Natural Gas Market Transparency
APGA Issue Brief
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Background: The Commodity Futures Trading Commission (CFTC) is the federal agency responsible for monitoring the trading of commodities in order to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures contracts and options.  While the CFTC fully oversees trading on U.S. commodity exchanges, they currently receive little information to monitor trading in the over-the-counter (OTC) natural gas derivatives market.  This is troubling because the OTC market is inextricably linked to the regulated futures market and directly impacts the price discovery function of the market.  This lack of oversight ability has eroded consumer confidence in markets for certain commodities like natural gas.  Restoring confidence in the natural gas market’s ability to set price requires a greater level of transparency to assure consumers that market prices are a result of fundamental supply and demand forces and are not the result of manipulation or other abusive market conduct.  .

The Issue: The CFTC is required by Congress to monitor the trading of natural gas contracts cleared through the U.S. New York Mercantile Exchange (NYMEX).  By contrast the OTC markets, which include centralized markets for trading natural gas contracts, are largely exempt from transparency.  The CFTC receives very limited information regarding the tens of thousands of trades that are transacted in the OTC markets in natural gas contracts every day.  Recently, the CFTC began receiving voluntarily information submitted from one of the larger OTC markets the Intercontinental Commodity Exchange (ICE). 

Over the past several years the CFTC has assessed over $300 million in penalties for market abuses associated with trading in the OTC markets.  Certainly, this demonstrates that some individuals or interests have taken, or attempted to take, advantage of the natural gas markets at the expense of consumers.  Therefore, it is important that the government be able to monitor large derivatives positions on both the regulated exchange and the OTC markets to detect and prevent any squeezes or manipulation.  Without comprehensive large trader position reporting, the government is currently handicapped in its ability to detect, much less to deter, market misconduct.  Additional transparency will provide the CFTC with the tools necessary to police its beat and this in turn will help limit opportunities for manipulations. 

APGA Action: LAPGA believes that Congress should extend current monitoring practices by passing legislation that would authorize the CFTC to collect information concerning all positions held by the largest traders in the natural gas derivatives market; not just positions cleared through the NYMEX Exchange or traded on the Intercontinental Commodity Exchange. APGA commends Congress for including language in the Farm Bill signed into law in April 2008 that would significantly increase natural gas market transparency. Specifically, the legislation clarifies CFTC authority to enforce the regulations applicable to trading of “significant price discovery contracts.” This enforcement tool will enable the CFTC to see a greater portion of the market and catch potential market abuses before they occur. The bill also increases penalties for market violations. APGA supports further Congressional efforts to increase market transparency measures, as well as provide increased funding for the CFTC to more effectively monitor natural gas commodity trading markets.

10/28/07