3-20-08 by dugan
Just as the oil bubble shows its first holes, the New York Times gets around to a real, meaty story on the dangers of unregulated commodity markets. It’s a story that could have made a difference in pushing Congress to do something before oil hit $90, much less $111. But reporter Diana Henriques explains the problem of poor regulation with typical NYT clarity:
The heart of commodities markets is the so-called cash market, a
“professionals only” setting where producers sell boatloads of iron
ore, tanker ships full of oil and silos full of wheat for immediate
Wrapped around that core are the commodities futures
markets. Here, hedgers and speculators trade various versions of a
derivative called a futures contract, which calls for the delivery of a
specific quantity of a commodity at a fixed price on a particular date.
[A]s the futures markets have grown, the ability of federal regulators
to police them for fraud and manipulation has been shrinking, as a
result of legislative loopholes and adverse court decisions. And
despite widespread agreement that these regulatory gaps are bad for
investors and consumers, they have not yet been repaired.
oldest of these is the so-called Enron loophole, an 11th-hour addition
to the Commodity Futures Modernization Act of 2000 that gave an
exemption to private energy-trading markets, like the one operated by
Enron before its scandalous collapse in 2001. Regulators later accused
Enron traders of using this exempt market to victimize a vast number of
utility customers by manipulating electricity prices in California.
to that loophole is a broader one for a category called exempt
commercial markets, envisioned in the 2000 law as innovative
professional markets for nonfarm commodities that did not need as much
scrutiny as public exchanges.
What lawmakers did not anticipate was that one of the exempt markets, the IntercontinentalExchange,
known as the ICE and based in Atlanta, would become a hub for trading
in a product that mirrors the natural gas futures contract trading on
the regulated New York Mercantile Exchange.
2006, traders at a hedge fund used the ICE’s look-alike contract as
part of what regulators later asserted was a scheme to manipulate
natural gas prices, again at great cost to users. The fund denied the
accusation, and civil litigation is pending.
That case persuaded
the commission that it needed more power to police these exempt
markets, at least when they help set commodity prices. But so far, it
has not received it, despite repeated requests to Congress.
attempt to close these loopholes is attached to the pending farm bill,
which is scheduled to emerge from a Congressional conference committee
next month. But this latest effort, too, faces market and industry
The courts have also curbed the commission’s reach.
In three cases since 2000, judges have interpreted federal law to
severely limit the commission’s ability to fight fraud involving both
over-the-counter markets and specious foreign currency contracts used
to victimize individual investors.