WASHINGTON — In a bid to curb financial speculation that's driven global energy prices sky-high in recent years, on Monday the Commodity Futures Trading Commission expanded its regulatory reach over trade in a vital contract for natural gas.
The agency used new authority from Congress to extend U.S. regulations and reporting requirements for the natural gas contract that's traded in London on the IntercontinentalExchange.
The ICE has been a prime focus because critics allege that financial firms, many of them big Wall Street players or global energy companies, have driven up global energy prices by ramping up the number of energy contracts they hold abroad, where U.S. regulators have limited information.
CFTC research has shown that contracts on the ICE and the New York Mercantile Exchange have come to be regarded as a single market, with traders looking to both exchanges before determining whether to invest. Yet the CFTC has limited real-time information about what's happening on the ICE, leaving it open to speculative price manipulation.
"To protect the American public, it is essential that we bring transparency and accountability to the marketplace," CFTC Chairman Gary Gensler said in a statement. "Bringing this natural gas contract under the CFTC's regulatory authority is a critical step toward ensuring a fair and orderly marketplace."
In a report April 16 on last year's spike in natural gas prices, the Federal Energy Regulatory Commission concluded that investment flows drove up the price that consumers paid to heat their homes with natural gas. The contract cited Monday by the CFTC, called the Henry Financial LD1, is a principal contract for natural gas trading.
Critics think so-called dark markets such as ICE fostered excessive speculation that aided last year's climb to record oil prices and volatile natural gas prices. Big Wall Street financial companies such as Goldman Sachs and Morgan Stanley had no limit on how many contracts they held in New York or London.
Michael Masters, a hedge-fund manager who's testified repeatedly before Congress about how excessive speculation has pushed up energy prices, thinks that this huge wave of speculative investment money became a self-fulfilling prophecy — driving up energy prices at the expense of ordinary consumers.
Last year's farm bill allowed U.S. regulators to impose tougher reporting requirements on overseas energy contracts if they're considered to be "significant" in determining broader consumer prices. Once that designation has been made, the overseas market — called an Exempt Commercial Market — is instructed to limit how many contracts a single buyer can hold.
Although Monday's action didn't affect oil contracts, Gensler signaled that's coming, noting that he'd continue to use the new authority.
"I think that when we look at that particular (natural gas) contract, in our opinion there is a very little doubt that any of the oil contracts that are traded would also fall under the same kind of rulemaking. It's just a question of when the CFTC gets around to examining them," Masters said.
Monday's action came just before the start of three unusual public hearings by the CFTC that will examine whether more limits are needed on how many contracts can be held by individual companies and traded in the broader market.
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Farm bill gave new powers to CFTC
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