New regulation proposed for OTC energy derivatives

A bill was introduced in the US Senate yesterday that seeks to expand regulatory oversight of the over-the-counter energy commodity derivatives market. Bill sponsor Senator Dianne Feinstein, a Democrat from California, wants the Commodity Futures Trading Commission (CFTC) to provide greater transparency for energy commodity derivatives transactions on multilateral markets and electronic trading platforms.

Feinstein believes the CFTC and the Federal Energy Regulatory Commission should regulate energy derivatives OTC transactions. Such transactions are currently excluded from regulatory oversight.

Bill co-sponsors Senator Maria Cantwell, Democrat from Washington, and Senator Ron Wyden, Democrat from Oregon, along with Feinstein, represent western US states that were plagued in 2000 and 2001 by soaring energy prices.

Some have charged that the high prices were due to market manipulation by energy marketing firms such as Enron. As a possible example of such manipulation, Feinstein said that on December 12, 2000, the spot price of natural gas in Southern California was $59 but only $10 in neighbouring San Juan and New Mexico. She claimed the cost of transporting natural gas between the two states at the time was only $1. “So there was $48 unaccounted for that undoubtedly found its way into someone’s pocket,” said Feinstein.

With the proposed new legislation, Feinstein added, the federal government would have new powers to “step in and do their jobs when markets have gone awry”.

In addition to expanding regulatory oversight of energy commodity derivatives, the bill would also require online trading forums to maintain sufficient capital to support their trading operations and to maintain open books and records for inspection by Federal authorities.