Commodity Futures Trading Commission: Trends in Energy Derivatives Markets Raise Questions about CFTC's Oversight
Published: 2007-10-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Prices for four energy commodities--crude oil, heating oil, unleaded gasoline, and natural gas--have risen substantially since 2002. Some observers believe that higher energy prices are the result of changes in supply and demand. Others believe that increased futures trading activity has also contributed to higher prices. This report, conducted under the Comptroller General of the United States' authority, examines (1) trends and patterns in the physical and energy derivatives markets, (2) the scope of the Commodity Futures Trading Commission's (CFTC) regulatory authority over these markets, and (3) the effectiveness of CFTC's monitoring and detection of market abuses and enforcement. For this work, GAO analyzed futures and large trader data and interviewed market participants, experts, and officials at six federal agencies.
section_title: What GAO Found
paragraphs: Rising energy prices have been attributed to a variety of factors, among them recent trends (2002-2006) in the physical and futures markets. These trends include (1) factors in the physical markets, such as tight supply, rising demand, and a lack of spare production capacity; (2) higher than average, but declining, volatility (a measure of the degree to which prices fluctuate over time) in energy futures prices for crude oil, heating oil, and unleaded gasoline; and (3) growth in several key areas, including the number of noncommercial participants in the futures markets (including hedge funds), the volume of energy futures contracts traded, and the volume of energy derivatives traded outside of traditional futures exchanges. Because these changes took place concurrently, the effect of any individual trend or factor is unclear. On the basis of its authority under the Commodity Exchange Act (CEA), CFTC focuses its oversight primarily on the operations of traditional futures exchanges, such as the New York Mercantile Exchange, Inc. (NYMEX), where energy futures are traded. Energy derivatives are also traded on other markets, namely, exempt commercial and over-the-counter (OTC) markets, that are exempt from CFTC oversight. Both types of markets have seen their volumes climb in recent years. Exempt commercial markets are electronic trading facilities where certain commodities, such as energy, are traded between large, sophisticated participants. OTC markets allow eligible parties to enter into contracts directly, without using an exchange. While the exempt commercial and OTC markets are subject to the CEA's antimanipulation and antifraud provisions and CFTC enforcement of those provisions, some market observers question whether CFTC needs broader authority to oversee these markets. CFTC is currently examining the effects of trading in the regulated and exempt energy markets on price discovery and the scope of its authority over these markets--an issue that will warrant further examination as part of the CFTC reauthorization process. Moreover, because of changes and innovations in the market, the methods used to categorize these data can distort the information reported to the public, which may not be completely accurate or relevant. CFTC conducts daily surveillance of trading on NYMEX that is designed to detect and deter fraudulent or abusive trading practices involving energy futures contracts. To detect abusive practices, such as potential manipulation, CFTC uses various information sources and relies heavily on trading activity data for large market participants. Using this information, CFTC staff may pursue alleged abuse or manipulation. However, because the agency does not maintain complete records of all such allegations, this lack of information makes it difficult to determine the usefulness and extent of these activities. In addition, CFTC's performance measures for enforcement do not fully reflect the program's goals and purposes, which could be addressed by developing additional outcome-based performance measures that more fully reflect progress in meeting the program's overall goals.

section_title: Letter
paragraphs: The price of energy commodities—crude oil, unleaded gasoline, heating  oil, and natural gas—increased significantly from 2002 to 2006, negatively  affecting consumers and the U.S. economy. While increased energy prices  generally are attributed to normal market forces of supply and demand,  some observers have questioned whether trading activity in energy futures  contracts and other types of energy derivatives placed upward pressure on  prices during this period. A futures contract is an agreement to purchase  or sell a commodity for delivery in the future. Like other types of  derivatives, its price is based on the value of an underlying commodity,  such as natural gas or oil. While futures prices are determined on the basis  of prices in the market where physical goods and commodities are sold  (physical market), buyers and sellers of natural gas, crude oil, gasoline,  and other energy products are influenced by the futures prices of these  commodities when determining their prices. Trading in futures contracts  has grown significantly since 2001, in part because of trading by new  market participants, such as hedge funds, and increased investment in  commodity index funds.
