In an "extraordinary" disclosure that appeared aimed at relieving political pressure on the agency over painfully high oil prices, the Commodity Futures Trading Commission said Thursday it has been investigating crude oil markets and related derivative contracts since December for possible manipulation or trading abuses.
The commission also announced it was increasing oversight of energy commodity and futures trading both on U.S.-based exchanges and on foreign exchanges where there is trading of derivatives linked to U.S.-regulated contracts for West Texas Intermediate (WTI) crude.
In particular, the agency said it had reached agreement with British financial regulators to get more information on large trader activity on a London-based futures exchange operated by Intercontinental Exchange (ICE), a leading U.S. energy futures market operator, which also agreed to provide more data to the commission, which is known as the CFTC.
And amid increasingly heated charges by congressional Democrats and others that Wall Street speculators are driving roaring oil prices, the CFTC also said it would be taking a closer look at the impact of index traders and "swap dealers" operating in U.S. energy futures markets.
But the most notable action by the CFTC was its highly unusual decision to reveal its crude oil investigation; the agency rarely, if ever, discloses its enforcement probes unless it brings charges or wants to clear a party that has been clearly identified as the target of an investigation.
In this case, the commission provided no details about its probe--nor any meaningful explanation for its disclosure decision--except to note the "unprecedented" situation in oil markets.
"In December of 2007, the agency's Division of Enforcement launched a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of crude oil and related derivative contracts," the CFTC said in a statement.
"Although the commission ordinarily conducts enforcement investigations on a confidential basis, the commission is taking the extraordinary step of disclosing this investigation because of today's unprecedented market conditions."
It added that while the specifics of the ongoing investigation remain confidential, "all commission enforcement inquiries are focused on ensuring that the markets are properly policed for manipulation and abusive practices."
But while not mentioned by the commission, its announcement followed by only two days a sharply worded letter by Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM.) to the CFTC in which he questioned the agency's repeated insistence that speculators in energy futures markets are not responsible for soaring oil prices.
Bingaman noted that oil industry experts had told his committee in recent weeks that supply and demand fundamentals could not fully explain the huge run-up in oil prices.
At the same time, he suggested the CFTC did not have adequate information about trading activity in WTI and other U.S.-linked contracts in foreign markets, and that its oversight of U.S. over-the-counter markets--such as those operated by ICE--remained too limited.
"I remain concerned that the commission's assertions to date--discounting the potential role of speculation in driving up oil prices--have been based on a glaringly incomplete data set," Bingaman told Acting CFTC Chairman Walter Lukken in the letter.
Lukken had no immediate response to Bingaman's letter, but the commission's announcement Thursday appeared to acknowledge some of Bingaman's concerns.
"Today, the commission is taking important steps to ensure that the U.S. energy futures markets function properly and operate free from manipulation and abuse," the CFTC commissioners said in a joint statement. "With these initiatives, we are improving our oversight capabilities and bringing greater sunshine to these markets."
Among other steps, the commission said it had reached agreement with the United Kingdom Financial Services Authority and ICE to get more information on large trader activity on energy commodity contracts with U.S. delivery points that trade on the London-based ICE Futures Europe exchange.
The CFTC noted that WTI futures contracts trade on both ICE Futures Europe and the New York Mercantile Exchange (NYMEX), which is far more heavily regulated by the CFTC than U.S. over-the-counter exchanges such as ICE. The commission added: "While the ICE Futures Europe WTI contract is a cash-settled contract that does not require physical delivery of oil in the U.S., its price is linked to the settlement price of the NYMEX crude oil contract."
The CFTC also said it would require ICE and other U.S. exchange operators to provide more information on so-called "index trading," which the commission said is a relatively new form of trading. In particular, the commission said it wanted additional data on index trading to determine how it is affecting prices and how index traders and so-called "swap dealers"--which include large investment banks--should be classified for regulatory and oversight purposes.
That commission appeared to be responding to specific concerns raised by Bingaman that the CFTC might be inappropriately classifying swap dealers as "commercial" traders-- meaning companies such as airlines or oil companies that buy futures to hedge financial risks associated with the use of oil, natural gas or other energy commodities in their operations.
Bingaman suggested swap dealers might be more accurately classified as "non-commercial" traders because they typically are not trading to hedge physical commodity risks, but rather are simply speculating in oil contracts for financial gain.
The distinction is important because--in downplaying the role of oil market speculators--the CFTC has pointed to its own oversight data showing that "commercial" traders still dominate the energy futures markets, and that trading activity by "non-commercial" players has risen only modestly.
Thus, the commission has repeatedly insisted that big investment banks and other financial players are not the primary force driving the sharply rising prices and trading activity seen in energy futures markets in recent years.
However, Bingaman said that by lumping swap dealers in with "commercial" traders, the CFTC was significantly muddying the waters about the role of speculators in driving up oil prices.
In a statement issued Thursday, Bingaman praised the CFTC's actions, though he reserved judgment on whether more was needed.
"I am pleased that the energy committee's continued oversight of speculation in oil markets, and the gaps in information and regulatory enforcement that we have uncovered, are at last getting attention by the Commodity Futures Trading Commission," he said. "The steps announced today by the commission should help it answer the detailed questions I sent to the acting chairman earlier this week on oil trading in dark markets, regulatory loopholes for swap dealers, and lack of transparency requirements."
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