x Abu Dhabi, UAESunday 21 January 2018

Getting a grip on commodities

The mood in the US Congress was one of acting against commodity speculators and squeezing out "bad money" from the trading system.

Despite the turmoil in international financial markets, and a recent weakening in commodity and oil prices, the mood in the US Congress was one of acting against commodity speculators and squeezing out "bad money" from the trading system. If ever there was an opportune moment to do so, given popular discontent against "fat cat" speculators, then this was the time for Congress to act. Boiled down, Senator Harry Reid's Stop Excessive Speculation Act of 2008 points to some consensus in Congress to include expanding the Commodities and Futures Trading Commission (CFTC) surveillance over futures markets, increasing transparency and reporting requirements for swaps dealers and index trading, and closing loopholes that allow speculative players to exceed position limits by trading on offshore exchanges. These measures will affect some Gulf regulators overseeing offshore commodity traders.

To show it meant business, the CFTC, the US energy regulator, recently took civil action against a Dutch-based oil trading company and three top employees for alleged manipulation of crude oil prices. The CFTC claims the activities of Optiver led to 19 attempts to manipulate oil prices during 11 days in March last year, of which five were successful, earning the company about US$1 million (Dh3.67m). We must all be grateful to the CFTC for this effort to curb international oil speculation.

However, in order to achieve a bipartisan consensus bill, momentum was initially fading for proposals that would require the CFTC to substantially raise margin requirements or to put far-reaching curbs on futures market participation by pension funds and index investors. Despite this, there are measures that would require the CFTC to tighten position limits on speculative players active on multiple exchanges, create position limits for swaps dealers and index players and to extend CFTC regulation to over-the-counter (OTC) energy commodities.

The main components of the bill that was finally fleshed out include ending exemptions from CFTC regulation for over-the-counter energy commodities including crude oil, coal, natural gas, diesel, petrol, jet fuel and electricity; closing the "London loophole" by extending CFTC regulatory authority over US contracts traded on foreign exchanges; extending CFTC regulatory authority to swaps in energy transactions; closing the "swaps loophole" by removing regulatory exemptions on swaps transactions that are not related to physical hedging requirements; requiring the CFTC to set aggregate position limits for energy contracts held by traders across multiple exchanges, not just regulated US exchanges, and requiring public disclosure of index fund positions.

Concerning closing the London loophole, Congress will not legislate anything that is not already being implemented in discussions between the CFTC and Britain's Financial Services Authority (FSA). The bill requires market players to keep records on OTC and swaps transactions that would be available to the CFTC on request and includes a provision presuming fraudulent activity by those who do not produce such records, which would remain confidential with the CFTC. The bill provides for an independent inspector general to be housed within the CFTC.

In many cases, the CFTC is already moving in this direction on its own accord. Senator Reid's effort is bound up with exploratory talks on a broader energy bill including provisions going beyond commodity market speculation. Democrats are sending signals that opposition to expanded offshore drilling is easing, but an attempt to wrap CFTC-focused provisions into a broader energy bill could be a recipe for inaction. Last month, Senator Reid failed to advance a veto-bait bill that included items such as a windfall profits tax on oil companies and the ability to sue Opec.