07.08.09

CANTWELL, SNOWE ASK CFTC TO REVOKE ICE NO-ACTION LETTER

WASHINGTON, DC – Today, U.S. Senators Maria Cantwell (D-WA) and Olympia Snowe (R-ME) wrote to the Commodity Futures Trading Commission (CFTC) asking it to revoke a no-action letter issued to IntercontinentalExchange’s (ICE) ICE Futures London.  No-action letters can be issued to foreign boards of trade that seek access to U.S. markets and exempt them from direct U.S. oversight.  However, for three years, ICE Futures London has been offering contracts that match off of U.S. commodities, in particular, West Texas Intermediate Crude – the signature U.S. oil contract traded on the New York Mercantile Exchange.  For months, Cantwell and Snowe have both been concerned that lax oversight and these no-action letters have partially contributed to the skyrocketing prices of oil seen last summer.

 

“It is clear that the Commission has the legal authority to immediately require ICE Futures to show cause as to why its U.S. based contracts should not be subject to the same level of oversight and transparency that are applied to fully regulated U.S. exchanges,” the senators wrote. “We strongly believe that the Commission must expeditiously review the current oversight over Foreign Boards of Trade that are selling American products and develop policies that provide, at the very least, comparable oversight.” 

 

Last year, Cantwell and Snowe sent a letter to the CFTC calling for the Commission to require greater scrutiny of foreign trading of U.S. delivered commodities. 

 

[The full text of the letter below]

 

July 8, 2009

 

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, NW

Washington, DC  20581

 

Dear Chairman Gensler and Commissioners Dunn, Sommers, and Chilton:

 

Last year we wrote to the Commodities Futures Trading Commission requesting that it use its authority to directly regulate all U.S. based trading of U.S. oil contracts.  Then, as today, unjustifiably high oil prices resulted in the unfair transfer of billions of dollars from oil consumers to market speculators.

 

We reminded the Commission that Congress has given it the authority and responsibility to prevent fraud, manipulation, and excessive speculation in U.S. commodity markets.  This means that the Commission has the authority to ensure that the market price for a particular commodity “accurately reflect[s] the forces of supply and demand.”[1]  As you well know, oil prices are again rapidly rising after bottoming out at $30.28 per barrel from the historic high of $147 per barrel in 2008.  Since December 2008, oil prices have doubled. 

 

Supply and demand indicators do not seem to support this rapid rise in price.  Specifically, according to the Energy Information Administration, U.S. crude oil stocks are at their highest levels in almost twenty years and are up 8 percent since January 1, 2009.  Also, consumer demand for crude oil is at a ten year low and is down nearly 8 percent since January 1, 2009. 

 

During this same time, we have seen commodity index funds pour an estimated $40 billion back into commodity indices raising total investment from around $87 billion up to over $140 billion at the beginning of June.  This resulted in the buying of between 125 and 155 million barrels of crude oil in the futures markets raising index speculators’ stockpile of crude oil futures from approximately 435 million barrels on January 1, up to more than 575 million barrels by the end of May. 

 

It concerns us that the current run-up in oil prices is strikingly similar to the oil price spike of 2008.  At that time, large financial firms were investing significant resources into the oil futures market and Commission data from that period showed that prices were more closely aligned to speculative activities than to the fundamental laws of supply and demand.  Clearly, other factors influence the price of oil, yet these facts raise questions regarding the role of noncommercial speculators in the futures markets. 

 

Rising oil prices are threatening to derail comprehensive efforts to restore the health of the nation’s economy and are harming oil consumers during the worst economic climate since the Great Depression in the 1930s.  This provides the Commission a new opportunity to live up to its statutory responsibility to protect the U.S. economy and oil consumers by responsibly enforcing U.S. commodity trading laws.  An informal Commission staff “no action” letter process is continuing to allow electronic exchanges located beyond our borders to trade U.S. based commodities, effectively free from direct U.S. regulation meant to prevent fraud, manipulation, and excessive speculation.  This is a significant issue as one such “no action” letter permits the trading of look-alike U.S.-based West Texas Intermediate (WTI) crude oil and related products such as home heating oil and gasoline upon ICE Futures Europe (ICE Futures), a wholly owned subsidiary of Atlanta-based InterContinental Exchange (ICE). 

 

The WTI contract is trading on ICE Futures in direct competition with the New York Mercantile Exchange’s (NYMEX) signature oil futures contract, which is regulated by the Commission and subject to the Commodity Exchange Act’s (CEA) eighteen core principals.  It is estimated that trading volumes on ICE Futures for WTI has grown to 30 percent of the trading on NYMEX. Data provided to Congress revealed that 60 percent of all trades on ICE Futures originate in the U.S. for this benchmark contract. Given that the ICE Futures contract is pegged to the NYMEX market—and traders indicate that there is regular arbitrage between the two—it is clear that the ICE Futures trading impacts price discovery.

 

Last summer, following our previous letters, the Commission and the United Kingdom’s Financial Service Authority (FSA) developed a framework where the FSA would provide the Commission with large trader position data from ICE Futures on look-alike U.S.-based WTI crude oil and related products and inform the Commission when traders exceeded NYMEX position limits and accountability levels.  While we appreciated the action that produced additional transparency, we remain concerned that the activities of traders on ICE Futures remain outside of the ambit of the Commission’s enforcement authority, that traders may exceed U.S. position limits by adding to their positions on a foreign regulated exchange doing business in the U.S., and that there is no weekly public disclosure of large trader positions—short and long—as we see with Commission regulated exchanges. 

 

We believe the Commission’s abdication of oversight responsibility has been based upon two flawed assumptions.  The first is that the lax regulatory structure of the FSA is comparable to the Commission’s and sufficient to police this critical market sector.  On this first point we strongly believe that the lack of the CEA’s eighteen core principals within FSA regulations does not meet a comparable standard and the level of information sharing remains inadequate.  Second, arguments have been advanced that there are legal impediments to the Commission enforcing U.S. regulatory protections on foreign boards of trade that locate their trading terminals in the U.S.  However, section 4(b) of the CEA provides that:

 

“[the] Commission may adopt rules and regulations proscribing fraud and … require registration with the Commission by any person located in the United States … who engages in the offer or sale of any contract of sale of a commodity for future delivery that is made [on] a board of trade … located outside the United States.”[2]

 

It is clear that the Commission has the legal authority to immediately require ICE Futures to show cause as to why its U.S. based contracts should not be subject to the same level of oversight and transparency that are applied to fully regulated U.S. exchanges.

 

We strongly believe that the Commission must expeditiously review the current oversight over Foreign Boards of Trade that are selling American products and develop policies that provide, at the very least, comparable oversight.  In addition, we strongly believe that if further cooperation with FSA is not possible to meet a comparable regulatory standard, that the Commission has the power to provide direct oversight and regulation of these markets selling American products.  Accordingly, we request that the Commission require ICE Futures to show cause why it should not register as a U.S. domestic exchange and also provide details of its strategy with respect to addressing foreign-based markets that seek access to U.S. markets.

 

We look forward to working with you to meet our shared goals of protecting American consumers and ensuring a fair and well-functioning energy futures market.  Please respond to us in writing by July 21, 2008 as to actions the Commission has taken in response to this request.

 

Sincerely,

Senator Maria Cantwell

Senator Olympia Snowe

 

 

 

 

 

 

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[1] 7 U.S.C. § 12a(9).

[2] 7 U.S.C. § 6(b) (2009).