Financial Markets Reform: Taking a Step Forward

A measure of restraint. That’s what industry trade groups hope will arise from financial reform legislation currently working its way through Congress. The industry is not opposed to speculation, per se, said representatives of trade groups such as the Petroleum Marketers Association of America (PMAA) and the New England Fuel Institute (NEFI).

‘We want to emphasize that we are for speculation,” Rob Underwood, manager of congressional relations for PMAA said. ‘We need speculation in the marketplace. We just feel that it’s a little overheated at times.” Underwood added, ‘Our folks are having a hard time understanding that supply is at record high levels and yet prices continue to fluctuate.”

On Dec. 11, the House of Representatives approved legislation called the Wall Street Reform and Consumer Protection Act of 2009. The Senate is working on similar legislation.

‘We’re very pleased with what the House bill accomplished,” PMAA’s Underwood said. The bill, H.R. 4173, was approved by a vote of 223-202. It includes a requirement for transparency and regulation of off-exchange trading, known as over-the-counter (OTC) swaps and derivatives trading. To establish regulatory oversight, the bill calls for expanding the authority of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) over off-exchange market activity, which includes OTC and foreign exchanges. 

Two amendments resulted in important improvements to the House bill, according to the Dec. 11 edition of NEFI Energy Online News, the institute’s e-newsletter. The first amendment, offered by Rep. Collin Peterson (D-Minn.), preserves the authority of regulators to define what constitutes legitimate risk management needs in gaining exemptions from the bill; and the other amendment, offered by Rep. Stephen F. Lynch (D-Mass.), limits the percentage of an exchange that can be owned by financial institutions. Lynch said that his amendment would keep financial institutions from “controlling the police station,” according to the report in the newsletter.


Since their concerns on the issue tend to mirror each other, PMAA and NEFI are working closely together to try to accomplish their goals for market reform.


‘We’re focusing our efforts on derivatives reform and the futures market issue of excessive oil speculation,” PMAA’s Underwood said. ‘Ultimately our goal consists of lowering the volatility in the marketplace.”

‘Our concern is specifically commodity derivatives swaps,” said Jim Collura, vice president of government affairs for NEFI. ‘The majority of those trades are done on over-the-counter markets, which are largely unregulated. They don’t occur on the regulated transparent exchanges like the NYMEX.” Most energy trading is done on the over-the-counter markets, Collura said: ‘We want to see that trading done out in the open rather than in the dark.”


Over-the-counter derivatives have been unregulated since 2000, Collura said. The Obama administration wants to require that those transactions be done on regulated exchanges, Collura said. ‘We support that.”


A big question that remains largely unanswered is: How much money is being invested in oil?

A widely publicized estimate puts the over-the-counter derivatives marketplace at more than $590 trillion. How much of that is being invested in oil isn’t altogether clear, but however much it is, Underwood said, ‘We feel that it’s having an impact on prices, and in order to fix this we need to have aggregate position limits. That’s what we’re lobbying for: aggregate position limits on oil futures.” The limits would apply to ‘non-commercial speculators” investing in oil.

The stance of the trade groups is that the position limits should apply to the number of contracts that a non-commercial investor, such as a Wall Street bank, could have in oil, gasoline, heating oil, and so on. The number should be set by the CFTC in consultation with an advisory group made up of hedgers and end users, including petroleum marketers ‘ ‘Folks that use the futures market to know how much they’re going to be paying in the future,” Underwood said.

‘If we have mandatory clearing, with some exemptions, for these over-the-counter derivatives that trade oil ‘ that would bring stability to the marketplace,” Underwood said.

The CFTC is drafting proposed rules that would extend hard limits to energy trading on the regulated market, Collura said, and ‘this new bill moving through Congress will allow [the CFTC] to do the same for the dark markets.” Indeed, applying position limits to the unregulated markets requires an act of Congress, Collura pointed out.


 As for what will happen to the reform effort in the Senate, the industry has generally positive expectations. Jurisdiction lies with the Agriculture Committee, chaired by Sen. Blanche Lincoln (D-Ark.)


Senator Lincoln has stated more than once that she wants the Senate to pass legislation in the first few months of 2010, Underwood said.

‘I think it’ll happen before the end of the first quarter,” said Sean Cota, president of Cota & Cota, a fuel dealer in Vermont, who is also vice chairman of PMAA and has served for years on the association’s task force on futures markets.

‘What will actually be included in the legislation remains to be seen,” Cota said. ‘I always like to think I’ve got youth, skill and idealism on my side, but I’ve been corrected by many people in my life who are older. They say age, treachery and wealth trump that. So we’ll see.”

Putting aside the humor, Cota took the opportunity to say that market reform must be accomplished.

‘If we don’t get control over this, we as a heating oil industry will be at a permanent disadvantage to natural gas,” Cota said, ‘because natural gas, by virtue of how it’s regulated in the U.S., will not be as volatile as our commodity.”

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