CFTC seeks greater energy market transparency

The US Commodity Futures Trading Commission (CFTC) has launched a series of new initiatives with which it hopes to increase the transparency of the energy futures markets.

Under the new measures, the CFTC has expanded surveillance of overseas trading of crude oil contracts with US delivery points, increased its scrutiny of index products and has disclosed for the first time that it launched a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of crude oil and related derivative contracts in December 2007.

The Commission hopes that the new measures will expand the amount and quality of information received from energy traders as it aims to boost its oversight of US futures markets in the wake of surging oil prices. Nymex West Texas Intermediate for July delivery reached a record high of $135.09 in trading last week while the December 2015 contract hit $136.99/bbl.

The CFTC has expanded international surveillance information for crude oil trading under an agreement with the UK’s Financial Services Authority (FSA) and ICE Futures Europe. The agreement allows for greater information sharing for surveillance of energy commodity contracts with US delivery points, including the WTI contracts that trade on the Nymex and IntercontinentalExchange (ICE).

The agreement will mean that ICE Futures Europe will provide greater transparency in its markets than other US futures exchanges, according to ICE chairman and CEO Jeffrey Sprecher. “Prudent regulatory information sharing and cooperation, rather than enactment of onerous and duplicative regulatory schemes, will ensure that these vital markets remain transparent and do not move offshore,” he said.

Since 2006, the FSA has provided the CFTC weekly trader information and daily information in the final trading week – specifically, the linked WTI crude oil contracts traded on both Nymex and ICE Futures Europe. Currently the exchange under US regulation, Nymex, maintains approximately 75% of the open interest of these futures contracts while UK regulated ICE Futures Europe has the remaining market share of approximately 25%, according to the CFTC.

Secondly, the commission has sought greater transparency in US markets by increasing scrutiny on index products. The CFTC will use its existing 'Special Call' authorities to immediately begin to require traders in the energy markets to provide the agency with monthly reports of their index trading to help the CFTC further identify the amount and impact of this type of trading in the markets. It will routinely require more detailed information from index traders and swaps dealers in the futures markets and review their trading practices in attempt to quantify its affect on the market overall.

“As total contract volume on U.S. futures markets has increased in recent years, all classes of market participants have grown,” said CFTC acting chairman, Walt Lukken.

“However, index trading is relatively new to the futures markets, and the Commission believes increased transparency of such trading activity may help the CFTC determine whether adjustments to trader reporting or classification are required.”

Thirdly, the CFTC also revealed that it is investigating the crude oil markets as a result of what it calls “today’s unprecedented market conditions.”

The Commission has recently denied that such prices rises are the result of market speculators or manipulative forces, but the implementation of today’s new measures demonstrates the pressure the Commission is under to address the situation as politicians seek scapegoats.

Following a May 20 hearing called to examine the effect of institutional investors and hedge funds on food and energy price inflation, Homeland Security and Governmental Affairs Committee Chairman Senator Joe Lieberman said “index speculators are responsible for a big part of the commodity price increases, and we in Congress ought to do the best we can to protect the public interest in an effort to bring food and energy prices down."

The expanded international surveillance information includes:

1. Immediately implementing expanded information-sharing to provide the CFTC with daily large trader positions in the UK WTI crude oil contract;

2. Extending trader information sharing to provide crude oil large trader position data for all contract months in the WTI contract, not just the nearby months;

3. A near-term commitment to enhance trader information to permit more detailed identification of market end users;

4. A near-term commitment to provide improved data formatting so trading information can be seamlessly integrated into the CFTC’s surveillance system; and

5. In addition to the established position management program that FSA currently requires of ICE Futures Europe, ICE Futures Europe will notify the CFTC when traders exceed position accountability levels, as established by U.S. designated contract markets, for WTI crude oil contracts.