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Opalesque Futures Intelligence

Regulators & Courts: Contract question, climate futures, fraud

Tuesday, June 16, 2009

CFTC Seeks Comments on Contract

The Commodity Futures Trading Commission wants to determine whether the Henry Financial LD1 Fixed Price contract traded on the Intercontinental Exchange performs a significant price discovery function.

Using a new power provided by the US Congress last year, the CFTC intends to subject previously exempt contracts to certain rules such as position limits, emergency authority and large trader reporting requirements, if they perform a significant price discovery role.

A notice about the Commission’s intent is to be published in the Federal Register. After that there will be a 30-day comment period.

Carbon Can be Largest Commodity Market

CFTC Commissioner Bart Chilton told the annual meeting of the Chicago Climate Exchange and Climate Futures Exchange that “Green CAT” markets—emissions cap-and-trade markets—are going to be good markets and good investments. Selected quotes from the June 11th talk:

A testament to that goodness is the diversity of membership here today—the diversity in this room. Folks representing entities from aerospace, agriculture and automotive; chemicals, and commercial interiors; electric and ethanol interests; financial, food and forest firms; manufacturing, mining, municipalities and other state and local governments; technology and transportation interests, and even healthcare and academia.

Also critical to making this market concept work are the offset providers and aggregators, liquidity providers, and market makers, who help make these markets function while also contributing to the goal of greenhouse gas reduction.

Just last Friday, CCFE established a new record for daily volume. Total open interest on the CCFE is up 143 percent in 2009. CCX also recently had its largest trading day in history. If we take a quick trip in the Wayback Machine to the origins of these markets in the 1990s, it is obvious that the global market for carbon emissions has grown tremendously. In 2002, the World Bank estimated the volume of carbon emissions traded globally at 32 million metric tons with a value of approximately $100 million. For 2008, these values were 4.8 billion metric tons, and a total dollar value of $126 billion. What does all that mean? It means that the market value of global carbon trades has experienced an average annual growth rate of about 329 percent since 2002!

Taking this a step further, we observe generally that in developed markets, futures trading is conservatively 10 times the size of the cash market for many commodities and can even be as great as 30 times that of the cash market for certain financial products. Even with the conservative assumption of 10 times the cash market, this would imply we are looking forward to a $2 trillion dollar futures market!

In terms of volume, a $2 trillion market would be the equivalent of anywhere from 60 to 180 million contracts. To give you an idea of the magnitude of this, in 2008, Light Sweet Crude Oil traded on NYMEX saw a volume of about 135 million contracts. Natural Gas experienced an annual volume of almost 39 million contracts, and all metals combined on NYMEX, about 53 million. So, we are talking about a really incredible potential for emission markets.

Make no mistake, these carbon markets can be the world’s largest commodity markets in a few short years.

Some think these Green CAT markets will be fraught will fraud, abuse or manipulation and we should simply put a tax on carbon emissions. By the way, that is one reason why the CFTC recently expanded an advisory committee, which I’m pleased to chair. The Energy and Environmental Markets Advisory Committee, or EEMAC, is seeking to do something all-too-often not done in government. We are trying to get ahead of the curve to ensure that we are ready for these new mandatory markets.

We read about regulatory reform in the newspapers. What I want to make clear is that we need it and need it now—especially as we look to Green CAT markets. As part of the Waxman-Markey legislation, there are important regulatory reforms that would be put in place at the CFTC—amendments to the Commodity Exchange Act to provide greater transparency of dark markets, that is regulation of certain over-the-counter trading that could have an impact on price discovery. The CFTC would place position limits to avoid undue speculation that could result in manipulation.

We all saw what happened last year with crude oil and gasoline prices. They went through the roof. Long passive investors flooded to these markets. I think they had an impact on raising the prices to $147 a barrel for crude oil. Unfortunately, we don’t have all the rules and regulations that we need in place to ensure that there is no excessive speculation in these markets.

Don’t get me wrong, we need speculators. Speculation shouldn’t be a four letter word. I understand that. I’m also not suggesting that speculators were the single cause of the large run-up. Certain fundamentals also played a role. But when consumers pay more for any commodity than they should, it is my job as a regulator to try and stop it. While some solid efforts have been made, nothing has been approved to give us new tools since last year. All of this as we are once again seeing oil and gas prices moving up fast.

Energy Investigator Becomes Top Regulatory Lawyer

CFTC Chairman Gary Gensler appointed Dan Berkovitz as general counsel. Mr. Berkovitz previously worked for the US Senate, where he led several investigations into energy markets, including the role of speculation in the trading of natural gas and crude oil contracts. He was counsel to the Senate Permanent Subcommittee on Investigations chaired by Senator Carl Levin. In 2008 he played a role in the passage of legislation to regulate electronic trading facilities for energy commodities.

Forex Ponzi Scheme Targeted Asians

SNC Asset Management and SNC Investments chief executive Peter Son and chief financial officer Jin K. Chung were charged with operating an $85 million foreign currency scam involving about 500 investors in the US, South Korea and Taiwan.

Korean-Americans in particular were solicited with the promise of 2% to 3% guaranteed monthly returns. SNC claimed to have a track record of 50% annual returns.

“This is yet another example of the insidious nature of fraudulent investment schemes that target affinity groups,” according to Stephen Obie, CFTC acting director of enforcement. “Based on personal relationships, people were lured into parting with their hard-earned money, only to learn, too late, that they were the victims of a massive forex fraud.”

The money raised was used to pay certain investors and for personal expenses that included paying the mortgage on a multi-million dollar house. Mr. Son faced criminal charges in federal court in Oakland, Calif., and both he and Mr. Chung face civil charges.



 
This article was published in Opalesque Futures Intelligence.
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