Rift emerges at CFTC over Feinstein bill

Thomas Erickson, a commissioner of the US Commodity Futures Trading Commission (CFTC), yesterday said he fully supports increased oversight of energy derivatives trading, in the wake of Enron’s collapse. Erickson, testifying before the US Senate Committee on Agriculture, Nutrition and Forestry, said the proposal by Senator Dianne Feinstein, to tighten over-the-counter energy trading regulation, is pragmatic, as it “recognises the benefits of market innovation by preserving the long-sought legal certainty for swaps".

Testifying to the same Committee, however, CTFC chairman James Newsome said: “From the beginning of the discussions on these energy issues, my position has been that we need to find the ‘facts’ first, before proposing or supporting a ‘solution'. My position has not changed.”

But Erickson appears to have made up his mind, even if CFTC investigations are still undergoing. “US energy markets are suffering a crisis in confidence... In this environment, liquidity dries up and the market efficiencies created by all derivatives are put at risk," said Erickson. "I believe this crisis in confidence is shaking the very foundation of our energy markets. Modest legislation is a good first step toward restoring this lost confidence and returning energy markets to a path of growth and efficiency.”

Feinstein’s bill proposes that all derivatives transactions should be subject to the CFTC’s fraud and manipulation authorities - something with which Erickson agrees. “It would not require the registration of swap counterparties, but would require that they maintain books and records of transactions – something that should be routine practice in the industry.”

Taking the example of EnronOnline, Erickson noted that if it were to have been operated by a bank, its risk exposure would have been reported to the banking regulators. “Moreover, those regulators would have the authority to impose capital requirements on the market," said Erickson. "The government, I believe, must be consistent in its expectations." He added: "Senator Feinstein’s bill embraces competitive markets in the context of consistent government standards. Enron and companies like Enron should have every right to establish markets and compete with banks, broker-dealers, and exchanges for market share. But if the right policy answer is that markets should be overseen, then all markets should be accountable to a federal financial regulator.”