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CFTC in talks to plug ‘London loophole’

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CFTC in talks to plug ‘London loophole’

By Jeremy Grant in London

Published: June 10 2008 23:40 | Last updated: June 10 2008 23:40

The US energy markets watchdog on Tuesday held talks with its UK counterpart about the possibility of introducing limits on traders’ positions in London’s oil markets, underlining in a sign of persistent US congressional concern that London is being exploited by “speculators” contributing to record oil prices.

Carl Levin, a top Democratic senator, has called this “the London loophole”.

The development could raise the spectre of US rules being extended beyond its borders, unnerving the City of London.

The Commodity Futures Trading Commission, the US commodity and futures watchdog, believes speculators are not to blame for current oil prices.

Only weeks ago it unveiled initiatives with the UK’s Financial Services Authority to expand the amount and quality of information received from energy traders in London on their trading activities.

A version of the West Texas Intermediate crude oil contract is traded in London on ICE Futures Europe, owned by Atlanta-based InterContinental Exchange, and regulated by the FSA. It is similar to the WTI contract traded on the New York Mercantile Exchange, regulated by the CFTC.

On Tuesday, the CFTC announced the creation of an “inter-agency task force”, including the Federal Reserve, Treasury, Securities and Exchange Commission, Department of Energy and Agriculture Department to “study the role of speculators and index traders in the commodity markets”.

The CFTC was also on Tuesday holding the first meeting of a recently-formed “energy markets advisory committee”. It would “focus on the issue of transparency in the energy markets”, including the role of index trading and energy trading on foreign exchanges.

However, the moves do not address a key difference in the way the US and UK oversee energy traders.

The CFTC requires US exchanges to put in place limits on the size of positions taken by traders “to reduce the potential threat of market manipulation”.

The FSA has no such rule, meaning there are no position limits in place for traders on ICE in London.

Jacqueline Mesa, director of the CFTC’s office of international affairs, said talks with the FSA had involved the possibility that ICE Futures Europe, where the London WTI contract is traded, could voluntarily impose position limits.

No decision had been reached either with the FSA or ICE, which has been involved in the talks. “We are in talks to see if there is a possibility and need to go further [than the recent initiatives with the FSA],” Ms Mesa told the Financial Times. “The FSA have been extremely co-operative.”

The dilemma for the CFTC is how to respond to Congressional pressure in the US to address the way US benchmark oil contracts are traded and regulated in London, without laying itself open to criticism that it is attempting to impose US-style regulation abroad.

In a video interview with the Financial Times John Damgard, president of the US Futures Industry Association, warned against such a move, saying the CFTC was under “intense pressure” from Congress. US politicians “looking for somebody to blame” for high energy prices could result in retaliation from foreign countries, he said.

Asked how the CFTC envisaged the introduction of position limits in London, Ms Mesa said: “We would be in favour of ICE recognising the current environment and putting on speculative limits on the WTI contract,” she said at a conference organised by the Washington, DC-based FIA and Futures and Options Association, its European counterpart.

The FSA said: “We work in partnership with them on a range of initiatives but we can’t comment on whether we met with them on that particular issue.”

Jeff Sprecher, chief executive of ICE, said: “There’s a recognition that you can’t put US law on the rest of the world but nonetheless people in the US want to know there isn’t some sort of loophole.”

He declined to say what steps ICE would be making, adding he did not think there was “a loophole” in London’s markets.

In London ICE already reviews traders’ positions – under so-called accountability limits – to ascertain whether traders have positions that are too large relative to the overall market. It also has 20 compliance and market supervision staff that monitor all trades.

The FIA, addressing the CFTC’s energy markets advisory committee meeting in Washington, said that while it would support any CFTC efforts to strengthen its market surveillance, it would “not support any proposal or legislation that could handicap the [CFTC’s] market surveillance ability by pushing trading overseas or walling off foreign markets from US market participants”.

“We are confident that if trading by US entities on foreign markets endangers the price integrity of US markets, the [CFTC] has all the statutory power it needs to take appropriate action,” the FIA said.

EDITOR’S CHOICE

In depth: Oil – Apr-29

Analysis: Businesses and consumers feel shock of record oil prices – May-23

Copyright The Financial Times Limited 2008

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