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A handful of US senators are convinced that London is a hotbed of speculation in oil markets…

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ICE restrictions cold comfort for FSA

By Jeremy Grant

Published: June 20 2008 03:00 | Last updated: June 20 2008 03:00

Stuart Fraser, head of policy at the City of London Corporation, says he is “not overly incensed” by moves unveiled this week by US federal regulators to change the way London’s oil market is regulated.

But to judge by the language he has been using to defend London’s reputation, it is hard to see why, having used phrases such as “American imperialism”.

A handful of US senators are convinced that London is a hotbed of speculation in oil markets and that traders might be using London’s less tightly regulated markets to speculate in a way that is contributing to record oil prices.

That pressure has forced the Commodity Futures Trading Commission, the US watchdog, to ask the US-based InterContinental Exchange to put greater limits on the positions traders can take in the benchmark West Texas Intermediate crude oil contract on its London-based subsidiary, ICE Futures Europe.

The move, to which ICE has agreed, brings ICE in line with position limit rules in place for trading a similar contract on the New York Mercantile Exchange.

The move has provoked protest from the City of London Corporation, which sees the long arm of US regulation extending across the Atlantic – over the head of the Financial Services Authority.

Mr Fraser says his language was a “deliberately provocative statement” to get people’s attention. “It was to say ‘we are watching things, and if a bunch of senators want to get rude about the FSA, that’s fine, but don’t interfere in our market’.”

In practical terms, users of London’s markets are unlikely to lose much sleep over the change.

Hugo Jenkins, managing director of the Futures and Options Association, says: “I’m not convinced myself that these changes are going to have a significant detrimental impact on volume levels going through ICE.”

Some in London argue that the changes would drive trading away to even less regulated markets, such as Dubai.

That is unlikely, since the Dubai Mercantile Exchange – part-owned by Nymex – also plans to apply the same position limits “if and when we list a WTI contract”, according to Jim Newsome, Nymex president.

But the political dimensions of the ruckus threaten to damage more than a year of efforts by US regulators to build better relations with their foreign counterparts.

The Securities and Exchange Commission, the CFTC’s sister regulator for securities, is pushing a system of “mutual recognition” with other like-minded regulators to make crossborder enforcement more seamless.

And while the FSA has a good working relationship with the CFTC, US politicians have an easy target as long as the UK watchdog approaches oil market oversight differently from the CFTC.

It pursues alleged fraud and manipulation in US energy markets through civil enforcement actions. Its biggest case came last year against BP, the UK energy group.

The FSA has a staff of 50 in “market monitoring”. It has two full-time supervisors to “ensure the regulatory requirements imposed on ICE Futures Europe are satisfied”.

Yet it operates a different system of “credible deterrence” of wrongdoing by engaging in a dialogue with market participants. Since the FSA’s creation in 1997, it has brought no civil or criminal cases in energy markets.

Michael Greenberger, professor of law at the University of Maryland, says: “No matter how you slice and dice it, [the CFTC] has brought many more enforcement actions.”

ICE is likely to bring about the change to its oversight through a “rule change”. The FSA must now decide whether to put the change out for market consultation – or to consider whether it has grounds to veto the change, under the “Balls clause”, introduced by the UK parliament to ring-fence the City from unwanted US regulation.

The FSA said: “We are waiting for ICE to tell us how the rule will look. This [the veto] isn’t top of the list of the things we are looking at; there are other options available to us.”

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