US regulators drive more speculation offshore

Limits Put on Some Oil Contracts On ICE Amid Outcry Over Prices
By IAN TALLEY
June 17, 2008

WASHINGTON — The U.S. commodity futures regulator Tuesday said ICE
Futures Europe has agreed to make permanent position and
accountability limits for some of its U.S.-traded crude contracts,
subjecting itself to the same regulatory oversight as its New York
based counterpart.

Following intense scrutiny and censure by Congress over skyrocketing
oil prices, the U.S. Commodity Futures Trading Commission also said it
would require daily large trader reports, and similar position and
accountability limits from other foreign exchanges.

Many in Congress have criticized the agency for not doing enough to
rein in what they believe is rampant speculation contributing to
record energy prices and have pointed the finger in particular at
trading on IntercontinentalExchange’s ICE Futures Europe.

ICE and other foreign exchanges have been exempt from the many of the
rules that govern the New York Mercantile Exchange, which critics
charge has attracted a host of financial investors intent on pushing
prices higher. The new agreement, made in consultation with the U.K.’s
Financial Services Authority, will subject ICE to the same oversight
as Nymex.

“This combination of enhanced information data and additional market
controls will help the CFTC in its surveillance of its regulated
domestic exchanges,” while preserving the integrity of its
cross-border cooperation with other regulators, acting CFTC Chairman
Walter Lukken said in prepared testimony.

“We have not found a smoking gun… [but] we’re definitely taking
constructive steps to make sure the markets are working correctly, to
make sure there is not excessive speculation driving the markets,” Mr.
Lukken said.

Specifically, the agreement will require trader reports on positions
in the benchmark U.S. crude contract — the West Texas Intermediate
contract — traded on the ICE Futures exchange. The contract is linked
to the WTI contract on the regulated New York Mercantile Exchange.

ICE has 120 days to implement the new reporting requirements.

On the Nymex, where the majority of oil futures are traded, most
traders face accountability levels and position limits on their
positions in crude oil and other commodities. Accountability levels
are guidelines for trading in all futures contracts, while position
limits are hard-and-fast caps on the number of front-month contracts a
trader may hold in the last three days before the contract expires.

Traditionally, the U.K.’s FSA has had informal accountability levels
of 10,000 contracts in West Texas Intermediate crude, but no position
limits, an ICE spokeswoman said. The new CFTC rules will make ICE oil
trading consistent with practices on Nymex: a 3,000 contract position
limit in the last three days of trading, and a 20,000-contract
accountability level.

Lukken said the same oversight requirements would apply to the Dubai
Mercantile Exchange if it were to also offer the WTI contract.

The Nymex and DME have been mulling offering such a contract and will
decide in the next few months, said Nymex chief executive James
Newsome.

ICE Warns Oversight Won’t Lower Prices

The CFTC will incorporate the ICE data into its commitment of traders
report, a weekly report categorizing positions held by speculators and
companies that use futures contract to hedge against operations in the
physical energy market.

ICE said it would comply with the new regulations but warned tighter
oversight won’t lower oil prices.

“With a mere 15% market share of global WTI, on a futures equivalent
basis, we feel it is highly unlikely that the ICE Futures Europe’s WTI
market is the primary driver of WTI prices,” Charles Vice, ICE
president, told a special Senate committee exploring exploring
oversight and resources for the CFTC.

“Therefore, any expectation that WTI crude oil prices will fall as a
result of increased restrictions on this relatively small portion of
that market are likely to go unmet,” he said.

Jennifer Gordon, an analyst at Deutsche Bank in New York said the
greater regulatory oversight was driving volatility and leading to
less liquidity in the oil markets. “So whatever the CFTC is doing, it
is certainly scaring away the marginal player,” she said. Ms. Gordon
noted that the CFTC move was “adding to the bearish tone on crude,” in
Tuesday trading.

Oil prices climbed within shouting distance of $140 a barrel on Monday
before slipping towards $134.03 on Tuesday, down 58 cents. Prices are
still up about 40% so far this year.

The CFTC action follows rebuke by Congress, which has ratcheted up its
efforts to regulate oil-markets trading. Several of the most powerful
U.S. senators and representatives have introduced proposals that would
give more money and power to the agency.

In the past several weeks, the CFTC has announced a raft of
investigations and new initiatives targeting speculation, the role of
financial participants in current prices and the potential for market
manipulation. Mr. Lukken said the agency couldn’t rule out that market
manipulation was going on in the commodity markets.

The agency disclosed in late May that it is conducting a broad
investigation into practices surrounding the purchase, transportation,
storage and trading of crude oil and related derivative contracts.

Mr. Lukken said the agency was studying the impact of swaps deals and
index trading in the commodity markets and would report back to
Congress by Sept. 15.

The agency said the massive increase in commodity trading, the growing
complexity of the market and an aging CFTC workforce meant that it was
just about able to maintain a business status quo.

“This agency’s lack of funding over the course of many years has had a
negative impact on our staffing situation, rendering it unsustainable
for the long run,” Mr. Lukken said.

“Given our staffing numbers, the agency is working beyond its steady
state capacity and is unable to sustain the current situation for much
longer without being forced to make…choices about which critical
projects should be completed and which ones will be delayed,” the
acting chairman said in his testimony.

The agency is now requesting a 20% rise in its funding for the next
fiscal year to $157 million, from $130 million previously requested.