CFTC votes against more oversight for carbon market

WASHINGTON Tue Apr 27, 2010 4:08pm EDT

Traders work in the Crude, Gasoline and Heating Oil Futures pit at the New York Mercantile Exchange May 19, 2009. REUTERS/Shannon Stapleton

Traders work in the Crude, Gasoline and Heating Oil Futures pit at the New York Mercantile Exchange May 19, 2009.

Credit: Reuters/Shannon Stapleton

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WASHINGTON (Reuters) - The top U.S. futures regulator, attempting to throw more light on contracts traded on unregulated exchanges, ruled on Tuesday to extend oversight to seven energy contracts because of the important role they play in setting the price for a commodity.

The decision by the U.S. Commodity Futures Trading Commission comes as Congress presses for an overhaul of U.S. financial regulation -- including tough rules for the derivatives market -- and as the CFTC considers a crack-down on speculative trades in the energy and metals arenas.

The CFTC last year identified more than 40 contracts listed on electronic markets that might merit closer supervision, mostly for electric power and natural gas.

Congress had empowered the agency to look at the contracts as it sought to close the so-called Enron loophole that allowed futures contracts to be traded on exempt electronic platforms with little government oversight.

The regulator said on Tuesday seven contracts owned by the IntercontinentalExchange Inc met the criteria for additional oversight, but 16 other energy contracts -- including five owned by the Natural Gas Exchange Inc -- did not require more rules.

A carbon contract owned by the Chicago Climate Exchange Inc also did not meet the criteria for additional oversight.

"This process will bring under federal oversight certain contracts that can affect prices -- prices that consumers pay for myriad commodities," said Bart Chilton, a CFTC commissioner.

A 2008 law allows the CFTC to determine if contracts on exempt commercial markets perform "significant price discovery functions." If CFTC decides contracts perform a significant price discovery function, a broader array of reporting and record keeping rules come into force. The contracts also can be subject to CFTC position limits.

Last year, the CFTC determined ICE's natural gas contract played a significant role in price discovery.

It currently is reviewing 17 more contracts, mostly electricity, to see if they require additional oversight. The CFTC expects to complete the review within a few months.

The work by the CFTC to determine which contracts play a significant role in price discovery could be moot if legislation in Congress does away with exempt markets.

Instead, trading facilities would be regulated as swap execution facilities -- subjected to similar or even enhanced CFTC authority, according to the agency.

CFTC Chairman Gary Gensler said the Enron loophole should serve as a lesson for Congress as it crafts regulatory reform legislation and faces pressure to grant exemptions from regulation in the energy market, particularly natural gas and electricity.

"It feels like for me deja vu when people are suggesting exemptions for energy contracts in a very similar way," said Gensler, who worked on the Commodity Futures Modernization Act in 2000 that created exempt commercial markets and blocked the credit default swap market from oversight.

"I hope we can have the discipline, and Congress hopefully will have the discipline, to learn from these lessons," he said.

(Editing by Alden Bentley, Lisa Shumaker and Walter Bagley)

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