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By Jim Hamilton

Senate Bill Would Close Foreign Energy Commodites Trading Loophole

A bill designed to ensure that energy commodities traded on foreign exchanges using trading terminals located within the United States are subject to the same speculative trading limits and reporting requirements as energy commodities traded on U.S. exchanges has been introduced by Senators Carl Levin and Dianne Feinstein. The Oil Trading Transparency Act (S 2995) would close a loophole allowing speculative energy trades by US traders on the London Exchange by requiring that foreign boards of trade operating US trading terminals comply with US trading limits and reporting requirements. This loophole was left open when Congress recently closed the Enron loophole. The bill closes the loophole for energy futures traded on international markets by ensuring that the trading of all US energy futures, on foreign or domestic markets, is done with transparency and an audit trail.

The major tenet of the legislation is that any exchange operating under a foreign board of trade exemption may only do so if the CFTC finds that the non-U.S. regulation is equivalent to that of U.S. regulation. The Levin-Feinstein bill directs the CFTC to ensure that any foreign exchange operating a trading terminal in the United States for the trading of a U.S. energy commodity meets two regulatory requirements that already apply to U.S. exchanges: (1) imposition of speculative trading limits to prevent price manipulation and excessive speculation, and (2) the mandatory daily publication of trading information from the exchange to ensure market transparency. The bill would also require the CFTC to obtain information from the foreign exchange to enable it to determine how much trading in U.S. energy commodities is due to speculation. The CFTC issues a weekly publication with speculation data for domestic markets.

One example highlighting the need for the bill involves the Intercontinental Exchange (ICE), which operates a key energy futures exchange in London, which exchange has set up computer terminals in the United States for U.S. traders. The trades are not subject to U.S. trading regulations. S 2995 would address the foreign board of trade exemption under which ICE is operating outside of CFTC jurisdiction.

Full post as published by Jim Hamilton's World of Securities Regulation on June 06, 2008 (boomark / email).