Tighter Oversight on Oil Trading

The U.S. agency that regulates futures markets plans to work more closely with its British counterpart and to scrutinize trading linked to commodity indexes

Less than two weeks after a public scolding from U.S. senators, the federal agency that regulates futures trading is rolling out new efforts aimed at boosting transparency in energy markets. The measures come as soaring oil prices have prompted new scrutiny of the role of energy speculators (BusinessWeek, 5/29/08).

The Commodity Futures Trading Commission (CFTC) said on May 29 that it will work with British regulators to monitor large trades of the benchmark U.S. crude on the ICE Futures Europe exchange in London. British authorities also will notify the CFTC when traders exceed certain trading thresholds that are already in place for the U.S. market.

The CFTC will also for the first time require traders in the energy markets to provide monthly reports of trading linked to commodities indexes. "With these initiatives, we are improving our oversight capabilities and bringing greater sunshine to these markets," said a statement attributed to CFTC Acting Chairman Walt Lukken and commissioners Michael Dunn, Jill Sommers, and Bart Chilton.

On May 30 the Wall Street Journal reported that the CFTC has also expanded an investigation into allegations of short-term manipulation of crude oil prices through a price-reporting system overseen by Platts, the energy data unit of the McGraw-Hill Cos. (MHP), which also owns BusinessWeek. There is suspicion that energy companies and traders at times issued a deluge of orders during a period Platts uses to determine reported prices for physical oil transactions, and then used the possibly distorted prices to profit in other markets, the Journal reported. CFTC spokesman Dennis Holden on Friday declined to "confirm nor deny" any agency probe of trading manipulation. Kathleen Tanzy, a Platts spokeswoman, says the company does not comment on investigations, adding that Platts "has full confidence in its price assessment processes. We support appropriate market oversight by regulators, and have been and continue to be in active discussions with both government officials and market participants globally to enhance transparency and integrity in the energy markets," Tanzy said.

Watching Trades on Futures Exchanges

Agency officials were called to a May 20 Senate hearing (BusinessWeek.com, 5/21/08) on the role of market speculation and how regulators monitor trading in energy futures. Senator Claire McCaskill (D-Mo.) told one official that the CFTC needed to "muscle up" because "the people of America are about to pick up pitchforks." The oversight effort also came two days after Senator Jeff Bingaman (D-N.M.), chairman of the Senate Energy Committee, wrote the CFTC to complain about "glaringly incomplete" data regarding oil trading and to demand a fuller explanation of how it tracks trading.

The CFTC's moves will expand surveillance of U.S. oil trading on the New York Mercantile Exchange (NMX) as well as international trades on ICE Futures Europe, a subsidiary of the Atlanta-based IntercontinentalExchange (ICE). Currently, the U.S.-regulated futures exchange, Nymex, holds approximately 75% of the outstanding futures contracts while the British-regulated futures exchange, ICE Futures Europe, has the remaining market share of approximately 25%.

The CFTC said it reached an agreement with Britain's Financial Services Authority (FSA) and ICE Futures Europe for expanded information-sharing for surveillance of energy commodity contracts with U.S. delivery points, including the West Texas Intermediate (WTI) crude oil futures contracts that trade on both the New York Mercantile Exchange and ICE Futures Europe in London.

Still Not Enough, Some Say

The agency also said it will immediately begin to require energy traders to provide monthly reports of so-called index trading, or trading by institutional investors of indexes linked to commodities, such at the Goldman Sachs Commodities Index. These trades, which involve pension funds and university endowments investing in futures via investment banks, are coming under increased scrutiny from Congress. Between 2003 and 2008, investment in index funds tied to commodities has grown from $13 billion to $260 billion, according to Atlanta, Ga.-based investment strategy firm Sixth Man Research. Some analysts to believe the influx of trading dollars is accelerating oil's price rise.

Some analysts offered cautious praise for the CFTC announcement. "Anything that gets us closer to transparency and understanding of this market is a good thing," says Peter Beutel, president of the energy risk management firm Cameron Hanover in New Canaan, Conn. "It's not revolutionary, but it's a step in the right direction."

"It seems like the CFTC has awakened from their long slumber," said Michael Masters, managing member of Masters Capital Management, a Virgin Islands-based hedge fund. "It's a first step, but definitely more is needed." Masters testified at the May 20 Senate hearing, calling for more CFTC oversight in energy futures trading on overseas exchanges and the unregulated over-the-counter market.

Others say the moves are more rhetoric than substance. "They mention bringing greater sunshine to the marketplace without offering one iota of additional information for the public," says Stephen Briese, author of The Commitments of Traders Bible and CommitmentsOfTraders.org, a site that focuses on U.S. futures markets. "That's not my idea of transparency."

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