Senator Carl Levin’s “Close the Enron Loophole Act” targets what it refers to as “energy commodity markets” – such as crude oil, natural gas, electricity, heating oil, and diesel fuel – and subjects them to Commodity Futures Trading Commission oversight in a bid to prevent speculation-driven price spikes.
The Act takes its name from a provision inserted at the request of Enron and other energy traders into the Commodity Futures Modernization Act of 2000 which made them exempt from government oversight.
Sen. Levin is chairman of the Senate Permanent Subcommittee on Investigations which recently concluded that energy hedge fund Amaranth Advisors distorted natural gas prices “from their fundamental values” by taking up large positions on the regulated New York Mercantile Exchange (Nymex) before focusing on the unregulated over-the-counter (OTC) space on the electronic IntercontinentalExchange (Ice) in 2006.
The report recommended that the so-called “Enron loophole” be closed to restore the CFTC’s ability to police the US energy markets effectively.
“The legislation I am introducing is critical to ensuring fair energy prices that reflect the fundamentals of supply and demand,” said Sen. Levin. “The Enron loophole makes it impossible for regulators to prevent major price distortions in U.S. energy markets. We need to put the cop back on the beat in all U.S. energy markets with effective tools to stop price manipulation, excessive speculation, and trading abuses.”
The CFTC today launched a public hearing on unregulated commercial markets (ECMs). Nymex responded with a statement supporting the commission.
"The most effective response would be targeted and would require routine mandated large trader reporting and position accountability/limit requirements for certain ECM contracts that are linked to and functionally equivalent with regulated futures exchange contracts," it said, adding that such ECMs also would be required to police their own markets.
"These statutory changes are necessary and would not negatively impact the price discovery and hedging functions provided by derivatives markets," said the statement.
Key provisions of the Close the Enron Loophole Act would:
Require energy trading facilities (ETFs) to register with the CFTC and comply with the same standards as apply to futures exchanges, like NYMEX, for trading futures contracts, except for standards governing retail trading since ETFs are restricted to large traders trading amongst themselves. ETFs would function as self-regulatory organizations under CFTC oversight in the same manner as futures exchanges.
Require ETFs to establish trading limits on traders, such as position limits or accountability levels, to prevent price manipulation and excessive speculation, subject to CFTC approval, in the same manner as futures exchanges. Position limits set a ceiling on the number of contracts that a trader can hold at one time on a trading facility; accountability levels, when exceeded, trigger a review by regulators of a trader’s holdings in order to prevent price manipulation and excessive speculation. The CFTC would ensure that position limits and accountability levels for similar contracts on different exchanges are on parity with each other and applied in a functionally equivalent manner. The CFTC would also ensure that a trader’s positions on multiple exchanges, when combined, are not excessive, and that trading limits are not circumvented through a trader’s use of an unregulated market.
Require large-trader reporting for domestic trades on foreign exchanges. Large trades of U.S. energy commodities taking place from the United States on foreign exchanges would have to be reported to the CFTC. Traders would be relieved of this reporting requirement if the CFTC reached agreement with a foreign board of trade to obtain the same information.
Define an “energy trading facility” as one that facilitates trading of contracts in an energy commodity (other than in the cash or spot market) between large traders (“eligible commercial entities”), and either provides for the clearing of those contracts or provides a price discovery function in the futures or cash market for that energy commodity. Clearing services, which are already subject to CFTC oversight, generally provide payment guarantees for trades. A trading facility performs a price discovery function when its prices become publicly known and affect the prices of subsequent transactions.
Define “energy commodity” as a commodity which is used as a source of energy, including crude oil, gasoline, heating oil, diesel fuel, natural gas, and electricity, or results from the burning of fossil fuels, including carbon dioxide and sulfur dioxide.
The week on Risk.net, July 7-13, 2018Receive this by email