Fair Trade?

Feature Story

FON interviews Professor Michael Greenberger on the IntercontinentalExchange

IntercontinentalExchange® operates a global, electronic marketplace for trading both futures and over-the-counter energy contracts. ICE offers a range of contracts based on crude oil and refined products, natural gas, power and emissions. ICE conducts its futures markets through its regulated London-based subsidiary, ICE Futures, Europe’s leading energy exchange. ICE Futures offers liquid markets in the world’s leading oil benchmarks: Brent Crude futures and West Texas Intermediate Crude futures, as well as the leading heating oil futures contract by traded volume. ICE also introduced the concept of cleared OTC energy contracts.

There are estimates that up to 75 percent of all energy trades are now OTC. In theory, an OTC contract represents a bilateral trading agreement between two parties outside of the regular exchange process. The parties agree on mutually acceptable terms in a futures process that should help manage risks, and provide opportunities for speculators. However, there have been concerns that this process leads to increased price volatility, higher price peaks during these periods and the potential for fraud and manipulation due to reduced regulatory monitoring.

FON interviewed Michael Greenberger, a professor at the University of Maryland School of Law about some of these issues. He has developed and teaches a course at the law school entitled: ‘Futures, Options and Derivatives.” Greenberger is frequently asked to testify before Congress and state legislatures on questions pertaining to whether commodity spot prices are being manipulated through the futures and derivatives markets. He also speaks both in the media and at academic gatherings about issues pertaining to financial regulation, and has appeared on the ABC Evening News, The Jim Lehrer News Hour, and C-Span to discuss financial issues arising out of the Enron, WorldCom, Refco and Amaranth failures.

Previously, Professor Greenberger was a partner for over 20 years in the Washington, D.C. law firm of Shea & Gardner, where he served as lead counsel and argued cases before the United States Supreme Court, eight federal circuit courts of appeals, four state supreme courts, and various other federal and state trial courts.

In 1997, Professor Greenberger left private practice to become the director of the division of trading and markets at the Commodity Futures Trading Commission. In that capacity, he was responsible for supervising exchange traded futures and derivatives. He also served on the Steering Committee of the President’s Working Group on Financial Markets, and as a member of the International Organization of Securities Commissions’ Hedge Fund Task Force. In 1999, Professor Greenberger began service as Counselor to United States Attorney General Janet Reno, and then served through January, 2001, as the Justice Department’s Principal Deputy Associate Attorney General, in which capacity he reported to the Attorney General and the Associate Attorney General about the supervision of five of the Department’s six litigating divisions (civil, tax, civil rights, antitrust and environment.)

Professor Greenberger is a Phi Beta Kappa graduate of Lafayette College and the University of Pennsylvania Law School, where he served as Editor-in-Chief of the Law Review.

FON: Last August in Providence, R.I., in your address to the attendees of the NORA Visions Conference, you mentioned the roll of the Intercontinental Commodities Exchange, based in Atlanta, Ga., as it relates to energy. You noted that this energy trading exchange, regulated by off-shore parties, does not now have to report to our Commodity Futures Trading Commission, (CFTC). How would fuel oil pricing benefit from having our CFTC examine the ICE trades?

Greenberger: After enormous pressure was placed on the CFTC by Congress, especially by those representing the change of control in Congress from the Republicans to the Democrats, the CFTC has finally done what it always had a right to do: It is now getting large trader data reporting from ICE, which brings transparency to these trades and makes it harder to use that exchange to manipulate commodity prices. This new reporting requirement with regard to ICE has now led CFTC commissioners to say to Congress, especially Democratic Chairs of the relevant committees, the following: ‘Now that we get the relevant information from ICE, there is no need for legislation requiring reporting all of energy futures trading.” That is self evidently incorrect. The over-the-counter energy futures computerized trading facilities are still unregulated. Making it harder to manipulate on ICE just means that the entirety of the malpractices will drift to the OTC markets, which many economists believe have always offered a refuge for opaque energy commodity.

The OTC market is huge and it is still unregulated. OTC market operators like to say that their markets are bilateral, thereby trying to give the impression to Congress and the lay public that OTC energy futures contracts are individually negotiated. That is simply not true. The multilateral computerized OTC energy derivatives trading facilities are only bilateral in the sense that when offers to buy and sell are made to a wide audience of traders and when one trader pushes the ‘enter” button on the computer to purchase or sell standardized contract, at that point in time, and only at that point in time is the transaction bilateral. Of course, the same could be said when a trade is made in a pit, i.e., someone catches the attention of the market maker to execute a contract when the market maker is making trade available to the entire pit.

FON: You have also referred to the 14 Families or 14 largest banking firms having an impact on ICE and its energy trades. How does that impact affect fuel oil pricing?

Greenberger: The 14 families, i.e., the world’s largest banks, supplemented by the world’s large energy trading hedge funds, dominate OTC trading and either are shareholders in, or substantially patronize, the ICE. Over-the-counter energy derivatives trading up until 2002 was dominated by companies affiliated with the energy markets, e.g. Enron. When Wall Street saw how Enron Online was used to have broad impact on the energy markets, especially in the Western Electricity manipulations in 2000-2001, they decided that they wanted to get into these markets in a big way. With the demise of Enron-like traders, the 14 families and hedge funds entered these markets in full force. They play a major role today, not only in the derivatives side of the business, but in the spot market as well.

FON: It seems that the new congress is holding hearings and investigating many current Bush administration practices from the inspector generals office, to the FBI’s abridging civil liberties under the patriot act, to the firing of United States Attorneys. Do you see the Senate or House Finance or Trade committees looking at the trading done at ICE?

Greenberger: The new Congress has taken a keen interest in the potential use of derivatives to manipulate the price of commodities, thereby causing the price of, e. g., natural and propane gas, heating oil, and gasoline to become unhinged from fundamental supply/demand economic principles. Unfortunately, the economic decoupling has led to prices skyrocketing. Congress worries that consumers (both the average citizen and industrial users of commodities) are unnecessarily paying prices that bear no relationship to costs. This concern drove the CFTC finally to collect data from ICE. It may also lead Congress to insist that similar data be collected from the OTC markets. I have been surprised at the substantial interest on the part of the Democratic leadership in both houses in the functioning of these markets.

FON: Recently it was in the news that ICE may be buying or merging with the Chicago Board of Trade. Will this have an impact on ICE having to disclose its energy trading activities should this merger occur?

Greenberger: The story that underlies the attempt by ICE to buy the Chicago Board of Trade is that this represents an effort by the big banks and hedge funds to get control of the regulated futures market. They already control the OTC market, but the traditional regulated exchanges are putting up a terrific competitive fight to offer products that will rival the OTC markets. The big banks and hedge funds have been conducting at least a ten year battle to gain influence over the Chicago exchanges, whose infrastructure is dominated not by the banks and hedge funds, but by the ‘old Chicago guard” who have nurtured the futures markets into the financial force they are today. Wall Street and London do not like the fact that this is the one important financial market they do not dominate. The ICE effort to beat out the Chicago Merc for control of the CBOT is really an attempt by New York and London to use ICE to gain control of the regulated market. Also, while ICE is promising to keep the CBOT infrastructure in Chicago, my belief is that, if ICE buys CBOT, that infrastructure will move to New York or even London, after the CBOT ‘body cools,” i.e. after governmental approvals are obtained.