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Oil Traders May Face New Scrutiny Under U.S. Bill

The Wall Street Journal: Oil Traders May Face New Scrutiny Under U.S. Bill

By SIOBHAN HUGHES
May 12, 2008; Page C3

Oil traders may be in for tougher oversight: Senate Democrats are seeking to crack down on speculation in an overseas market that has come to play a major role in oil trading in a little more than two years.

Some members of Congress are concerned that short-term investing on IntercontinentalExchangeInc.’s ICE Futures Europe is helping drive up oil prices, which closed at a record high of $125.96 a barrel Friday on Nymex Holdings Inc.’s New York Mercantile Exchange. ICE, based nominally in London, isn’t subject to the speculation limits that the Nymex is, even though many of the ICE computer screens through which trades are placed are in the U.S.

[Crude Alternative]

The United Kingdom’s Financial Services Authority doesn’t keep track of how much trading is conducted by speculators, and doesn’t hold speculators to account if their positions become inordinately large.

While U.S. regulators treat FSA regulation as if it were comparable to U.S. regulation, there are differences. U.S. lawmakers are concerned that the disparities may be prompting traders to bid up oil prices using overseas markets in ways that artificially inflate the prices consumers end up paying for gasoline in the U.S.

“The loophole that still exists is when that electronic exchange is located in London,” Sen. Carl Levin (D., Mich.) said at a news conference Thursday as he described a measure in an energy bill scheduled to be voted on later this month. “We are taking action to see if we can’t squeeze that speculation out of the market.”

The Senate bill, the Consumer-First Energy Act, is aimed at sending a message that Democrats are serious about dealing with surging oil prices. Because it includes controversial measures such as imposing new taxes on oil companies, it is unlikely to pass. Mr. Levin has also introduced a separate bill that would deal only with U.S. commodities trading that is steered overseas. Together, the bills are the first that would impose equal speculative-trading limits on the London and New York markets for a key crude-oil futures contract known as West Texas Intermediate.

ICE says it collects information about its trades and shares that information with the FSA, but isn’t disputing that regulators have no access to information about the proportion of total trades conducted by noncommercial — that is, speculative — players.

The Commodity Futures Trading Commission “has not expressed a need for information beyond what is already provided,” Sarah Stashak, an ICE spokeswoman said.

She also said “speculation has not been proven to be a driver of prices in the energy, or other, commodity markets,” and that more information wouldn’t help make such a determination.

Under the Levin legislation, information about speculators’ positions in the West Texas Intermediate crude-oil contract and two other contracts for goods delivered in the U.S. would have to be provided to U.S. regulators. The Commodity Futures Trading Commission already issues weekly reports outlining the positions in U.S. futures markets held by commercial traders, such as airlines that buy fuel for their operations, as well as speculators, such as hedge funds.

If ICE disagreed with the new regulatory system, it would have to pull its trading screens off U.S. traders’ desks. That would be counter to what other online markets are doing: Only a year ago, the Dubai Mercantile Exchange won the right to make certain contracts available to U.S. traders.

But cutting off U.S. traders from steering trades overseas might not have an effect. “The attempt to clamp down on trading of oil in a single contract in a single country can’t impact traders around the globe who trade and set the price of crude oil,” Ms. Stashak said.

A CFTC spokeswoman declined to comment, as did a Financial Services Authority spokesman.

The Senate legislation is a shot across the bow for an exchange that has thrived under a nearly decade-old decision allowing it to place computer-trading screens on U.S. traders’ desks without being subject to U.S. oversight.

Once known as the International Petroleum Exchange, the company received a letter from the CFTC in 1999 that allowed it to place computer terminals in the U.S. while being regulated by U.K. regulators. After it was purchased by Atlanta-based ICE and renamed ICE Futures Europe, the market retained its status as a foreign exchange.

One of the biggest developments came in early 2006, when ICE Futures Europe began providing trading in West Texas Intermediate crude-oil contracts.

Write to Siobhan Hughes at [email protected]

http://online.wsj.com/article/SB121055200238583887.html

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