CFTC increases its exempt commercial market oversight

The US Commodity Futures Trading Commission closed the so-called "Enron Loophole" on Mar. 23 as it approved final rules and amendments increasing its oversight of exempt commercial markets.

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Mar. 24 -- The US Commodity Futures Trading Commission closed the so-called "Enron Loophole" on Mar. 23 as it approved final rules and amendments increasing its oversight of exempt commercial markets (ECMs).

The rules implement provisions of the 2008 CFTC Reauthorization Act, which created a new regulatory category, ECMs with significant price discovery contacts, and subjected these electronic trading facilities to additional regulatory and reporting requirements effective Apr. 22, the commission said.

Federal lawmakers and groups that had been critical of CFTC not taking action sooner welcomed the move but added that more financial market oversight is needed.

"What should be of great concern to all is how long it took the CFTC and Congress to act," said Industrial Energy Consumers of America Pres. Paul N. Cicio on Mar. 24. "We still have many more pressing government oversight gaps to close," he said.

Cicio noted: "We are reminded of the excessive speculation that occurred during the first half of 2008 when natural gas prices doubled while domestic production increased by 8.6% and national inventories were well within the normal 5-year average. The increase in the price of gas cost homeowners, farmers, and manufacturers about $40.4 billion. Excessive speculation caused the run-up, not supply versus demand fundamentals."

Additional steps
Cicio said Congress and CFTC should also establish position limits for speculators, require "aggregating position limits" across all exchanges and the over-the-counter market, and establish limits or ban index funds and passive long-only and short-only funds.

The US Senate Energy and Natural Resources Committee's Energy subcommittee will hold a hearing on Mar. 25 to examine draft legislation aimed at improving energy market transparency and regulation. Two of its members, Byron L. Dorgan (D-ND) and Maria Cantwell (D-Wash.), asked US Attorney General Eric H. Holder Jr. on Mar. 18 to establish an Economic Crisis Financial Crimes Task Force to investigate and prosecute criminal behavior involved in events that caused the current economic downturn.

ECMs were created under the 2000 Commodity Futures Modernization Act as electronic markets to trade exempt commodities on a principal-to-principal basis between qualified commercial entities supposedly at the urging of Enron Corp., which was an active energy trader at the time. By 2007, these unregulated markets had grown to a point that critics said showed speculators used them to circumvent regulated exchanges and manipulate crude oil and other commodity prices.

Impact on prices
When CFTC began to investigate, it eventually concluded that information was insufficient about how price swaps and other financial instruments were being used to affect commodity markets. It found, however, that these financial instruments sometimes had an impact on prices, and that they needed to be regulated. Congress gave CFTC authority to regulate them as part of the 2008 reauthorization act.

Acting CFTC Chairman Michael V. Dunn said on Mar. 23 that the new rules are a step in the right direction to make ECMs more transparent and accountable so participants and the general public can be better protected.

"The final rules put in place the framework in which we will exercise our new authority to police these important contracts," Dunn indicated. He said the new rules incorporate several changes:

-- They revise information submission requirements for ECMs.

-- They establish procedures and standards by which CFTC determines that an ECM contract performs a significant price discovery function.

-- They provide guidance with respect to complying with nine statutory core principals for ECMs with significant price discovery contracts.

-- They amend existing regulations applicable to registered entities in order to clarify that such regulations now apply to ECMs with significant price discovery contracts.

CFTC said several commenters, in responses to the commission's notice of proposed rulemaking, expressed concern about proposed acceptable practices for position limits or accountability relating to uncleared trades. The comments raised complex issues, which warrant further consideration, CFTC said, and it chose not to make this core principle final until these issues could be examined fully. The commission said it expects to complete a review and issue a separate rulemaking in the next several months.

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