Transatlantic Cooperation or
Regulatory Creep?
The United States Takes On Global Oil & Gas Derivatives Markets
ByPrajaktSamant&AthenaVelie
MANY UNITED STATES legislators CFTC’s view. Political pressure to repeal this exemption began to
blame speculators and a lack of market build following the 2000 energy crisis in California and the Enron
transparency for rising fuel prices. The manipulation scandal in the US. Many blamed the exemption
US Congress, responding to rising oil (dubbedthe‘EnronLoophole’becauseEnron wasaprincipal propo-
and gas prices and a looming presiden- nent of the 2000 amendments to the CEA) for the disruption of US
tial election, have stepped up efforts to energy markets.
close some of the perceived ‘loopholes’ The CRA 2008 did not entirely repeal the ECM exemption, but it
in US commodities regulation that increased the CFTC’s oversight with respect to contracts traded on
have allowed certain over-the-counter ECMs that serve a ‘significant price discovery function.’ ECMs that
(OTC) and offshore commodities trad- list these significant price discovery contracts (SPDCs) are now
ing to occur relatively unregulated. required, among other things, to provide the CFTC with information
InMay2008,theUSCongresspassed on trader positions, adopt speculative position limits where neces-
the first in a series of proposed legisla- sary and appropriate, and make price and volume information avail-
tion – the CFTC Reauthorization Act of able to the public. The CFTC is required to designate which contracts
2008 (CRA 2008) – to increase US serveasignificantpricediscoveryfunctionwithin180daysfollowing
oversight of OTC energy markets. adoption of a final rule identifying the standards to be used in mak-
There still are over twenty bills pending ing the determination. Certain factors that the CFTC must consider
that would place limits on speculation are mandated by the CRA 2008. It is likely that many of the energy
and increase transparency on both US contracts currently traded on US ECMs will be designated as SPDCs.
and foreign exchanges. Some of this
proposed legislation would authorise Closingthe‘LondonLoophole’
the Commodity Futures Trading US regulators believe a significant amount of trading in US oil and
Commission(CFTC),thefederalagency gas contracts (e.g., the West Texas Intermediate (WTI) crude oil con-
charged with oversight of the US com- tract)takesplacethroughUScomputerterminalsoperatedbytrading
modity derivatives markets) to impose facilitiesbasedoutsidetheUSwithoutanyCFTCoversight.Undercur-
regulatory controls, such as speculative rent US law, the CFTC is authorised to issue a no-action letter to a for-
position limits and mandatory report- eign exchange giving it direct access to US traders without having to
ing, on London-based and other non-
US-based exchanges that allow direct
There still are over twenty bills pending that would
electronic access to US traders, such as
place limits on speculation and increase
ICE Futures Europe, the London-based
transparency
subsidiary of the Intercontinental-
Exchange, Inc. (ICE). register as a designated contract market (DCMs). In other words, the
CFTCcanallowaforeignexchangetooperateintheUSlargelyunreg-
TheFirstStep: ulated. This alleged regulatory gap has been dubbed by many the
Closingthe‘EnronLoophole’ ‘London Loophole.’ Some industry participants have said they expect
Prior to the CRA 2008, the tradingonsuch‘foreign’exchangestoincreaseinresponsetotheCRA
Commodity Exchange Act (CEA) 2008. Many in Congress fear that unless they close the ‘London
exempted from regulation certain US Loophole’,theCFTC’snewauthoritytopoliceSPDCsonUSECMsmay
markets that trade OTC derivatives in be insufficient.
‘exempt’ commodities (e.g., energy In June 2008, five US Senators introduced the so-called ‘Close the
commodities) between eligible com- LondonLoopholeAct’.AcompanionbillwasintroducedintheHouse
mercial entities (ECEs) (e.g., sophisti- by Reps. Jim Matheson (D-Utah) and Charlie Melancon (D-
cated market participants as specified Louisiana).Severalsimilarbillsalsohavebeenintroducedinboththe
in CEA § 1a(11)). These exempt com- Senate and the House. The proposed legislation would generally
mercial markets (ECMs), such as ICE, require the CFTC to engage in a formal rule-making process (instead
thus, operated largely outside the of being able to issue a no-action letter) before allowing a foreign
84 SEPTEMBER 2008 COMMODITIES NOW
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