Commodity Futures Trading Commission 

Office of External Affairs

Three Lafayette Centre 

 1155 21st Street, NW 

Washington, DC 20581 

 202.418.5080

Remarks 

Remarks of General Counsel Terry Arbit Before the Energy 

Markets Advisory Committee 

June 10, 2008 

Good afternoon, and thank you for the opportunity to appear here today. With the 

recent dramatic increases in crude oil futures prices, on May 29 the Commission 

announced a series of energy market initiatives to improve oversight of the energy 

futures markets. I have been asked to briefly identify these important Commission 

initiatives. 

The first set of measures will provide for enhanced cross-border surveillance 

information sharing for crude oil trading through an agreement that the Commission has 

reached with the United Kingdom’s Financial Services Authority (FSA) and the ICE 

Futures Europe exchange. Before describing this agreement, though, let me first 

provide some legal and historical background. Section 4(a) of the Commodity 

Exchange Act (Act) generally requires that all futures trading be done on designated 

contract markets. But it also contains an exception for futures contracts listed for 

trading on a board of trade that is “located outside the United States,” so that U.S. 

persons under appropriate circumstances can trade these futures contracts. In Section 

4(b) of the Act, Congress has provided that the Commission may not adopt rules or 

regulations that govern any rule, contract term or action of a foreign board of trade. 

During the past two decades, several foreign boards of trade have sought permission to 

place computer terminals in this country to permit direct electronic access to the foreign 

exchange by U.S. persons. The legal question raised by such requests is whether a 

particular foreign board of trade with trading terminals in this country is “located outside 

the United States” so that it need not become a designated contract market? This has 

proved to be quite a vexing question, and has prompted extensive debate over the 

years. The concern has been voiced that a definition of an exchange’s “location” that is 

cast too broadly could obstruct the development of global futures trading by subjecting 

exchanges to duplicative and inconsistent regulatory requirements.

Having received voluminous public comments and held prior public forums on this topic, 

the Commission has permitted foreign boards of trade to place direct access trading 
screens in the U.S. pursuant to the issuance of staff “no-action” letters, but only: 1) if

Commission staff has determined that the foreign board of trade is a bona fide 

exchange and that the exchange and its regulator abide by comparable regulatory 

objectives; and 2) subject to a number of significant conditions, such as informationsharing. This process is consistent with the Commission’s historical leadership in 

developing international regulatory networks, increasing international cooperation, and 

promoting responsible innovation and fair competition in the face of increasing 

globalization – all the while maintaining vigilant oversight of the U.S. futures markets. 

It also proved to be consistent with the intent of Congress as subsequently expressed in 

Section 126 of the Commodity Futures Modernization Act of 2000 (CFMA).∗

 There, 

Congress found, among other things, that “regulatory impediments to the operation of 

global business interests can compromise the competitiveness of United States 

businesses.” The CFMA also included the Sense of the Congress that the Commission 

should encourage, among other things: 1) the facilitation of cross-border transactions 

through the removal or lessening of any unnecessary legal or practical obstacles; 2) the 

enhancement of international supervisory cooperation; 3) the strengthening of 

international cooperation for customer and market protection; and 

4) improvements in the quality and timeliness of international information sharing. 

Two years ago, in 2006, ICE Futures Europe listed three cash-settled energy futures 

contracts that were linked to the settlement price of competing futures contracts traded 

on the New York Mercantile Exchange (NYMEX); of the three, the one that has 

developed the most significant liquidity is the West Texas Intermediate (WTI) crude oil 

contract. Even though the ICE Futures Europe WTI contract is not physically settled, 

the Commission was concerned about the contract’s possible effects on U.S. markets. 

Specifically, the Commission and its surveillance staff were concerned that we would 

not be able to observe the entirety of a trader’s position in both markets, which would 

increase the possibility of trading abuses. This concern was heightened when ICE 

Futures Europe allowed U.S. persons to directly trade this product through terminals in 

this country pursuant to a previously-granted staff no-action letter. 

Accordingly, the Commission undertook a transparent process, including a public 

hearing, to evaluate its approach to foreign boards of trade that seek to place direct 

access terminals in the U.S. As a result, a unanimous Commission published a 

Statement of Policy in November 2006*

 which affirmed its existing process with respect 

to such foreign boards of trade, but significantly, also added certain enhancements to 

ensure, among other things, proper cross-border information sharing by regulatory 

authorities necessary for the Commission to carry out its regulatory responsibilities. 

Pursuant to the Statement of Policy, the Commission shortly thereafter entered into a 

Memorandum of Understanding with the FSA which established a framework for the 

sharing of information that each regulator needs to detect abusive or manipulative 

trading practices in these related futures contracts. Since 2006, the FSA has provided 

the Commission with weekly trader information, and daily information in the final trading 

 

∗

 Appendix E of P.L. No. 106-554, 114 Stat. 2763 (2000). *

 71 Fed. Reg. 64443 (November 2, 2006). 

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week, to facilitate oversight of trading in the linked WTI contracts traded on NYMEX and 

ICE Futures Europe. 

As envisioned by the Memorandum of Understanding, the Commission and the 

FSA continually review the oversight framework, with a view to making changes where 

regulatory oversight of these markets can be enhanced. Two weeks ago, the 

Commission and the FSA agreed upon expanded information-sharing for surveillance of

the WTI futures contracts that trade on both NYMEX and ICE Futures Europe. This 

agreement includes: 1) immediate implementation of expanded information-sharing to 

provide the Commission with daily large trader positions in the ICE Futures Europe WTI 

crude oil contract; 2) extending trader information sharing to provide crude oil large 

trader position data for all contract months in the WTI contract, not just the nearby 

months; 3) a commitment to enhance trader information to permit more detailed 

identification of market end users; 4) a commitment to provide improved data formatting 

so trading information can be seamlessly integrated into the Commission’s surveillance 

system; and 5) in addition to the established position management program that the 

FSA currently requires, ICE Futures Europe will notify the Commission when traders 

exceed position accountability levels, as established by U.S. exchanges, for WTI crude 

oil contracts. 

But the Commission’s recent energy market initiatives do not address foreign boards of 

trade alone, as they also include three steps to increase transparency of trading in U.S. 

energy markets. First, to improve transparency for energy market index trading activity, 

the Commission will use its existing Special Call authorities to immediately begin 

requiring traders in the energy markets to provide the agency with monthly reports of 

their index trading. Second, the Commission will develop a proposal to routinely require 

more detailed information from index traders and swap dealers in the futures markets, 

and review whether classification of these types of traders can be improved for 

regulatory and reporting purposes. Third, the Commission will review the trading 

practices for index traders in the futures markets to ensure that this type of trading 

activity is not adversely impacting the price discovery process, and to determine 

whether different practices should be employed.*

It is not surprising that the creativity and innovation in the futures markets over the past 

decade, especially when coupled with the drive toward globalization, have raised new 

regulatory challenges such as linked contracts across the oceans, and increased index 

trading activity. As reflected in these important energy market initiatives, the 

Commission is committed to obtaining the information, and providing the transparency, 

that is necessary to ensure effective oversight that will keep the energy futures markets 

responsive to fundamental economic forces of supply and demand, and free from fraud, 

manipulation, and other trading abuses. 

This concludes my remarks. Thank you very much. 

 

*

 Finally, the Commission’s recent initiatives also included the disclosure that in December 2007, the agency’s 

Division of Enforcement launched a nationwide crude oil investigation into practices surrounding the purchase, 

transportation, storage, and trading of crude oil and related derivatives contracts. The Commission took the 

extraordinary step of disclosing this investigation because of today’s unprecedented market conditions. 

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