United States Government Accountability Office

GAO Testimony 

Before the Committee on Energy and 

Commerce, House of Representatives

FUTURES MARKETS

Approach for Examining 

Oversight of Energy Futures

Statement of Orice M. Williams, Director 

Financial Markets and Community Investment 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Thursday, May 4, 2006

 

GAO-06-742T 
Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss the design of our ongoing study of 

the Commodity Futures Trading Commission’s (CFTC) oversight of 

futures trading in energy commodities. As you are aware, record high 

crude oil and natural gas prices have generated significant concerns by the 

public and members of Congress that the high and relatively volatile prices 

may be the result of factors other than market forces. Several members of 

the House and the Senate have expressed concerns over the upward 

trending prices and factors that may be causing the perceived increases in

volatility of several energy commodities, including crude oil, gasoline, 

natural gas, and heating oil. As a result, we initiated this study under the 

authority of the Comptroller General. My remarks today focus on our 

ongoing study of (1) changes in energy futures markets and volatility since 

2000 and (2) CFTC surveillance and enforcement activities in the oversight 

of energy futures trading.

This ongoing work will leverage results of our previous reviews of the 

financial and physical energy markets, and trading data from the CFTC 

and the New York Mercantile Exchange (NYMEX).1

 It will also be based on 

discussions and reviews of available information from officials and staff 

from several federal agencies, refiners, vertically integrated oil companies, 

associations representing end users of natural gas, investment banks, and 

hedge funds, as well as market analysts and academics. We will also be 

reviewing relevant CFTC enforcement cases and CFTC Inspector General

reports and incorporating their results in our work. 

In summary: 

Our ongoing study explores how energy futures markets and market 

participants with different investment objectives affect futures and 

commodity prices in a complex and rapidly evolving marketplace. Some of 

these participants include producers and refiners, who use futures 

 1

See U.S. GAO, Energy Markets: Factors Contributing to Higher Gasoline Prices, 

GAO-06-412T (Washington, D.C.: February 1, 2006); U.S. GAO, Motor Fuels: Understanding 

the Factors That Influence the Retail Price of Gasoline, GAO-05-525SP (Washington, D.C.: 

May 2005). 

Page 1 GAO-06-742T 
contracts2

 as a key tool to manage risk they face due to changes in prices. 

Since 2000, there has also been an increase in the number of new 

participants, such as hedge funds and investment banks. Our ongoing 

study will evaluate what market studies and other market data indicate as 

to whether energy futures prices have become more volatile. Specifically, 

we are looking at different ways of measuring volatility and reviewing 

recent studies on volatility by NYMEX, CFTC, Consumer Federation of 

America, and others. We are also using NYMEX trading data to document 

trends in volatility. 

Our ongoing study also explores how CFTC’s market surveillance program 

is used to monitor and detect market abuses in the trading of energy 

futures. We are also determining what fraudulent, manipulative, and 

abusive practices have been identified by CFTC and others in the trading 

of energy futures and how CFTC is positioned to protect market users 

from these practices. CFTC’s surveillance program is one tool used to 

oversee the integrity of the futures market. CFTC uses its large trader 

reporting system and other sources such as relevant self-regulatory 

organizations (SRO) and other federal agencies to monitor for attempted 

manipulation in the futures markets. In cases of suspected fraud, 

manipulation or abuse, CFTC will undertake enforcement actions. As part 

of this study, we are looking at CFTC’s authority and its resources to 

protect market users. 

Futures contracts are traded on regulated exchanges and are settled daily 

based on their current value in the marketplace. The key players in futures 

markets are hedgers, speculators, and brokers. Hedgers use futures to 

shift the risk of a price change onto other market participants such as 

speculators. Speculators may assume the price risk that hedgers try to 

avoid in the hope of making a profit. Although speculators usually have no

commercial interest in the commodities they trade, the desire to make a 

profit motivates them to collect market information regarding the supply 

Background 

 2

Futures are one type of derivatives contract. The market value of a derivatives contract is

derived from a reference rate, index, or the value of an underlying asset, including stocks, 

bonds, commodities, interest rates, foreign currency exchange rates, and indexes that

reflect the collective value of underlying financial products. The regulation of derivatives 

generally varies depending on whether they are traded on exchanges (exchange-traded) or 

traded over-the-counter (OTC) and on the nature of the underlying asset, reference rate, or

index. Futures obligate the holder to buy or sell a specific amount or value of an underlying 

asset, reference rate, or index at a specified price on a specified future date and are often 

traded on exchanges. 

Page 2 GAO-06-742T 
and demand of commodities to anticipate the potential impact of this 

information on prices. Finally, there are brokers, who make the trade. 

