ROME Institute - October 22:Energy Risk – Trends in Energy Derivatives Markets Raise Questions About CFTC’s Oversight

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October 22:Energy Risk – Trends in Energy Derivatives Markets Raise Questions About CFTC’s Oversight
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by RiskCenter Staff on Oct 22, 2007 - 12:00 AM read 403 times
Source: http://www.garp.com/resources/newsfeed.asp?Category=6&MyF...

On the basis of its authority under the Commodity Exchange Act, CFTC focuses its oversight primarily on the operations of traditional futures exchanges, such as the New York Mercantile Exchange, where energy futures are traded. Energy derivatives are also traded on other markets, namely, exempt commercial and over-the-counter markets, that are exempt from CFTC oversight. On the basis of its authority under the Commodity Exchange Act (CEA), CFTC focuses its oversight primarily on the operations of traditional futures exchanges, such as the New York Mercantile Exchange, Inc. (NYMEX), where energy futures are traded. Energy derivatives are also traded on other markets, namely, exempt commercial and over-the-counter (OTC) markets, that are exempt from CFTC oversight. Both types of markets have seen their volumes climb in recent years. Exempt commercial markets are electronic trading facilities where certain commodities, such as energy, are traded between large, sophisticated participants. OTC markets allow eligible parties to enter into contracts directly, without using an exchange. While the exempt commercial and OTC markets are subject to the CEA’s antimanipulation and antifraud provisions and CFTC enforcement of those provisions, some market observers question whether CFTC needs broader authority to oversee these markets. CFTC is currently examining the effects of trading in the regulated and exempt energy markets on price discovery and the scope of its authority over these markets—an issue that will warrant further examination as part of the CFTC reauthorization process. Moreover, because of changes and innovations in the market, the methods used to categorize these data can distort the information reported to the public, which may not be completely accurate or relevant. CFTC conducts daily surveillance of trading on NYMEX that is designed to detect and deter fraudulent or abusive trading practices involving energy futures contracts. To detect abusive practices, such as potential manipulation, CFTC uses various information sources and relies heavily on trading activity data for large market participants. Using this information, CFTC staff may pursue alleged abuse or manipulation. However, because the agency does not maintain complete records of all such allegations, this lack of information makes it difficult to determine the usefulness and extent of these activities. In addition, CFTC’s performance measures for enforcement do not fully reflect the program’s goals and purposes, which could be addressed by developing additional outcome-based performance measures that more fully reflect progress in meeting the program’s overall goals. To view the full report, click here. Source: RiskCenter.com

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