Curbing Excessive Energy Speculation that is Driving Up Gas Prices
On July 30, 2008, the House voted on the Commodity Market Transparency and Accountability Act, H.R. 6604, which takes common sense steps to curb excessive speculation in the energy markets, further close the Enron loophole, bring much-needed transparency to commodities and futures markets, and strengthen enforcement to prevent market manipulation and to prosecute fraud. It is carefully crafted, giving the Commodity Futures Trading Commission (CFTC) needed flexibility, so that it can curtail excessive speculation and other practices distorting the energy market and restore market fundamentals of supply and demand, without any unintended consequences. Though 276 Members voted in favor of the bill, it failed to receive the 2/3 support necessary for passage.
It is critical for the American people paying a record $4 per gallon and the integrity of the oil futures market 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. The International Monetary Fund recently concluded that, “speculation has played a significant role in the run-up of oil prices.” [Regional Economic Outlook, Middle East and Central America, 5/08, p. 28]
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.
Before the Enron loophole law, an estimated 70 percent of the energy futures market trades were made by energy producing and using industries—only 30 percent by speculators. Today, those numbers are reversed—and trading volume has increased six-fold.
Speculators buy and sell futures contracts that require delivery of a commodity at a specified price, on a specified future date. Right now, some oil speculators are betting that price of oil will increase and their trading is driving up the price in the market. It is time to side with the American people– not the unchecked speculators who are playing the markets and profiting at the expense of everyone else.
Congress took a good first step in addressing the Enron loophole with the just enacted Farm Bill -- a measure opposed by President Bush and Senator McCain. Last month, the House passed legislation (H.R. 6377) directing the CFTC to use its emergency powers to take immediate action to curb excessive speculation in energy markets after President Bush refused the Speaker’s call to do so.
Details of the Bill
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.
- Establishes an independent office for the CFTC Inspector General.