The surge in energy prices and the growth in the volume of futures  contracts and other derivatives have renewed questions about the  adequacy of the Commodity Futures Trading Commission’s (CFTC)  authority and ability to oversee derivatives that are traded off exchange, or  over the counter (OTC). CFTC’s primary mission includes preserving the  integrity of the futures markets and protecting market users and the public  from fraud, manipulation, and abusive trading practices. In 2000, CFTC’s  authority regarding futures contracts and other types of derivatives was  clarified by the Commodity Futures Modernization Act of 2000 (CFMA).  Among other things, the CFMA specifically authorizes off-exchange  derivatives trading by establishing a framework that tailors the level of  regulation of a market to the products being traded and the market’s  participants. Under the act, some exchanges (e.g., the New York  Mercantile Exchange, Inc. (NYMEX)), that allow all types of traders,  including retail customers, to access their facilities are regulated, while  other venues that are off exchange can be accessed only by large,  sophisticated traders and are either largely unregulated or exempt from  regulation. Like futures markets, these unregulated, off-exchange markets  also have grown significantly, raising questions about the amount of  regulatory scrutiny that CFTC should provide.
This report, conducted under the Comptroller General of the United  States’ authority, addresses concerns raised by Congress, consumer  groups, states’ attorneys general, and others about rising prices in energy  markets and the relationship, if any, of futures trading to rising energy  prices. We addressed this report to you because of your expressed interest  or your committee’s jurisdiction. This report focuses on four energy  commodities—crude oil, unleaded gasoline, natural gas, and heating oil— and CFTC’s oversight of these commodities. Specifically, this report  examines (1) trends and patterns of trading activity in the physical and  energy derivatives markets and the effects of those trends on prices;   (2) the scope of CFTC’s authority for protecting market users from  fraudulent, manipulative, and abusive practices in the trading of energy  futures contracts; and (3) the effectiveness of CFTC’s monitoring and  detection of market abuses in energy futures markets and in connection  with energy-related enforcement actions.
To address these objectives, we obtained and analyzed end-of-the-day  trading data for energy futures contracts from NYMEX and data from  CFTC’s large trader reporting system (LTRS) database, which we tested  and found reliable for our purposes. We obtained and analyzed other  CFTC records and reports relevant to the commission’s surveillance and  other activities. We also reviewed applicable laws, regulations, and policy  statements. We obtained information from a broad range of participants in  the energy futures markets and officials knowledgeable about the futures  markets. These individuals included officials from large oil companies,  refiners, trade associations representing end users of natural gas,  investment banks, and hedge funds as well as energy consultants and  academic experts. We interviewed officials in CFTC’s Division of Market  Oversight, Division of Enforcement, Office of the Chief Economist, Office  of the General Counsel, and Office of the Inspector General. Moreover,  because CFTC oversight is also provided through officials located in the  commission’s field offices, we obtained information from officials at the  CFTC New York Regional Office, which conducts surveillance of futures  trading on NYMEX. In addition, we gathered and analyzed information on  oversight of the energy markets provided by other federal agencies,  including the U.S. Department of Energy’s Energy Information  Administration (EIA), the Federal Energy Regulatory Commission (FERC),  the Federal Trade Commission (FTC), the Department of Justice (DOJ),  and the Securities and Exchange Commission (SEC). We conducted our  work in Chicago, Houston, New York City, and Washington, D.C., between  July 2005 and September 2007 in accordance with generally accepted  government auditing standards. Appendix I contains a more detailed  description of our scope and methodology.
subsections: section_title: Background
paragraphs: Energy commodities are bought and sold in several different physical and  financial markets. Physical markets include the spot, or cash, markets  where products such as crude oil or gasoline are bought and sold for  immediate or near-term delivery. The United States has several spot  markets. Examples are the pipeline hub near Cushing, Oklahoma for West  Texas Intermediate crude oil and the Henry Hub near Erath, Louisiana, for  natural gas. The prices set in the specific spot markets provide a reference  point that buyers and sellers use to set the price for other types of the  commodity traded in other locations.
The prices established for energy commodities in the physical markets  generally are determined by supply and demand. For example, when the  demand for the product rises relative to supply because economies are  growing, prices are likely to rise. Conversely, when demand falls relative  to supply, prices are likely to fall. For energy products, demand and  supply, and therefore price, can fluctuate on a seasonal basis. For  example, consumer demand for gasoline in the United States is generally  higher from May through early September—the summer driving season— and tends to flatten after Labor Day. Similarly, demand for natural gas and  heating oil is highest during the heating season between October and  March.
The relative inelasticity of energy commodities means that small shifts in  demand and supply can result in relatively large price fluctuations. In  general, when the price of an energy commodity rises, the demand for that  product is likely to fall in the long term, and vice versa. However, demand  for energy commodities is price inelastic in the short term—that is, the  quantity demanded changes little in response to a change in price. On the  supply side, rising energy commodities prices motivate producers to  increase the amount of commodities they supply to increase profits.
However, because producers hold relatively low inventories of energy  commodities in reserve, and finding and producing additional energy  commodities takes a long time and is expensive, supply also is relatively  inelastic. For example, supplies of natural gas from new production wells  cannot be increased quickly to meet higher demand because of the time  required to get the newly produced gas into the marketplace.
