August 20, 2009 / 7:48 PM / 10 years ago

Energy market tightens regulation

WASHINGTON (Reuters) - U.S. and U.K. regulators moved on Thursday to increase supervision of energy markets while Washington also detailed new initiatives to tighten the rules in commodities trading.

The Commodity Futures Trading Commission and the U.K. Financial Services Authority announced the steps, which include closer auditing and mutual on-site visits of exchange operators, to gain a better view of trading in U.S. oil futures on the IntercontinentalExchange’s (ICE.N) London exchange.

“Today’s action further ensures that the CFTC has the tools necessary to carry out its surveillance and enforcement mission while promoting market integrity in the energy markets,” CFTC chairman Gary Gensler said in a statement.

The move comes after many U.S. legislators called for greater regulation of some commodity markets after a price surge last year sent crude oil to record highs. They argued that speculation was the main factor in the rise.

The CFTC is currently considering a host of measures to curb excessive speculation, including position limits in U.S. futures markets.

Regulatory overhaul is a big priority for the Obama administration and the Democrat-led Congress. Since last year’s financial meltdown, the Treasury Department has been working with the CFTC and the Securities and Exchange Commission to increase controls over the vast, unregulated over-the-counter derivatives market.

The CFTC also announced along with the Securities and Exchange Commission that they will hold hearings next month on how to harmonize the regulatory framework to help it track violators and introduce new financial instruments. The hearings will be held September 2-3.

In addition it was revealed on Thursday that CFTC’s Gensler sent a letter to Congress last week asking for greater regulatory powers, including making more over-the-counter derivatives subject to mandatory clearing. He also suggested language to prevent foreign exchange swaps from eluding regulation and stronger rules against fraudulent marketing of “rolling spot” commodity contracts.

“Today was a big day for regulatory reform in the U.S. and more broadly internationally,” said analyst Edward Morse at LCM Commodities in New York in a research note.

Under the agreement announced Thursday, the CFTC and the FSA will increase information sharing and cooperation in surveillance of oil markets; enhance direct access rights to trade execution and audit trail data; and share exchange regulations and disciplinary notices.

The agreement also built up a framework for coordination of emergency actions.

The latest provisions between the two regulators would apply to all ICE Futures Europe contracts currently linked to CFTC-regulated exchange contracts and those listed in the future.

Analysts welcomed the news of greater transparency in the agreement. Many said it might not immediately affect trading, and some were relieved there was no mention of limiting positions of big traders, a move now being considered by the CFTC.

“This will bring a little more transparency to the system, which is always welcome,” said Barclays Capital Analyst Amrita Sen.

“If the CFTC goes ahead and imposes very strict position limits, that could create more volatility and distort the price, but this agreement with the UK doesn’t really alter the arrangements they already had.”

Lawmakers have complained repeatedly that the lack of oversight on the ICE exchange allows oil traders to dodge U.S. rules and cause volatile oil price swings.

The U.S. benchmark West Texas Intermediate crude oil contract trades on ICE, although the volumes are relatively small compared with trade on the New York Mercantile Exchange, which is owned by the CME Group Inc (CME.O).

Facing pressure last year, the CFTC began to require the NYMEX and ICE to have the same position limits for their respective WTI crude oil contracts.

Before that, a trader could get around the position limits at NYMEX that restricted the number of oil contracts a trader could control by going to ICE — which didn’t have position limits — and buying that exchange’s oil contracts.

“We welcome the CFTC-FSA statement and will continue to work closely with regulators around the world to ensure the effective operation of global oil markets,” said David Peniket, president of ICE Futures Europe.

Additional reporting by Charles Abbott and Tom Doggett; Editing by Jim Marshall and Russell Blinch

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