Levin and Feinstein Introduce Oil Trading Transparency Act

Bill would limit speculation in oil trading and close loophole for trades on foreign exchanges using U.S. terminals

WASHINGTON – Senators Carl Levin (D-Mich.) and Dianne Feinstein (D-Calif.) today introduced the Oil Trading Transparency Act to ensure that energy commodities traded on foreign exchanges using trading terminals located within the United States are subject to the same speculative trading limits and reporting requirements as energy commodities traded on U.S. exchanges.

“The United States places limits on speculative energy trades that contribute to high prices,” said Levin. “But traders of U.S. crude oil know that they can avoid U.S. limits and transparency requirements by trading crude oil futures on the London exchange instead of the NYMEX exchange in New York. The traders can do it by using computer terminals that are located in the United States but provide direct access to the London exchange. Our legislation would close this loophole by requiring that foreign boards of trade that operate trading terminals in our country comply with the same speculation trading limits and reporting requirements that apply to U.S. trades.”

“Oil prices continue to set records – yesterday, oil hit $123 per barrel – and there seems to be no relief in sight for consumers as we head into the summer travel season. The concern is that energy markets are not working – and that speculation adds an extra $20 - $25 per barrel to the price of oil. We must protect these markets from manipulation, excessive speculation and fraud,” Senator Feinstein said. “The good news is that Congress is poised to finally close the ‘Enron Loophole,’ and place all major electronic trades that could drive energy prices under the watchful eye of the CFTC. However, I remain concerned that there are no comparable protections in place when U.S. energy futures are traded on international markets – presenting yet another regulatory loophole for energy traders to exploit. So, this legislation would close that loophole and ensure that the trading of all U.S. energy futures – whether on foreign or domestic markets – is done with transparency and with an audit trail.”

The Levin-Feinstein Oil Trading Transparency Act would direct the Commodity Futures Trading Commission (CFTC) to ensure that any foreign exchange operating a trading terminal in the United States for the trading of a U.S. energy commodity meets two regulatory requirements that already apply to U.S. exchanges: (1) imposition of speculative trading limits to prevent price manipulation and excessive speculation, and (2) the mandatory daily publication of trading information from the exchange to ensure market transparency.

The bill would also require the CFTC to obtain information from the foreign exchange to enable it to determine how much trading in U.S. energy commodities is due to speculation. The CFTC issues a weekly publication with speculation data for U.S. markets.

One example highlighting the need for this bill involves the Intercontinental Exchange (ICE), which operates a key energy futures exchange in London called ICE Futures Europe. ICE Futures Europe has set up computer terminals here in the United States where U.S. traders can trade U.S. crude oil (West Texas Intermediate) on the London exchange. West Texas Intermediate crude oil is produced here, used here, and never leaves the United States, but because it is traded on the London exchange, the trades are not subject to U.S. trading regulations.

Traders who use the London exchange aren’t subject to the same speculation limits that apply to U.S. exchanges like NYMEX, and the exchange itself doesn’t have to provide daily reporting of their trading data in the same manner as NYMEX. That regulatory disparity means U.S. traders trading U.S. oil on the London exchange can engage in excessive speculation that affects U.S. prices and not report their trades.

Earlier this year, Feinstein and Levin, along with Senator Olympia Snowe (R-Maine) and others, introduced a measure to close the so-called “Enron Loophole,” which has exempted electronic energy markets for large traders from government oversight. This measure has been incorporated into the farm bill which is expected to pass Congress and be sent to President Bush in the near future. Additionally, Levin, who serves at the chairman of the Permanent Subcommittee on Investigations, has conducted a number of investigations into the pricing of energy commodities, including gasoline, crude oil, and natural gas. These investigations reflect a continuing concern over the sustained increases in the price and price volatility of these essential commodities, and, in light of these increases, the adequacy of governmental oversight of the markets that set these prices.