Credit crisis to spur futures market oversight

WASHINGTON Thu Oct 30, 2008 11:22am EDT

A worker walks at an oil rig in Havana in this October 16, 2008 file photo. REUTERS/Enrique De La Osa

A worker walks at an oil rig in Havana in this October 16, 2008 file photo.

Credit: Reuters/Enrique De La Osa

WASHINGTON (Reuters) - U.S. lawmakers' zeal for new regulations will soon spread beyond the battered financial sector to futures markets as a newly elected Congress pounces on the credit crisis to expand government oversight.

With oil prices surging to record levels above $147 a barrel this summer, many in Congress blamed speculators in futures markets for run up in fuel prices.

During that time lawmakers unsuccessfully attempted to increase the powers of the Commodity Futures Trading Commission to rein in excessive speculation, but the global financial crisis has breathed new life into the issue.

"The credit crisis has only strengthened the resolve of many people to go back and look very hard at this energy speculation issue," said Michael Greenberger, a professor at the University of Maryland. "Even though they're two different issues, it's the same cast of characters," he added.

Before Congress adjourned for the November elections, the Senate blocked passage of an anti-speculation bill that would have restricted the number of oil futures contracts speculators could control.

The House of Representatives passed a similar bill imposing position limits on energy and agricultural futures but it failed to advance further.

Senator Maria Cantwell, who has been a strong advocate of overhauling the CFTC's policies, said when lawmakers return after the elections she does not expect as many roadblocks for such legislation.

"People would have to be blind right now if they came back to Congress and said we shouldn't have regulatory oversight changes," Cantwell, a Washington Democrat, told Reuters.

Many of the institutions that were lobbying against increased regulation of energy markets such as Goldman Sachs Group Inc (GS.N) and the International Swaps and Derivatives Association are now wrapped up in the turmoil of the financial markets. As a result those groups have lost some credibility with lawmakers, according to Greenberger.

Facing intense congressional scrutiny, the CFTC has already taken some actions to address speculation, including launching an investigation into manipulation of futures last December and heading an interagency task force to assess commodity markets.

Adam Sieminski, chief economist for Deutsche Bank, said the CFTC has been focused on possibly increasing regulation in three areas: electronic exchanges, international exchanges, and swaps markets.

Experts such as Sieminski say regardless of the outcome of the U.S. elections, the CFTC will likely continue to expand its supervision of these areas on its own.

"It's pretty obvious what they need to do: they need more information and they need it more frequently," Sieminski said of the CFTC.

Additional rules the commission or Congress could impose under a new administration include aggregated speculation limits, higher margins on oil traders, or requiring all energy futures to be traded in regulated environments.

Cantwell said she hopes Congress will add more transparency to futures markets.

"Taking any type of dark market that exists and shining a bright light on it is going to be essential to protect consumers," she said.

Rapidly declining oil prices, however, may hinder major reform. Oil has dropped dramatically from the historic highs over the summer to around $67 a barrel this week over concerns about the economic downturn.

"My guess is that other matters will be more pressing," said Michael Salinger, professor of economics at Boston University School of Management. "I think they're going to have very ambitious agenda when they get back and if oil prices have not shot back up, that will move to the back burner."

(Editing by Christian Wiessner)