Nothing appears to generate efforts towards transparency and compliance more than the threat of government regulation and on Thursday the Commodity Futures Trading Commission (CFTC) and Intercontinental Exchange (ICE) announced steps to create greater transparency in the reporting of energy trading in general and crude oil in particular.
The CFTC announced “multiple energy market initiatives,” in a release yesterday. That was followed by a release from ICE stating that it had facilitated the development of a cross-border program to provide enhancements to its energy market data reporting in concert with the CFTC and the U.K. Financial Services Authority (FSA) related to its West Texas Intermediate (WTI) crude oil futures contract.
The moves may have been prompted by multiple efforts in Congress to place blame somewhere for rising energy costs. The Oil Trading Transparency Act seeks to apply U.S. reporting requirements to non-U.S. markets and the Consumer-First Energy Act of 2008 calls for higher margins on crude oil futures.
Perhaps the first major effort began last summer when a Congressional committee blamed failed hedge fund Amaranth for spikes in natural gas prices. This preceded enforcement actions by the CFTC and the Federal Energy Regulatory Commission (FERC) against Amaranth and head trader Brian Hunter.
It also helped build momentum to add increased supervision of Exempt Commercial Markets (ECM), a CFTC exchange designation that allows for less scrutiny than a fully registered futures exchange or Designated Contract Market (DCM), in the recently passed CFTC Reauthorization. (The ICE over-the-counter markets operate as an ECM while its ICE Futures US operates as a DCM. ICE Futures Europe comes under the FSA, which has different reporting requirements from the CFTC.) In the measure a compromise was struck where certain ECM markets would have to meet the regulatory requirements of a fully regulated futures market while others would still fall under the less elaborate ECM structure.
With $100 plus per barrel crude oil, however, politicians have become more aggressive in advocating increased regulation, actually calling for increased margins to restrict what it sees as out of control speculation. More recently the Senate Committee on Homeland Security and Governmental Affairs held hearings where it was suggested the government restrict access to funds linked to the performance of commodity indexes.
In the ICE release, Chairman and CEO Jeff Sprecher addressed ICE’s efforts as well as recent congressional proposals. “Changes such as those agreed to today can increase transparency without impeding price discovery or artificially muting supply and demand fundamentals, which could result from mandated, arbitrary margin adjustments. In the past year, margin requirements for the ICE WTI contract have risen over 140%, yet crude oil prices continue to rise. Margin requirements are, and should continue to be, used solely to ensure prudent risk management via a clearing house and not to attempt to establish artificial price controls. Markets have demonstrated over time that such efforts are ineffective.”
ICE and the CFTC are trying to create as transparent a reporting mechanism as possible but that doesn’t help Congress in their attempt to place blame, especially if, as the CFTC maintains, higher prices are due to basic market fundamentals.
Tags: CFTC, crude oil, Exempt Commercial Markets, ICE, regulation
