CFTC reviews regulatory imbalances, June 29, 2006
A Commodity Futures Trading Commission hearing Tuesday on the broad issue of U.S. regulation of foreign exchanges rapidly turned its focus to a more local concern: the WTI crude contract.
At the heart of the discussion were the gains that the WTI contract on the ICE Futures exchange has made at the expense of the New York Mercantile Exchange's benchmark light, sweet crude contract, which is generally viewed as a WTI contract.
It was Michael Gorham, former director of oversight at the CFTC, who presented the issue in stark terms. Referring to the approximately 30% market share of WTI exchange-traded open interest snagged by ICE Futures, just since its launch in February, Gorham said NYMEX "is at risk of losing WTI."
Gorham, who is now director of the Illinois Institute of Technology Center for Financial Markets, said financial markets are in "an incredibly intense period in the US," adding "we have screens vs. floors."
NYMEX's broader cooperation agreement to allow 24-hour trading of its contracts on the Globex platform of the Chicago Mercantile Exchange is only one of the issues, Gorham said. There is a "regulatory imbalance" between NYMEX and ICE, he said.
"CFTC does some things that nobody else does," according to Gorham, citing position limits and the weekly requirement that traders report their positions to the commission. "Traders don't like this either, and if they have a chance [to trade elsewhere, without those rules] you know where they are going to go, all other things being equal."
Richard Berliand, representing the Futures Industry Association, and discussing the battle for market share between NYMEX and ICE and the regulatory background involved, said: "In Europe, there aren't contracts that duplicate each other that have reached this level of political sensitivity."
On the sidelines, Gorham's successor at the CFTC, Richard Shiltz, said the hearing goes "hand-in-hand" with revamping the Commitment of Traders Report.
ICE Futures and its parent, the Atlanta-based Intercontinental Exchange, are not regulated by the CFTC. They are governed under a so-called "no action" letter issued several years ago -- ironically, when NYMEX President James Newsome was chairman of the CFTC -- that freed ICE from CFTC oversight, based in part on its lack of a physical facility like the NYMEX floor. Newsome, in his comments to the CFTC, did not ask specifically for the regulation of ICE or the elimination of such rules as position limits. Rather, he referred to the "level playing field" on several occasions, and said the CFTC should take a "balanced approach versus a bright line," the latter having been referred to during the hearing as representing firm regulations. "All we're saying is that if it's good for one, it's got to be good for everyone," he said.Newsome made a similar comment before the hearing, speaking on the sidelines. He said NYMEX is not necessarily seeking position limits for ICE Futures; the exchange would just as readily prefer its CFTC-mandated position limits and large-trader reporting be eliminated to put it in a more competitive position against ICE.
Without that sort of regulation, Newsome told the CFTC, exchanges operating in cyberspace can simply choose the more preferable regulatory regime. The NYMEX, if it were to operate with no floor, could choose to be regulated by the UK's Financial Services Administration rather than the CFTC.
Non-US exchanges are governed primarily by the conditions laid down in "no-action" letters issued by CFTC staff. Representatives at the hearing from non-US exchanges spoke in favor of the no-action letters as a "flexible" tool for governing such entities.
But CFTC Commissioner Michael Dunn ripped into them in his opening remarks and later in the hearing. As a product of the CFTC staff, rather than the commission, "they can be withdrawn at any time," Dunn said. But more importantly, since they are issued just to one entity and do not then provide a framework for others, it is possible that the single exchange could gain an unfair advantage because it would have governing rules that others do not. "Anybody who gets a 30-day leg up is going to capture the market," he said.
--Linda Rafield, firstname.lastname@example.org --John Kingston, email@example.com
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