COMMODITIESREGULATION
exchange to have direct access to US to detect at an early stage when manipulative activity might be
traders. The legislation would also occurring either on the foreign exchange or in a US OTC or futures
impose speculative position limits and market. Without greater transparency, commodity traders may be
mandatory reporting requirements on able to engage in manipulative activity undetected by taking posi-
suchexchangesatleastwithrespectto tions in US OTC and futures markets for the purpose of benefiting
US-linked contracts. According to theirlargelyinvisiblepositionsonICEFuturesEuropeandothernon-
Senator Carl Levin, the sponsor of the US regulated markets. US regulators are concerned that, if the CFTC
‘Close the London Loophole Act’, the is unaware of these offshore positions, it will not recognise possible
proposed legislation “will strengthen manipulativeactivityorbeabletotakestepstomitigatetheactivity.
theCFTC’sabilitytodetectandprevent
manipulation and excessive specula-
Some US commentators point to the FSA’s ‘light
tion [in the oil markets]”.
The CFTC and the UK’s FSA already
touch’ regime as being flawed and inadequate
haveanagreementtoshareinformation,
whichwasconcludedinNovember2006 Or is it really that US regulators don’t trust the FSA to effectively
(the CFTC-FSA 2006 Memorandum of monitor futures trading on ICE Futures Europe? It has not gone
Understanding), but this legislation unnoticed that the FSA has brought no civil or criminal cases in the
would give the CFTC access to informa- energy markets since its establishment in 1997. The FSA has
tiondirectlyfromICEFuturesEurope. expressed the view that public enforcement is not necessary to
ensure compliance, but US regulators doubt that private ‘slaps on
FactorFiction:WillIncreased the wrist’ are enough to deter many market participants, including
OversightofForeignExchanges hedgefunds,whichdonotnecessarilyneedtoco-existwiththeFSA.
LowerOilandGasPrices? Whatthisamountstoislittleshortofaphilosophical(andmaybe
There has been extensive discussion even a culture) clash on what it means to ‘regulate’ a market, and
in the US about speculators driving up how that regulation is enacted and interpreted. The CFTC has
thepriceofoilandgasmerelybytrans- always been an enforcement-led regulator, which takes a more
acting in the OTC and futures markets. overtly aggressive approach to ‘policing’ its markets. The FSA has
However, these vague fears are rarely placed more of the responsibility of ‘front-line monitoring’ – and
(ifever)accompaniedbyanyacademic the consequent creation of a culture of compliance – on its autho-
research, economic principles, court rised market participants. As such, the FSA’s Director of Markets
findings or other relevant authoritative Division, Alexander Justham, regards recent spikes in oil prices as
source to support the grim predictions. part of “a global phenomenon,” and believes that “there is not
In contrast, economic experts have huge evidence of market abuse.”
made extensive findings that specula- SomeUScommentatorspointtotheFSA’s‘lighttouch’regimeas
tionisgoodformarketsbecauseitadds being flawed and inadequate on the basis of there having been no
needed liquidity and allows the market enforcement actions brought for commodity market manipulation,
to operate more efficiently. That said, despite numerous such actions having been brought in the US.
withoutsomelimitationonthespecula- However, although the CFTC has pursued numerous manipulation
tivepositionsonemayhold,marketrisk actionsintheUS,nonehasbeenlitigatedtoasuccessfulconclusion.
arguably increases as does the poten- Rather, US enforcement has been carried out primarily through
tial for manipulative activity. negotiated settlements. Perhaps in an attempt to reconcile these
For example, in re Sumitomo Corp., seemingly diametrically opposed modes of regulation, Alexander
Comm. Fut. L. Rep. (CCH) P27,327, Justham stated; “We [the FSA] have exactly the same philosophy,
1998CFTCLEXIS96(1998),Sumitomo just expressed and managed differently.”
entered into a settlement with the Responding to mounting Congressional pressure, the CFTC
CFTCforallegedlycorneringthecopper amended the previous no-action letter relief it had granted to ICE
market by establishing a dominant Futures Europe to condition direct access on its adoption of equiv-
futures position in copper metal traded alent US speculative position limits and accountability rules with
on the London Metal Exchange and respect to the WTI contract. On July 7
th
2008, the CFTC also
then acquiring a controlling position in amendedtheno-actionletterithadissuedtotheDubaiMercantile
the cash market, thereby artificially Exchange to impose similar conditions. Essentially, the CFTC’s
increasingthepriceofcopper,including amendment means that ICE will be dually regulated by both the
in the US cash and futures markets. FSA and the CFTC. Such flexing of extra-territorial muscles on the
Sumitomo’s principal copper trader part of the CFTC has given rise to accusations of ‘regulatory creep’
allegedly engaged in the manipulative incertainquartersoftheUK.However,theCFTCmaintainsthatthe
schemetocoverlargelossesfromspec- global and interdependent nature of the commodity markets
ulative trading. demandsacoordinatedandconcertedresponsetoensurethatreg-
Lack of transparency also arguably ulation is effective across the board, even if that means crossing
hinders US regulators from being able international borders.
86 SEPTEMBER 2008 COMMODITIES NOW
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