Congress still has questions as CFTC unveils new foreign market data pact

The Commodity Futures Trade Commission improved its access to data on US commodities traded on overseas exchanges as it amended terms under which ICE Futures Europe is permitted direct access to US customers, the CFTC's top official told a joint hearing of two Senate committees.

The amended "no-action relief letter" will require ICE Futures Europe to adopt equivalent US position limits and accountability levels on its West Texas Intermediate crude oil contract, which is linked to the New York Mercantile Exchange crude oil contract, Acting CFTC Chairman Walter L. Lukken said.

It also will require ICE Futures Europe to follow similar US hedge exemption requirements and report any violations to the CFTC, he told a joint hearing of the Senate Agriculture, Nutrition and Forestry Committee and the Appropriations Committee's Financial Services and General Services Subcommittee.

"The CFTC will also require other foreign exchanges that seek such direct access to provide the CFTC with comparable large trader reports and to impose comparable position and accountability limits for any products linked with US regulated futures contracts," Lukken said.

"This combination of enhanced information data and additional market controls will help the CFTC in its surveillance of its regulated domestic exchanges while preserving the benefits of its mutual recognition that has enable proper global oversight over the last decade," he maintained.

'No one knows'

The announcement was applauded by several House and Senate members, but critics on both sides of the Capitol said that the CFTC still needs to do more. "With the economy in a tailspin and with the average price for a gallon of [gasoline] topping $4 across the country, people are asking why this is happening. Is excessive speculation taking place or is it simply supply and demand? The answer is that no one knows and the CFTC lacks the information, resources and, in some cases, legal authority to tell us," said Sen. Richard J. Durbin (D-Ill.), the Appropriations subcommittee chairman who ran the hearing.

He said that the joint hearing by these two committees was unprecedented but reflected intense interest in the CFTC's regulatory role and resources. Fifteen senators made opening statements or asked Lukken questions, Durbin noted before introducing a second group of witnesses. "Those who wanted to get government off our backs ended up taking cops off the beat," he said.

In the House, Energy and Commerce Committee Chairman John D. Dingell (D-Mich.) and Bart Stupak (D-Mich.), who chairs its Oversight and Investigations Subcommittee, released a letter to Lukken commending the CFTC for issuing a special call to obtain more information about passive investments in commodity indexes and single commodities, and for efforts to get more information from ICE Futures Europe and its British regulator, the Financial Services Administration.

"Despite these initiatives, the futures markets remain far from transparent to regulators or the public," the two House members continued. Congress particularly needs to understand the role and activities of sovereign wealth funds in commodity markets to better determine if oil-producing countries may be contributing to upward pressure on commodity prices through undisclosed oil and other investments, they said. Dingell and Stupak asked Lukken 11 questions in their letter and requested answers by June 20.

Four Senate bills

Four separate Senate bills were filed on June 12 and 13 to address possible speculation and increase the CFTC's authority and resources. S. 3130, which Durbin introduced, would give the agency money to hire another 100 employees, make the its inspector general independent, order the US comptroller general to study the international regime for trading energy futures and derivatives and submit a report to Congress within 120 days of the bill's enactment, and require a non-US board of trade selling an energy commodity for US delivery to operate under US regulations.

Several senators at the hearing asked Lukken about specific energy commodity market issues. Ken Salazar (D-Colo.) said an independent oil and gas producer in Colorado wondered why Congress had not increased margin requirements from 5 to 40%. "Margins are a very blunt instrument when used in that fashion and could send many businesses overseas," Lukken replied.

Amy Klobuchar (D-Minn.) asked him if the CFTC would support repealing the provision in the 2000 Commodity Futures Modernization Act which created exempt commercial markets – the so-called Enron loophole – and moved the burden of regulatory proof from traders to the commission. When Lukken said that he did not believe this had prevented the CFTC from investigating market manipulation allegations since the CFMA became law and the agency had won all of its cases, Klobuchar said, "I understand that you have taken measures. I don't understand why you apparently don't want a stronger law."

One difference which emerged was the difference between the CFTC's definition of market manipulation and that of federal lawmakers, which Lukken said might more accurately describe a speculative bubble. "Manipulation in the CFTC's eyes is an illegal act where someone tries to push prices higher without taking any risk. We've seen cases in the past where someone has tried to manipulate a market by holding one leg of their position in clear view while doing something more on the outside," he explained.

Republicans' assessments

Republicans said that the CFTC should be given a chance to implement its new responsibilities. "Mr. Lukken, your challenge is before you can put all the changes in your authority into operation, some people in Congress are trying to push it further," said Sam Brownback (Kan.).

"Simply blaming foreign boards of trade and the CFTC will not lower energy prices," said Saxby Chambliss (Ga.), the Agriculture Committee's ranking minority member. Several bills have been introduced and hearings held about commodity markets and higher energy prices, he pointed out. "We should not rush to legislate an uninformed solution, particularly when we might create more problems by driving speculators into markets from which the CFTC receives no trading data and has no ability to monitor," he said.

Lukken said that the commission already is extending its inquiries into major new areas. When Agriculture Committee Chairman Tom Harkin (D-Iowa) asked about "netting out" by index traders to possibly camouflage their true positions, the CFTC official said: "We typically have not looked markets to get information on traders. Swap dealers take different positions for their clients so this will be unprecedented. We will be going through large investment bank clients' portfolios and trying to determine what they are doing."

The agency is doing this because it is concerned that some investors may be using swaps to evade commodity position limits, he continued. "It's imperative that we get this data. That's why we announced two weeks ago that we were putting out special calls for it," Lukken said.

Contact Nick Snow at nicks@pennwell.com

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