Curbing Excessive Energy Speculation that Impacts Gas Prices
On September 18, 2008, the House passed the Commodity Market Transparency and Accountability Act, H.R. 6604. The bill would take crucial steps to curb excessive speculation in the energy futures markets by directing the CFTC to:
Curbing Excessive Speculation
- Overseeing Off-shore Trading – Makes offshore markets trading in the U.S. follow the same rules as U.S. exchanges -- by requiring foreign boards of trade to share trading data and adopt limits on the number of futures contracts an investor can own similar to U.S.-regulated exchanges. Foreign boards of trade that offer electronic access to U.S. traders for energy or agricultural commodities to be delivered in the U.S. are not currently subjected to the same position limits traders are subject to on domestic exchanges. About 30 percent of U.S. oil futures trades fly below the regulatory radar because they are transacted on a U.S. exchange that works through a subsidiary in London.
- Position Limits -- Requires the Commodity Futures Trading Commission (CFTC) to set position limits – the size of the stake that each speculative investor can hold in a given market -- for all agricultural and energy commodities on the designated contract markets, such as the New York Mercantile Exchange. This will limit traders’ ability to amass huge positions that would otherwise allow them to distort the market.
- Over the Counter Trading -- Provides the Commodity Futures Trading Commission (CFTC) with new authority to impose position limits on the $9 trillion unchecked over-the-counter trading market. Over-the-counter trades — often negotiated privately by large financial entities — are less transparent than those that happen on fully regulated futures exchanges. Under the bill, the CFTC can only impose position limits if it finds disruption in over-the-counter markets for an energy or agricultural commodity. The Commission must also study the effectiveness of establishing position limits in over-the-counter markets. It also requires mandatory reporting for over-the-counter trading in agricultural and energy contracts, similar to on-exchange contracts.
- Limit eligibility for hedge exemptions to bona-fide hedgers – Reforms the process for granting hedge exemptions from trading limits in order to shut down a loophole that has allowed institutional investors to take, through a series of trades, larger positions, than they would be able to take if they traded on the exchanges directly.
Bringing Greater Transparency in the Market
- Requires the CFTC to get a complete picture of the swaps markets by defining and classifying index traders and swap dealers, and subjecting them to strict reporting and recordkeeping requirements.
- The Commission will also disaggregate and publicly provide data to examine the true extent of index fund and other passive fund participation in futures markets for energy and agricultural products.
Strengthening Enforcement to Prevent Market Manipulation
- Calls for a minimum of 100 full-time CFTC employees to strengthen enforcement, to prevent manipulation and to prosecute fraud. Despite record trading volume in the futures markets, increasing 8000 percent, CFTC staffing is at its lowest level since the agency was created in 1974.
Background
The Democratic-led Congress is moving America in a New Direction for Energy Independence—working for consumers to lower gas prices, make America more secure, and launch a cleaner, smarter, more cost-effective energy future that creates millions of new jobs.
This week, the House passed a comprehensive reasonable energy compromise -- expanding our domestic supply, protecting consumers with strong action to lower the costs of energy and protecting taxpayers by making Big Oil pay its fair share, ensure a clean, green future through energy efficiency and conservation, and commit America to renewable energy and help create millions of good-paying green jobs.
Today, we will build on that accomplishment with another critical step to protect consumers and lower energy costs. The House will consider legislation to takes crucial, common sense steps to curb excessive speculation in the energy futures markets. The measure further closes the Enron loophole, brings much-needed transparency to commodities and futures markets, and strengthens enforcement to prevent market manipulation and to prosecute fraud -- while giving the Commodity Futures Trading Commission (CFTC) needed flexibility, so that there are no unintended consequences.
It is critical for the American people paying nearly $4 per gallon and the integrity of the markets to curb the excessive speculation, which experts have testified may be responsible for inflating prices by as much as $20 to $60 more per barrel.
A new independent study by Masters Capital Management found that speculation by large investors -- and not supply and demand for oil – was a primary reason for the surge in oil prices during the first half of the year, and the more recent price declines.
That report also credited congressional efforts to stop excessive speculation for investors' departure from the markets. “From May 20th onward, Congress held multiple hearings on excessive speculation in the oil markets and multiple bills were introduced to crack down on speculators. It is likely that Congressional scrutiny caused many Index Speculators to exit their positions.”
In 2000, Senator Phil Gramm – former chairman of Senator McCain’s presidential campaign – slipped in the Enron loophole that exempted all energy futures trading from oversight by the CFTC and since then the percentage of speculators in the energy markets has climbed from 30 to 70 percent and the trading volume has increase six-fold.
It is time to make sure that the market works the American people – by making sure that excessive speculation does not go unchecked by federal regulators.