US regulator CFTC calls for curbs on oil trading in London
A rift has opened between regulators in Washington and London after the Americans called for restrictions on oil trading in the City.
Congress created the Commodity Futures Trading Commission (CFTC) in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency's mandate has been renewed and expanded several times since then, most recently by the Commodity Futures Modernization Act of 2000.
It is understood that the Financial Services Authority (FSA) is resisting calls by the US Commodity Futures Trading Commission (CFTC) to introduce daily price limits on some oil futures contracts.
The Americans also want to cap the amount of particular oil contracts that a trader can hold. The moves would limit the ability of a trading firm or individual trader to corner the market in one type of futures oil contract.
The price cap measure, which exists in American energy markets, has been devised to stem sharp rises in the price of a particular commodity. However, London regulators believe that the market should determine the price of an asset, rather than it being limited by a daily price cap.
Both regulators want to identify traders who try to manipulate the price of oil, which reached a record $139 a barrel in New York last week. It is understood that the CFTC has urged the FSA to impose limits on the positions that traders can take on the West Texas crude oil futures contract, bringing British traders in line with their American counterparts.
The benchmark light crude oil contract is traded on the ICE Futures Europe exchange. The New York Mercantile Exchange, which the CFTC regulates, has about a 75 per cent share of the West Texas oil contract market. ICE Futures Europe, regulated by the FSA, has 25 per cent.
The regulatory difference between the two, and the trading opportunities it opens up, is known as the London loop. American regulators are concerned that the difference in regulatory regimes allows traders to exploit the less regulated regime in London and distort the price.
However, there is much scepticism about the degree to which financial speculators have driven up the price of oil. Henry Paulson, the US Treasury Secretary, and Alistair Darling, the Chancellor, have indicated separately that they believe the price has been driven by supply and demand.
You have to love the US position on oil, no opening of Alaska or off the continental shelf. But it is ok for oil companies to drill overseas in environmentally sensitive areas like the Congo with little to no oversight. Another bright move by the environmentalists, what ever happened to that one world view?
Jeff in Miami Beach, Miami Beach, USA/FL
And while you're at it, hows about a curb on excessive executive wage rises. How about curbing the off-shoring of earnings for tax efficiencies sake. Hows about a curb on unwarranted executive bonuses paid on an annual and weak performance target such that the bonus is virtually guaranteed.
Joe, Geelong, VIC Australia
These guys are the "New Enron" traders. Of course the market is being manipulated and no rational person can justify or explain the explosion from $60 a barrel to $137a barrel.