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Pressure on oil futures’ ‘London loophole’

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Pressure on oil futures’ ‘London loophole’

By Jeremy Grant in London

Published: July 10 2008 19:54 | Last updated: July 10 2008 19:54

Attempts by the US Congress to close a regulatory “gap” in the way the UK’s main energy futures market is overseen – dubbed “the London loophole” – is unlikely to have any effect on record crude oil prices, the US owners of London’s oil futures exchange said on Thursday.

Debate has been raging in Washington over whether speculation in the oil and oil futures markets could be a factor behind record oil prices. Next week, the Treasury select committee holds the first hearing in Britain into the issue.

Some US politicians say the UK oil futures markets could be more vulnerable to what they call “excessive speculation – or outright manipulation – because they are regulated by the Financial Services Authority (FSA), which is perceived in the US as having weaker surveillance and enforcement than US watchdogs.

Under pressure from Congress, the US futures watchdog, the Commodity Futures Trading Commission, has required ICE Futures Europe, the London-based platform where Brent and WTO oil futures are offered, to impose the same trader “position limits” as those that apply to US oil futures exchanges. The aim is to close the “London loophole”.

ICE has agreed to the move. However Charles Vice, chief operating officer of the InterContinental Exchange, the Atlanta-based owner of ICE Futures Europe, told a congressional hearing: “Though politically popular, closure of this loophole is unlikely to have any effect on crude oil prices.”

He pointed out that ICE’s London operations accounted for only 15 per cent of trading in the WTI contract, which is a US benchmark oil futures contract. The New York Mercantile Exchange accounted for the rest.

“Such a small and, in fact declining, market share hardly seems evidence of a meaningful loophole. Does anyone really believe that 15 per cent of any market can somehow cause prices on the dominant 85 per cent of the market to be far above where they would otherwise be?”

His comments came as the UK’s Treasury select committee announced the names of who would be testifying at next week’s “evidence session”, which will focus on “the key factors behind the rise in oil prices, including the role of speculative activity”.

Those giving evidence include three ICE Futures Europe executives – including Sir Bob Reid, its chairman – Alexander Justham, director of market supervision at the FSA, and Steven Fries, chief economist at Shell, the energy group.

In a sign that ICE is stepping up its campaign to lobby the US Congress, the exchange on Thursday unveiled an advertising campaign warning lawmakers against hasty legislation that was “likely to have other unwelcome consequences”.

Using the slogan: “If you make laws in a hurry, it’s bound to end in tears”, ICE cited the banning by Congress in the 1950s of trading in onion futures, which it said resulted in wild fluctuations in the price of onions as speculators were removed from the market.

 

In depth: Oil – Apr-29

Opec and US fuel figures at odds – Jun-26

Copyright The Financial Times Limited 2008

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