With Enron Loophole Closed; Senate Looks to International Markets

By James Hamilton, J.D., LL.M.

With the Enron Loophole closed by recent passage of the Farm Bill, key senators now want to ensure adequate market protections for the trading of U.S. energy future contracts on international markets. In a letter to CFTC Acting Chair Walter Lukken, Senators Diane Feinstein and Olympia Snowe expressed concern that, when the Enron Loophole is finally closed, there will be a lack of comparable protections in place for trading of U.S. energy futures on international markets. Allowing the trading of US commodities in a foreign jurisdiction presents the potential for a significant loophole in oversight that must be closed, they emphasized.

The senators noted that the CFTC has allowed US energy traders to trade energy commodity futures contracts on European exchanges, even for United States based energy products. The CFTC allows this because it has recognized the UK regulations enforced by the Financial Services Authority as comparable to US regulation, and because it receives data from the FSA on trading activity in U.S. based contracts.

The senators are concerned that the CFTC has declared FSA regulation comparable even though they do not reflect some of the core principles of the Commodity Exchange Act. Specifically, exchanges in London are not required to monitor daily trading to prevent manipulation, publish daily trading information, or impose and enforce position limits that prevent excessive speculation.

The senators are aware that the CFTC and FSA signed a Memorandum of Understanding (MOU) in 2006 establishing a framework for the agencies to share information that the respective authorities need to detect potential abusive or manipulative trading practices involving trading in related contracts on U.K. and U.S. derivatives exchanges. They now request an update on the nature of the oversight currently preventing manipulation in US energy contracts traded abroad. Specifically, they want to know if the CFTC has asked the FSA to impose speculation limits when U.S. commodities are traded under the FSA’s jurisdiction.

They also want to know which system is more likely to prevent manipulation if the CFTC imposes speculation limits and the FSA does not. More broadly, the senators request the CFTC to explain what steps it is taking to monitor US energy commodities traded abroad. For example, how many times has the CFTC referred a suspected manipulation case to the FSA.