WATCHING GOVERNMENT: CFTC’s timely look at markets

Oct. 1, 2007
At a time when energy issues supposedly had moved into the background in Washington, DC, the US Commodity Trading Futures Commission quietly held a timely-some might say overdue-hearing.

At a time when energy issues supposedly had moved into the background in Washington, DC, the US Commodity Trading Futures Commission quietly held a timely-some might say overdue-hearing.

The Sept. 18 event basically examined whether more oil and gas commodity markets need to be regulated. Several currently are not.

“In 2000, Congress created a tiered regulatory structure for the futures markets with passage of the Commodity Futures Modernization Act (CFMA). This calibrated structure has provided regulators with the proper flexibility and focus as we strive to keep pace with this industry’s global growth,” acting CFTC Chairman Walter L. Lukken said in his opening statement.

Energy markets have changed dramatically in 7 years, and CFTC’s regulation should evolve as well, he said. While exempt commodity markets (ECMs) have increased competition and lowered costs for derivatives trading, “certain ECMs now function as virtual substitutes [for] regulated exchanges with tight correlation and linking of prices,” Lukken said.

Different products

Witnesses said that the largest energy ECM, the Inter-Continental Exchange (ICE), developed as an electronic trading alternative to the New York Mercantile Exchange’s open outcry trading. NYMEX Pres. James E. Newsome noted that the nation’s largest regulated commodities exchange has developed its own electronic trading, which now is its main trading mechanism. Currently exempt markets that function like traditional exchanges and link prices to their products should be regulated, he said.

Jeffrey C. Sprecher, ICE’s chairman and chief executive, said the exchange offers regulated futures and unregulated over-the-counter contracts.

Regulation may be appropriate for some of its cleared OTC contracts, such as its Henry Hub swap contract, that settle on a futures market contract price and are the true economic equivalent of an actively traded futures contract, he said.

But ICE also offers much less-liquid OTC products that do not fit that definition. “The level of regulation should fit the market in question,” Sprecher said.

Speculators’ role

Some energy market critics charge that speculators make prices more volatile. Natural Gas Supply Association Pres. R. Skip Horvath disagreed.

“In general, participation by speculative traders serves to further balance the supply-demand question via higher-risk market positions, which those interested in producing or consuming natural gas often do not wish to take. If it were not for such speculators, who actually smooth out delivered commodity prices over time and geography, price volatility could, most likely, be even greater,” he said.

Many other questions were raised. The hearing probably won’t be the final word on the subject, especially if gas and heating oil prices soar this winter.