U.S. commodities regulator Gary Gensler said Thursday that his
agency's oversight powers will now literally touch down on foreign
soil, another sign of the aggressive push to tighten financial
market regulation.
The U.S. Commodity Futures Trading Commission's latest tweak to
a three-year-old agreement with U.K. regulators will let both
agencies conduct on-site exchange visits and give the CFTC direct
access to audit trail data to help survey all foreign futures
contracts that settle against U.S. prices.
The move aims to close what may remain of the so-called "London
loophole," amid divergent policy moves by the CFTC and the U.K.
Financial Services Authority, or FSA. The agencies on Thursday
trumpeted an extension of their existing cooperation to include the
sharing of advanced notices of exchange rule changes and
disciplinary notices.
The FSA, which regulates ICE Futures Europe, signaled in a
recent August meeting with U.S. officials it does not see a need to
impose speculative position limits on its side of the Atlantic.
However, that represents a sticking point for concerned U.S.
authorities who believe cross-border and cross-market regulation
are both essential to tackling the problem.
The new transatlantic deal will allow the London-based ICE
Futures Europe unit of IntercontinentalExchange Inc. (ICE) to
continue offering traders access to its electronic terminals in the
U.S.
The ICE unit, one of the largest oil trading venues, has also
been targeted by U.S. lawmakers wary of the FSA acting as the first
line of defense in oversight, rather than the CFTC.
The moves comes as the U.S. government's revamps U.S. financial
regulation in the wake of the global economic crisis. Part of that
effort has entailed meetings with foreign regulators to ensure that
any new regulations installed in the U.S. are comparable abroad so
that big Wall Street firms don't migrate to lesser regulated
countries.
It also represents Gensler's latest attempts to crack down on
excessive speculation, which some critics blame for causing oil
prices to skyrocket last year. The agency is planning to impose
sweeping new trading limits for speculators on crude oil and other
energy products.
Despite those differences, however, the CFTC's ability to nail
down an even stricter agreement with ICE Futures Europe and the FSA
shows a willingness on the part of foreign regulators to work with
the U.S. - even if it means at times they must share some turf.
The four ICE derivatives contracts being targeted by the CFTC
are cash-settled against U.S. futures contracts such as West Texas
Intermediate crude oil, which are traded on the New York Mercantile
Exchange.
That has raised concerns among U.S. lawmakers and some others
who feared American traders could skirt position limits on NYMEX's
crude oil futures contracts by trading look-alike contracts on
ICE's London exchange. Those critics dubbed the problem "The London
Loophole."
For years, the CFTC has allowed foreign exchanges to offer U.S.
traders access to their electronic terminals through "no-action"
letters, which are issued by staff to firms who seek exemptions
from regulations without the fear of enforcement action.
Up until about last year, the letters were granted in many cases
by CFTC officials without even first paying a visit to the foreign
exchanges requesting them.
ICE Futures Europe has been among the many exchanges to operate
under the terms of a no-action letter over the years, but it came
under fire in 2006 after announcing it planned to offer the U.S.
look-alike contracts.
The CFTC, FSA and ICE struck an agreement at the time that would
allow the CFTC to receive large trader data on those contracts each
week, but the issue came up again last year when oil prices rose to
$145 a barrel.
The CFTC, then under Republican leadership, strengthened the
agreement to require ICE to agree to impose the same equivalent
trading limits that NYMEX imposes on its look-alike contracts.
Still, lawmakers at the time, including Sen. Maria Cantwell,
D-Wash., found the agreement unacceptable because it left oversight
of the contracts largely to European regulators. Cantwell has been
asking Gensler ever since he was installed at the CFTC to revoke
ICE's no-action letter.
"This is definitely a reaction to the table-pounding [lawmakers]
have done in regards to the London loophole," said Craig Pirrong,
director of the Global Energy Management Institute at the
University of Houston.
This newest arrangement now gives the CFTC and the FSA each a
more hands-on regulatory approach.
Sen. Cantwell, in an interview with Dow Jones Thursday, reacted
cautiously, saying it's clear that "Gensler is trying to build a
stronger regulatory house" at the CFTC.
"There are some aspects of this that are good," she said, citing
the position limits and other regulatory requirements that are
equivalent on NYMEX. "But I think we still have to see that the
structure that he is proposing really does produce results," she
added, noting that NYMEX still has both self-regulation and CFTC
oversight.
Aside from the few contracts offered by ICE, no other exchange
in the world with a CFTC no-action letter offers U.S.-linked
contracts.
If any arise in the future, however, the CFTC made an internal
policy decision in January stating that future look-alike contracts
will be subject to the same regulations as those imposed on ICE
Futures Europe.
As pressure continues to build on Capitol Hill for the CFTC to
tighten oversight of derivatives markets, Pirrong said further
conflicts between U.S. and U.K. financial authorities may be
unavoidable.
"At this stage, the things that the CFTC was asking for, the FSA
felt were reasonable," he said. "But I can see it coming to a
point, because of political pressures, where the FSA will say
no."
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com
(Lananh Nguyen in London contributed to this article)