CFTC Releases New Details on Proposed Oil and Commodity Trading Regulations

Posted by Jackson Stone on April 27, 2011 at 3:13 pm

An oil rig is hit by a storm in the North Sea. US regulators today unveiled new rules to help control big traders on world commodity markets. (image: roadsofstone.com)

As crude and heating oil prices trend higher, US regulators have unveiled new tools in the fight against volatile commodity market speculation, Reuters reported Wednesday.

The Commodity Futures Trading Commission (CFTC) is charged with creating new rules to reign in the effect of speculation on the price of oil and other commodities. Part of its job is expanded supervision of the highly complicated $600 trillion “swaps” markets. Today’s announcements have direct implications for home heating oil customers who prepay for winter fuel deliveries.

The CFTC and Securities and Exchange Commission have just released definitions spelling out which types of trades will constitute ‘swaps’. Swap transactions will be subject to new regulations aimed at limiting risk and boosting transparency, Bloomberg reported Wednesday. Under the new definitions, swaps will include a range of currency transactions and commodity options. But exemptions will apply to certain consumer and commercial transactions, including prepay contracts to purchase home heating oil.

This is good news for heating oil customers and dealers, as technically a prepay heating oil contract is a speculative bet on the fuel’s future price. Not having these transactions defined as swaps means home heating oil purchases avoid onerous regulatory hurdles and red tape.

Prepay home heating oil deliveries will be exempt from new rules designed to regulate "swap" transactions. (image: msnbc.msn.com)

CFTC chairman Gary Gensler said the new rules had taken longer than expected. “[But] It will provide the public greater certainty as to jurisdictional lines without creating gaps in the regulatory oversight.”

In a bid to prevent price volatility, the CFTC is also considering implementing position limits on major traders who buy and sell commodity futures. But the new regulations have been delayed amid huge opposition from the financial sector. Hopefully the CFTC can now make progress with further regulatory work as mandated under the Dodd-Frank financial reform law to help make oil prices more predictable.

Another proposed change is increasing regulatory oversight over mutual funds, which make risky speculative bets on oil and other commodities. The Wall Street Journal reported Wednesday that CFTC officials were concerned about a spike in commodity-heavy mutual funds using offshore subsidiaries to skirt domestic regulations. There are fears volatile commodity markets could expose investors to massive losses. A proposed CFTC rule would preclude mutual funds from using offshore subsidiaries to invest in commodities and require investment firms trading in commodities to register with the CFTC, even if they are already regulated by the SEC.

“Mutual funds would face a host of rules, including greater disclosure about fees and operations, as well as restrictions on marketing and trading,” the Journal article states.

Just as with the proposed position limits, the mutual fund industry, which holds $12.1 trillion in assets, is fighting the new regulations.