People outside the regulatory community tend to fog over when regulatory issues are discussed in vague, general terms, but the current dispute between ICE Futures and the Nymex shines a bright light on the devil lurking in the details.
Mike Gorham, who spent two years as the CFTC’s first director of the division of market oversight, resigning two years ago to become director of the Illinois Institute
of Technology’s Center for Financial Markets, recalls his first encounter with the exchange at the center of today’s dispute: “On my very first day on the job, (someone) representing ICE came in and said we have to tell you about the material changes that take place as proper under the no-action letter.”
“‘One change is that our owners are now in Atlanta. Secondly, we are going to become a cyber-exchange.’ It hit me for the first time that this is really both intellectually interesting, but really messy.”
And the messiness only increased this February, when London-based ICE Futures launched its West Texas Intermediate (WTI) crude oil contract, which is cash-settled based on the Nymex’s daily settlement prices. Indeed, the hearing centered around Nymex’s contention that the CFTC’s reporting requirements give Nymex an unfair competitive regulatory burden.
For our purposes, the history of ICE Futures, formerly known as the International Petroleum Exchange (IPE) and now a subsidiary of Atlanta-based Intercontinental Exchange, is written in the no-action letters it received from the CFTC. In November 1999, the CFTC issued a no-action letter to the IPE, allowing it to let U.S.-based members place trades directly via IPE’s new electronic trade-matching platform. In July 2002, IPE got permission to offer U.K. natural gas under the same rules. In early 2003, the IPE received permission to migrate early morning trading of Brent futures and gas oil futures to the ICE platform. Days later, the exchange asked to extend the trading hours of those contracts to 2 a.m. London time arguing not only that making such an extended electronic trading day available to U.S. traders would not attract business from the United States, but that the IPE’s corporate governance, market supervision and regulatory functions would remain the same as described in their previous letter.
The CFTC granted the no-action letter with two conditions: that the IPE request permission before making other contracts available to U.S.-based traders via the electronic system, and that the IPE request permission before extending the trading hours of the Brent and/or gas oil futures contracts available electronically in the United States. Later, the CFTC granted the exchange an amendment to allow the electronic trading of all of the exchange’s products all day, which enabled it to launch its WTI contract in February.
Nymex’s Jim Newsome says the CFTC’s position reporting requirements place an unfair regulatory burden on his exchange when going head-to-head with ICE but Rick Shilts, the CFTC’s current director of market oversight, disagrees.
“As you know, the Commission relies on its large trader reporting system, which generates position data on traders that meet a certain reporting level in that contract,” he says. “We found the ICE Futures also has similar position information between the two regulators. Our large trader data is supplemented with the information we get from the FSA that is generated from ICE Futures. In doing surveillance of the Nymex markets, we are able to accumulate and look at the positions that are on Nymex, and look at the positions on ICE Futures.”