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Regulation Of Oil Market Exchanges Brings With It Legal Considerations Regulation Of Oil Market Exchanges Brings With It Legal Considerations

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Regulation Of Oil Market Exchanges Brings With It Legal Considerations

A flurry of activity has accompanied growing interest in both parties on quashing excessive speculation in the oil futures markets that some observers say is contributing to the spike in crude oil and gas prices.

Staying current with the proposals offered is as complex as the topic itself, which has largely transcended partisan bickering. A half-dozen House and Senate bills last Thursday alone were initially offered or modified, some with overlapping language and co-sponsors.


Many aim to close the so-called London loophole, wherein U.S. crude oil is traded on the London-based ICE Futures Europe exchange and is overseen by British regulators but not by the Commodity Futures Trading Commission.

The ICE Europe exchange is owned by the Atlanta-based Intercontinental Exchange and trades about 30 percent of the West Texas Intermediate crude oil contract market.


Sens. Maria Cantwell, D-Wash., and Olympia Snowe, R-Maine, want to bring this exchange under full CFTC regulation, as is done with the New York Mercantile Exchange, which accounts for around 70 percent of the West Texas Intermediate crude oil contract market.

"Let's call this what it is: a United States exchange," said Michael Greenberger, a University of Maryland professor and former CFTC staffer who has testified before Congress on increasing U.S. oversight of the oil futures markets.

But others say it would be akin to having the U.S. regulate a foreign market, which they say would be unprecedented and legally questionable.

The leading Senate plan was introduced by Majority Whip Durbin and is backed by Majority Leader Reid and other Democratic leaders.


It includes language offered separately by Sens. Carl Levin, D-Mich., and Dianne Feinstein, D-Calif., giving CFTC the same authority over traders based in the United States who trade on foreign exchanges as the CFTC has over traders in the United States trading on U.S. exchanges.

Unlike the Cantwell-Snowe bill, it does not propose to directly regulate any foreign exchange itself that has a terminal in the United States but focuses on the traders themselves.

Durbin's bill has language from Levin and Feinstein prohibiting CFTC from allowing foreign exchanges to install trading terminals in the United States unless the foreign exchange has comparable limits on speculation.

Durbin added a resolution asking for emergency supplemental spending that would allow CFTC to hire 100 more employees to police the commodity markets; require CFTC to report separate data for various types of traders, including index fund traders, and determine if new regulations are needed.

While Feinstein is co-sponsoring Durbin's bill, she and Senate Commerce ranking member Ted Stevens want to impose trading limits on commodity traders who do not own the physical commodity -- including hedge and pension funds, investment banks and others who trade through brokers.

On Wednesday, Senate Homeland Security and Governmental Affairs Chairman Joseph Lieberman will release three draft proposals in advance of a hearing set for next week.

His ideas include barring some institutional investors from investing in commodities markets; limiting the size of the stake any one investor can have, and regulating non-electronic trading.

There will be a joint CFTC oversight hearing today with the Senate Agriculture Committee and the Financial Services Appropriations Subcommittee, which Durbin chairs. Senate Agriculture Chairman Tom Harkin has not yet backed a proposal.

Today's hearing features testimony from CFTC Acting Chairman Walter Lukken, who has been lambasted by Democrats over his suggestions that there is no connection between oil market speculation and the spike in prices.

Bush administration officials argue that oil supply and demand -- not speculation -- is to blame. But a Senate Democratic aide though said, "This is gambling; this is not supply and demand."

Senate Democrats included market speculation language in a larger energy package that fell to a Republican-led filibuster last week. They might try to move a separate speculation package before the Independence Day recess, although time is getting short. While the package as a whole -- including repeals of oil and gas industry tax incentives -- faced a veto threat, the speculation language was opposed by the White House but was not targeted with a veto threat.

Senate Republican leaders say they are interested in finding a compromise that would be tied to language increasing domestic oil and gas production.

In the House, Energy and Commerce Chairman John Dingell and ranking member Joe Barton have offered to set up an interagency working group led by the Energy Department that would examine the problem and report to Congress within a year.

"Concerns about the effects of speculation have reached a fever pitch over the last few months, and while we have some ideas about the effects of this practice on the oil markets, we need a comprehensive picture of what is happening in these markets and the role of different federal agencies in policing them," a Dingell spokesman said.

The Energy and Commerce Oversight and Investigations Subcommittee, chaired by Rep. Bart Stupak, D-Mich., is holding a Monday hearing on oil market speculation.

Stupak is co-sponsoring the Dingell-Barton bill, but he is also set to release a modified version of a plan he has offered in recent years that gives CFTC regulatory power over all exempt energy markets -- not just petroleum -- that involve overseas exchanges.

This article appears in the June 21, 2008 edition of NJ Daily.

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