COMMODITIES REGULATION
The‘ClosetheLondonLoopholeAct,’ifitcomesintoforce,would driving this, but I do see supply and
givetheCFTC‘directauthority’torequireaUS-basedtradertoreduce demand[issues].”Pricespikesequally
hisorherposition(ifdeemedtobeexcessive)onaLondonexchange can be attributed to the response of
withdirectaccesstoUStraders,suchasICEFuturesEurope.Thatsaid, market participants seeking a hedge
theproposedlegislationwouldalsorequiretheCFTCtoconsultwith against inflation, not to mention a
theexchangeaswellastheFSApriortoissuingsuchanorder.TheFSA numberofgeopoliticalfactorssuchas
isyettocommentonthisproposedlegislation,anditremainstobe trouble in the Niger Delta, sabre-rat-
seenwhetherornotthelegislationwillprovoketheinvocationofthe
so-called‘BallsClause’(allowingtheFSAthepowertovetochangesto
UKexchangeregulationwhichitdeemstobe‘excessive’).
What Does This Mean for UK Trading Facilities?
Thenewproposalsarenotlikelytohaveasignificantimpacton
largeUStraderswhoarefamiliarwithpositionlimitandaccounta-
bilityrulesonDCMs.However,theproposedlegislationwouldmean
big changes for UK-based trading facilities such as ICE Futures
Europe,whichwouldhavetoadapttoanewandadditionalregula-
tor. ICE’s position on these developments is quite clear and
unequivocal. It believes that its OTC markets have no bearing on
thepriceofcrudeoil,anddonothaveanyhandinsettingtheprice
Certainly the evidence ... seems to point to the fact
that price movements are primarily
due to market fundamentals
for major benchmark products. Furthermore, as an exchange
already subject to the FSA’s regulation, ICE Futures Europe has
been providing information regarding its WTI futures contract to
the CFTC as a result of the CFTC-FSA 2006 Memorandum of
Understanding. Trading in ICE Futures Europe’s WTI futures con-
tractcomprisesonly15%oftheopenpositionsintheglobalWTI
market (as compared to NYMEX’s 85%). Furthermore, ICE’s WTI
contractisafinancially-settledproduct,whichmeansthatphysical
deliveryofoilisneithermadenortaken,therebyreducingthelike-
lihoodofamanipulativesqueeze.ThesentimentintheUKseems
tobethataUKfuturesmarketisbeingpenalisedunjustly,for(non-
UK)politicalandpopulistends,fordoingwhatitexiststodo–act
asapricediscoverymechanism.
Future Outlook – Where is the US Headed Next?
Perhaps more worrisome than the proposed ‘Close the London
Loophole’ legislation, is the expressed feeling (in certain US quar- tlingbetweenIranandIsrael,andthe
ters) that the diversification of market participants in the energy insatiable demand of the growing
commodity markets (to encompass institutional investors such as ChineseandIndianeconomies.Whilst
pension, sovereign wealth and hedge funds) has led to untenably added regulatory burdens on market
speculativeinvestmentpatternswhichcanonlybestampedoutby participantsmayleadtolessliquidity
delimitinginvestorclasses. and (potentially) even higher prices,
Thecruxofthequestion,therefore,iswhethertheseeminglyinex- whatisclearisthatsuchburdenswill
orableriseinoilpricesistobeattributedtospeculationortotheoper- havelittle(ifany)effectontheopera-
ationofmarketfundamentals.Certainly,theevidenceofhearingson tionofmarketfundamentals
•
bothsidesoftheAtlantic,andrecentpricedeclines,seemtopointto
the fact that price movements are primarily due to market funda-
Prajakt Samant isaPartnerinthe
mentals.InthecourseofTreasurySelectCommitteehearings,con-
EnergyGroupofMcDermottWill&
venedinresponsetotheUSCongress’hearings,UKPrimeMinister,
EmeryUKLLP.
GordonBrown,saidthathighenergypriceswerebeingdrivenhigher
Athena Velie isaPartnerintheEnergy
andDerivativesMarketsPracticeGroup
“[because]demandforoilintheworldexceedsthesupplyofoiland
oftheWashington,DCofficeof
itwillexceedthesupplyofoilforyearstocome.”
McDermottWill&EmeryLLP.
Brown’sviewisechoedbythatoftheCFTC.WalterLukken,the
www.mwe.com
CFTC’sActingChairman,stated“Idon’tseemarketparticipants
COMMODITIES NOW SEPTEMBER 2008 87
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