U.S. regulators deem July 2011 cotton expiry 'orderly' in exchange review

NEW YORK Wed Aug 20, 2014 5:39pm EDT

NEW YORK Aug 20 (Reuters) - U.S. regulators said that a review of market surveillance during a period of alleged supply squeeze showed that IntercontinentalExchange Inc. adequately monitors physical deliveries against cotton futures contracts.

A Commodity Futures Trading Commission report, dated July 22, revealed that ICE specifically investigated a July 2011 cotton futures contract expiry that is the subject of an ongoing lawsuit. The U.S. regulators concluded the delivery proved "orderly."

Lawyers for Louis Dreyfus Commodities, which has been accused of manipulating the market during that time period, have cited the review in a bid to get a New York judge to reconsider a motion to dismiss the case, according to court documents seen on Wednesday.

The CFTC said it took into consideration surveillance changes that have been implemented in the aftermath of the wild price swings of 2011 and that the ICE Futures U.S. has the tools to monitor physical deliveries and position limits.

Former Glencore Xstrata Plc trader Mark Allen has sued Louis Dreyfus's Allenberg Cotton and Term Commodities units and others, saying they created the illusion of a supply crunch three years ago. A judge in late 2013 denied Louis Dreyfus's move to dismiss the case.

Glencore is not involved in the complaint.

In response, Allen's counsel said the CFTC review was "limited," takes into account an anti-manipulation ICE amendment and other changes since the events, and does not undermine the case, according to a court document filed on Wednesday. They noted the CFTC report does not address the May 2011 delivery cotton futures contract, which is also included in the lawsuit.

In its July report, the CFTC recommended that the exchange boost its oversight of hedging exemptions and clarify rules regarding the reporting of open interest.

An ICE spokeswoman declined to comment. Counsel for Allen and a spokeswoman for Louis Dreyfus could not be reached immediately for comment. (Reporting by Chris Prentice)