US Trading, Oil Indus Worry FTC Rule Would Chill Oil Mkts
Wednesday November 12nd, 2008 / 16h15
By Ian Talley Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- The U.S. derivatives industry and oil companies are concerned that a new regulation aimed at petroleum market manipulation drafted by the Federal Trade Commission may chill energy commodities trading, forcing it overseas. Under new powers given to the FTC by Congress, the agency has drafted a rule that would penalize market players up to $1 million a day for recklessness or fraud in the wholesale petroleum markets. While watchdog groups such as the Consumer Federation of America, or CFA, applaud the proposal, the draft regulationhas raised the ire of many in the trading industry because of the lower bar for prosecution. They say the agency's concept of what constitutes fraud is too vague, and instead of the need to to prove intent, the rule would allow the censure of traders for carelessness - something that is open to interpretation. The proposed regulation also has inflamed the jurisdictional battle the Commodity Futures Trading Commission is waging on several fronts, including with the Federal Energy Regulatory Commission and the Securities Exchange Commission. As oil prices surged to nearly $150 a barrel in July, many lawmakers, believing that existing oversight was too weak and laxly regulated, put pressure on the FTC to promulgate the anti-manipulation regulation. Lawmakers are concerned that excessive speculation - and possible manipulation - in the oil markets helped drive prices to record levels, and they are seeking ways to enforce tougher market oversight. Congress is considering legislation designed to rein in speculative trading deemed to be distorting the market. Although prices have since fallen more than 50% and are now hovering around $60 a barrel, the FTC said it intends to reach a decision on any rule changes by the end of the year. Members of groups such as the American Petroleum Institute, or API, the International Swaps and Derivatives Association and the Futures Industry Association are concerned the proposed regulationis too broad and too strict. "It's a recipe for disaster," said De'Ana Dow, managing director for government relations at the Chicago Mercantile Exchange Group (CME), at an FTC workshop on the proposed regulation last week. "It will create uncertainty and interfere with the efficient functioning of the markets," said Robert Long, a partner at the law firm, Covington & Burling, which represents the API. Specifically, these groups are concerned that the proposed regulation could give the FTC power to prosecute usinga lighter burden of proof for both the spot market and the futures market, the CFTC's domain. They would rather the CFTC have exclusive jurisdiction over the futures market and want the CFTC to define fraudulent - manipulative - activity with the intention to affect prices. But CFA head of research, Mark Cooper, says the proposed rule would provide the type of protection for consumers that has been lacking in the market. "Let us be clear, the existing agencies have failed to protect the public from abuse," Cooper told the FTC workshop. "Concerns about jurisdictional overlap shouldn't dissuade you from issuing an aggressive consumer protection rule," he said. Many in the industry say the existing law - the Commodity Exchange Act - is effective. "But they're not looking out the window and seeing what's happening in the financial markets," said Cooper. Many experts say a failure of regulatory oversight in the derivatives-linked markets - specifically those for credit default swaps - precipitated the current global economic meltdown. However, Long at Covington & Burling told the FTC: "The costs vastly outweigh the benefits, because you would just be creating this specter that all sorts of ordinary market behavior could be challenged as a result of this rule." Representing the International Swaps and Derivatives Association, Athena Velie of the law firm, McDermott, Will & Emery, asked the commission to take out the recklessness standard. "Ultimately, it will chill beneficial activity in (the petroleum wholesale) markets," she said. Allan Hallock, a lawyer for the refining company Flint Hills Resources, said "there's a great deal of fear that the determination of recklessness will be made at a later point in time ... based on harm that has occurred," and not on specifically defined actions. FTC Chairman William Kovacic said in an interview with Dow Jones Newswires that the commission is "acutely sensitive" to the possibilities of jurisdictional overlap, and would "coordinate as best we possibly can our own activities with those of other regulators." He said his agency had been in extensive dialogue with the CFTC, FERC and the SEC on the proposed the rule. Kovacic said if a rule was adopted, it "would be put in place in such a way that would not upset the existing framework of enforcement or cause unnecessary confusion." Asked if the risk of trading migration was a concern in creating the rule, Kovacic said: "We are completely aware of all possible strengths and weaknesses of this approach." Craig Pirrong, a professor at the University of Houston and specialist in derivatives trading, said that the current political momentum toward more stringent regulation indicated the FTC could move ahead with only a slight modification of the proposed regulation. The CFA's Cooper said even if the agency does move forward with a less stringent rule, President-elect Barack Obama - a Democrat pushing stronger oversight of the financial and commodity markets - could overrule the new regulation. As part of the turf war the CFTC is fighting, the agency filed a brief with a District of Columbia federal appeals court against the FERC's right to oversee the futures market. -By Ian Talley, Dow Jones Newswires; 202-862-9285; ian.talley@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=gyqrrrOUgvITV9NeLavKMw%3D%3D. You can use this link on the day this article is published and the following day.
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