CFTC Makes Its Case for Energy Futures and OTC Reform

By Lisa Valentine

In testimony to the House Committee on Energy and Commerce, Subcommittee on Energy and the Environment, Gary Gensler, Chairman of the Commodity Futures Trading Commission, reiterated his position that the CFTC is the most logical regulator of energy futures. Although he didn’t say it directly, we assume Gensler is positioning the CFTC to take over regulation of carbon emissions trading markets.

The CFTC already oversees crude oil, heating oil, natural gas, gasoline, and electricity futures. This market is large—315 million energy futures and options contracts were traded on CFTC-regulated exchanges. The OTC market is even larger: the dollar amount is 20 times the size of the U.S. economy. In Gensler’s example, a $50 tank of gas could have as much as $1,000 in derivatives behind it.

In addition to plugging the CFTC, Gensler continued his drumbeat of regulatory reform of the OTC derivatives market. His suggested reforms encompasses four areas:

• All OTC transactions should be cleared by central counterparties, regardless of the type of entity on either side of the trade.

• All swap dealers and major swap participants, including previously exempt non-bank dealers, should have to meet stronger capital requirements.

• Swap dealers should be required to post and collect margin for individual transactions to reduce the risk that either counterparty to a trade will fail to deliver its part of the deal. At the same time, end users should continue to be able to enter into individualized credit arrangements with financial institutions with an option of posting noncash collateral.

• The CFTC and SEC should be able to mandate business conduct standards such as the timely and accurate confirmation, processing, netting, documentation and valuation of all transactions.