Energy Law

Senate Joins House in Passing Measures to Expand CFTC Authority over Energy Markets

By Andrea Kells

The U.S. Senate reauthorized the Commodity Exchange Act (CEA) in a farm bill, strengthening the Commodity Futures Trading Commission's (CFTC) authority over energy (and other commodity) trading platforms such as the Intercontinental Exchange (ICE) that are currently "exempt commercial markets."  This closes the so-called "Enron loophole" that allows these exchanges to avoid federal regulation of their trading activities.  

In language very similar to a CEA reauthorization that the House Agriculture Committee also passed last week, the Senate amendment to the CEA would require electronic exchanges to monitor trading for manipulative trading behavior and price distortions, limit position sizes to prevent excessive speculation, and reduce the holdings of traders who have violated position limits.  Exchanges would be required to collect data on trading activity, report large traders to the CFTC, and publish daily price and trading volume data.  These requirements would apply only to futures and financials contracts that offer a "price discovery function" for energy commodities.  The CFTC is directed to review all currently exempt contracts to determine which ones affect market prices and, for that reason, should be brought within the expanded purview of the CEA, with the main target being ICE's financial Henry Hub swap.

The main distinction between the House and Senate measures is that the Senate amendment permits an electronic trading platform to determine whether a previously unregulated product serves a price discovery function, while the House measure includes no such provision.  The House measure could be attached to that body?s farm bill. 

Expanded CFTC oversight of commercial futures and financials markets enjoys broad bipartisan support.  The CFTC itself now supports the measure after abandoning its resistance to calls for expanded oversight.  If the expanded authority is enacted ? which now appears likely ? that authority would validate the CFTC's evaluation the actions of energy markets and traders, including ICE as well as Amaranth Advisors.

Full post as published by Energy Legal Blog on December 21, 2007 (boomark / email).