Feds Pursue Energy Trade Regulation

By Published On: September 18, 2009

In its recent plans to centralize and increase oversight of derivative energy trading, the Commodity Futures Trading Commission began workshop-like meetings for information gathering September 16. Regulators’ idea is to rein in possible manipulation from a cap-and-trade market in greenhouse gases. “The top seven energy contracts are worth over $700 billion in the futures market,” noted CFTC chair Gary Gensler of the magnitude of energy trading in the economy. “We are working with Congress to ensure that the ‘trade’ part of cap-and-trade legislation is effectively regulated,” he added in addressing the CFTC’s Energy & Environmental Markets Advisory Committee. Financial traders are against the plan to consolidate trades into one market regulated by the CFTC. They say it will increase the cost of energy. The new trading regime would call for more collateral to be posted for trades, said Skip Horvath, president, Natural Gas Supply Association. “Don’t force consumers to [underwrite] energy prices,” he said. Traders, however, may “engage in disruptive or manipulative activity,” said Stephen Sherrod, CFTC action director, market surveillance. A process that came up a couple times in the hearing spotlighted what is called “banging the close.” That is when traders wait until the last minute of closing markets to transfer positions and then at close they take the settlement price. The move by the commission is causing ripples in Washington’s and New York’s financial bureaucracy. The Federal Reserve is reportedly skeptical of the CFTC’s centralization plans. The New York Mercantile Exchange’s parent company issued a white paper September 16 maintaining it should retain the power of regulation and setting trading position limits on the amount of trading “position.” Meanwhile, the IntercontinentalExchange supports CFTC’s energy trade regulation. In related news, crossing the Beltway with California grid operations is the California Independent System Operator’s plan for “virtual” or “convergence” bidding. The CFTC is expected to treat this trading option as something it should regulate as a derivative. California Public Utilities Commission counsel Elizabeth Dorman urged a slowdown September 11 to the CAISO board in approaching this particular trade. Dorman said it would “leave ratepayers holding the bag.” Convergence bidding allows sales and buys in the grid operator’s day-ahead market--with the caveat that bidders have to buy or sell back in the real time market. The idea is to reduce the bets that the real time markets could offer better prices once the energy is scheduled in the day-ahead market, moving more electricity into the more-predictable day-ahead market. The Federal Energy Regulatory Commission required California’s grid operator to implement convergence bidding as a part of its approval of CAISO’s massive market redesign.

Share this story

Not a member yet?

Subscribe Now