird, to be replaced completely by electronic trading of the same contracts that once ruled the pits, there is no reason why the regulatory regimes of the two exchanges should differ.
Closing the loophole and giving regulatory oversight of online exchanges to the Commodity Futures Trading Commission was passed by the Senate in the so-called Farm Bill. It was approved by the House of Representatives as an amendment to a different piece of legislation, so it must be reconciled between the two bodies.
But as Platts' Jessica Marron notes, the ending of the loophole is not all-inclusive. Both the Senate and House versions only call for individual contracts that serve a "significant price discovery" function on electronic exchanges to fall under increased regulation. The biggest target right now is ICE's financial Henry Hub swap contract. So far, it seems that will be the only one that will fit the definition of a "significant price discovery" contract per a loose set of prerequisites (volume, arbitrage, whether the exempt contract can influence the NYMEX contract price, etc.) proposed by the CFTC and adopted in the government's language.
Still, some of the loudest proponents of ending the Enron Loophole are in the heating oil industry, and a representative of a heating oil industry group was my debating partner on one of the broadcasts. The heating oil lobby in the Northeast US, the primary region in which heating oil is used, has a very clever series of radio ads, with clinking champagne glasses in the background while the announcer talks about speculators driving up the price of heating oil, celebrating while downing Cristal (presumably), and reaping the profits while homeowners shell out more money to keep Grandma warm. The ads end with the announcer encouraging the listener to contact their Senators and Representatives and tell them to "end the Enron Loophole." US Sen. Olympia Snowe of Maine, where heating oil costs certainly have pinched residents, is one of the leaders in pushing for repeal of the Enron Loophole.
But Olympia Snowe and the heating oil dealers must realize that the fulcrum on which retail heating oil prices turn is the NYMEX No. 2 oil contract, which is already regulated by the CFTC. So, yes, Amaranth can amass huge positions on ICE and fly under the radar of regulators, as it did, which ending the loophole repeal is designed to prohibit. But those sorts of position limits and oversight already exist for NYMEX, where traders must report their positions, where position limits restrict the taking of too-massive positions and where CFTC regulators are watching at all times. It's regulated to the teeth.
All of these efforts at ending the Enron Loophole make perfect sense, but the implied rationale for doing it - that this lack of online regulation is driving prices higher- is nonsense. Non-regulated exchanges such as ICE do have oil contracts, but the ICE gasoil contract is not driving the regulated No. 2 contract on NYMEX higher. The price relationship between those contracts is loose, regulated by the cost to ship gasoil from Europe to New York Harbor.
The politically-easy search for a scapegoat for higher oil prices goes on. But this particular villain, while having some flaws, is not at fault. It's a red herring.
Posted by John Kingston on January 4, 2008 04:23 PM
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