As the wrath of Congress and the public searches for a scapegoat for soaring oil prices, the high-priority targets on their list include speculators and the agencies regulating the commodity futures markets.
The Commodity Futures Trading Commission (CFTC) is the chief federal regulator charged with overseeing the role of speculation and non-commercial investors. However, critics accuse the CFTC of permitting certain speculators to have unlimited access to the commodities market.
On Tuesday Senate Committee on Energy & Natural Resources Chairman Jeff Bingaman urged the CFTC to dig more deeply into what's really going on in energy markets.
The CFTC responded Thursday with the confirmation that it has been conducting a nationwide crude oil investigation into the practices surrounding the purchase, transportation, storage and trading of crude oil and relative derivative contracts.
In his letter, Bingaman said, I recognize that tight oil market fundamentals and geopolitics are important determinants of global oil prices. However, I take seriously the testimony of oil industry analysts who have suggested the supply and demand for physical barrels of oil simply cannot fully explain today's prevailing oil prices. Moreover, the lack of comprehensive oil trade data has hampered attempts to qualify the impacts of speculative investment on the prices now imposing hardships on American consumers.
Bingaman said he was also troubled about the lack of transparency requirements applicable to energy trading, in particular off-shore oil trading. ...It would seem that the commission should exhaust every remedy at its disposal to shed the light on current energy market dynamics.
The CFTC responded Thursday by announcing it had reached an agreement with the United Kingdom Financial Services Authority and ICE Futures Europe for expanded information-sharing for surveillance of energy commodity contracts with U.S. delivery points. The commission said the agreement will enhance and expand information sharing between the CFTC and the FSA and their respective oversight of these markets.
The commission said it was taking the following steps to gather additional information from the energy futures markets:
1. Improve Transparency for Energy Markets Index Trading Activity: Energy traders will immediately be required to provide the commission with monthly reports of their index trading to help the CFTC further identify the amount and impact of this type of trading in the markets.
2. Review of Trader Reporting and Classification: The commission will develop a proposal to routinely require more detailed information from index traders and swaps dealers in the futures markets, and to review whether classification of these types of traders can be improved for regulatory and reporting purposes.
Bingaman has expressed concern that a CFTC loophole had allowed swap dealers to be classified as commercial market participants alongside physical hedgers in crude oil markets. Critics have been concerned that excessive speculation in crude oil futures may have been detrimental to the markets.
3. Examine Trading Practices for Index Traders: The commission will review the practices of index traders in the futures markets to ensure that this type of trading activity is not adversely impacting the price discovery process and to determine whether different practices should be utilized.
The CFTC noted that as total contract volume on U.S. futures markets have increased in recent years, all classes of market participants have grown. However, index trading is relatively new to the futures markets, and the commission believes increased transparency of such trading activity may help the CFTC determine whether adjustments to trader reporting or classification are required.
Meanwhile, NYMEX Holdings, the parent company of the New York Mercantile Exchange, commended the CFTC to increase the transparency of energy futures markets. NYMEX President and CEO James Newsome said, NYMEX has advocated for greater transparency of futures activity linked to U.S. exchanges occurring on markets regulated by foreign regulators.
NYMEX also highlighted the commission's decision to review whether classification of index traders and swap dealers in the futures market can be improved for regulatory and reporting purposes. Some commentators have recently made sweeping assets regarding the impact of index traders on the basis of distorted and patently erroneous information. Consequently, the Exchange believes that it will be useful to the development of thoughtful public policy for the CFTC to obtain more precious data so as to better assess the amount and impact of this type of trading in the markets.
Finally, in response to the CFTC's extraordinary step of publicly acknowledging an ongoing investigation into crude oil practices generally, the Exchange simply reaffirms its long-standing commitment to provide full assistance to the CFTC on enforcement matters in order to ensure the integrity of U.S. Markets, NYMEX concluded.