Oversight of the futures market is the responsibility of CFTC, which was 

created in 1974 as an independent agency responsible for encouraging 

competitiveness and efficiency in futures markets, ensuring their integrity, 

protecting market participants against manipulation, abusive trading 

practices, and fraud, and ensuring the financial integrity of the clearing 

process.3

 Through its oversight, especially its surveillance and 

enforcement programs, CFTC is responsible for enabling the futures 

markets to provide a means for determining the price of commodities—

price discovery—and for offsetting price risk faced by market participants. 

Oversight is also provided by NYMEX, an SRO, that is itself regulated by 

the CFTC. 

In the U.S. futures regulatory structure, SROs—the futures exchanges and 

the National Futures Association—provide industry oversight. Futures 

SROs, such as NYMEX, are responsible for establishing and enforcing 

rules governing member conduct and trading; providing for the prevention

of market manipulation, including monitoring trading activity; ensuring 

that futures industry professionals meet qualifications; and examining 

members for financial strength and other regulatory purposes. Their 

operations are funded by the futures industry through transaction fees and 

other charges. CFTC oversees the SROs to ensure that each has an 

effective self-regulatory program. 

Since 2000, there has been an increase in the number of market 

participants in the energy futures markets, such as hedge funds and 

investment banks, raising questions about the impact they have had on the 

market overall and volatility in particular. Futures contracts are also seen 

as a key tool that producers and refiners use to manage the risks they face 

due to changes in prices. Our work is designed to describe how energy 

futures markets and market participants with different investment 

objectives influence energy prices. To address this, we will provide an 

overview of the energy futures markets and the role played by various 

market participants. Further, we will discuss how the markets function to 

Changes in Energy 

Futures Markets and 

Volatility Since 2000 

 3

According to CFTC, clearing is the procedure through which the clearing organization 

becomes the buyer to each seller of a futures contract or other derivative, and the seller to 

each buyer for clearing members. 

Page 3 GAO-06-742T 
provide price discovery, liquidity, and risk management. We will also 

address markets other than NYMEX, such as the over-the-counter (OTC) 

market, and how these markets differ from NYMEX. Finally, we will 

explore NYMEX’s role in providing price discovery for energy 

commodities and futures prices and their link to spot or cash prices. 

As part of our work, we are also reviewing what market studies by CFTC, 

NYMEX and others have found to affect volatility. Specifically, we are 

determining how volatility is defined and identifying factors that impact 

volatility. We will also address whether available evidence suggests that 

new market participants are a factor causing volatility. In answering this 

question we will analyze both CFTC and NYMEX trading data and studies 

that have addressed the causes of volatility in the futures markets. 

CFTC provides oversight through surveillance and enforcement of energy 

futures trading and our ongoing work involves assessing how CFTC’s 

market surveillance program is used to monitor and detect market abuses 

in the trading of energy futures. To address these issues we are evaluating

both CFTC and NYMEX surveillance programs, with a focus on how CFTC

uses its large trader reporting system data as part of its surveillance. This

work will describe how CFTC commissioners are kept informed of 

surveillance and other market concerns. We will also describe how both 

CFTC and NYMEX surveillance programs provide oversight and how 

NYMEX monitors positions against specific limits to detect attempted 

abuses. This work will also document efforts of other agencies, including 

the Department of Justice, the Federal Trade Commission, and the Federal 

Energy Regulatory Commission in providing oversight to energy market 

activities. 

CFTC Provides 

Oversight Through 

Surveillance and 

Enforcement 

Activities of Energy 

Futures Trading 

We are also focusing on what fraudulent, manipulative, and abusive 

practices have been identified by CFTC and others in the trading of energy 

futures. We will provide information on the enforcement programs of 

CFTC and NYMEX, including the results of recent enforcement actions 

taken by CFTC and NYMEX and the settlements reached involving these 

enforcement actions. We are also addressing the extent to which CFTC 

uses internal and external sources in developing enforcement cases. This 

includes discussing NYMEX’s enforcement activities and how NYMEX 

coordinates these activities with CFTC. 

Finally, we are exploring how CFTC is positioned to protect market users 

and the public from actual and potential abuses in the trading of energy 

futures. Areas we are focusing on include changes in CFTC’s regulatory 

Page 4 GAO-06-742T 
approach since the Commodity Futures Modernization Act of 2000 and 

staff resources available to accomplish its mission including the allocation

of staff. Our current timeframe from completing this work is September 

2006. 

Mr. Chairman, this completes my prepared statement. I would be pleased

to answer any questions that you or Members of the Committee may have. 

For further information about this testimony, please contact Orice 

Williams on (202) 512-8678 or williamso@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this statement. Individuals making key contributions to this 

testimony include John Wanska (Assistant Director), Kevin Averyt, and 

John Forrester. 

Page 5 GAO-06-742T 

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Acknowledgements 

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