Energy commodities also are traded in the financial markets, especially in  the form of derivatives. Derivatives include futures, options, and swaps,  whose values are based on the performance of the underlying asset.  Options give the purchaser the right, but not the obligation, to buy or sell a  specific quantity of a commodity or financial asset at a designated price.  Swaps traditionally are privately negotiated contracts that involve an  ongoing exchange of one or more assets, liabilities, or payments for a  specified period. Futures and options contracts are traded on exchanges  designated by CFTC as contract markets (futures exchanges), where a  wide range of energy, agricultural, financial, and other commodities are  bought and sold for future delivery. Commodity futures and options can be  traded on both OTC and exempt commercial markets if the transactions  involve qualifying commodities and the participants satisfy statutory  requirements.
Energy futures include standardized contracts for future delivery of a  specific crude oil, heating oil, natural gas, or gasoline product at a  particular spot market location. The exchange standardizes the contracts,  and participants cannot modify them to their particular needs. For  example, a standard gasoline futures contract traded on NYMEX is for  1,000 barrels (42,000 gallons), quoted in dollars and cents per gallon, and  for delivery of up to 36 months into the future at New York Harbor. The  owner of an energy futures contract is obligated to buy or sell the  commodity at a specified price and future date. However, the owner may  eliminate the contractual obligation before the contract expires by selling  or purchasing other contracts with terms that offset the original contract.  In practice, relatively few futures contracts on NYMEX result in physical  delivery of the underlying commodity, but instead are liquidated with  offsets. Options on futures contracts also are traded on exchanges such as  NYMEX and foreign boards of trade that U.S. traders access directly.
In addition to exchange-traded futures and options, the financial markets  for energy commodities include derivatives traded among multiple traders  on exempt commercial markets and derivatives created bilaterally in OTC  transactions. As with futures, exempt commercial markets and other OTC  derivatives allow producers and users of energy commodities to manage  the risk of future changes in the price of a particular commodity. These  contracts include options and swaps at an agreed-upon price. Appendix II  shows some of the different types of contracts and transactions for energy  commodities in the physical and financial markets.
subsections: section_title: Functions of Futures Markets
paragraphs: Market participants use futures markets to offset the risk caused by  changes in prices, discover commodity prices, and speculate on price  changes. Some buyers and sellers of energy commodities in the physical  markets trade in futures contracts to offset, or “hedge,” the risks of price  changes in the physical markets. The futures markets help buyers and  sellers determine, or “discover,” the price of commodities in the physical  markets, thus linking the two markets. Other participants—generally,  speculators—that do not have a commercial interest in the underlying  commodities but are looking to make a profit take varying positions on the  future value of commodities. In doing so, speculators provide liquidity and  assume risks that other participants, such as hedgers, seek to avoid.  Arbitrageurs are a third group of participants that aim to benefit by  identifying discrepancies in price relationships, rather than by betting on  future price movements. Arbitrage is a strategy that involves  simultaneously entering into several transactions in multiple markets to  benefit from price discrepancies across markets. For example, traders can  trade simultaneously in exchanges and OTC.
Price risk is an important concern for buyers and sellers of energy  commodities because wide fluctuations in cash market prices introduce  uncertainty for producers, distributors, and consumers of commodities  and make investment planning, budgeting, and forecasting more difficult.  A statistical measurement of the degree to which prices fluctuate over  time is known as “volatility” and can be applied to prices in both the  physical and financial markets. There are two basic types of volatility  measurements. Historical volatility measures are calculated on the basis of  price changes, using data from market transactions. Implied volatility  reflects market participants’ expectations of future volatility as derived  from the prices of traded options (see app. III). This report presents data  on the relative historical volatility of energy futures contracts, which we  calculated from relative changes in daily prices.
Futures and off-exchange derivatives markets provide participants with a  means to hedge or shift unwanted price risk to others more willing to  assume the risk or those having different risk situations. For example, if a  petroleum refiner wanted to shed its risk of losing money as a result of  falling gasoline prices, it could lock in a price by selling futures contracts  to deliver the gasoline in 6 months at a guaranteed price. Likewise, a  transportation company that knows it must refill its gasoline tanks in 6  months might want to offset the price risk associated with purchasing fuel  by buying futures contracts to take delivery of gasoline then at a set price.  Without futures contracts that help them manage risk, producers, refiners,  and others likely would face uncertainty related to investment planning,  budgeting, and forecasting—and potentially higher costs.
Futures markets also provide a means of price discovery for commodities  such as energy products. For price discovery, markets need current  information about supply and demand, a large number of participants, and  transparency. Market participants monitor and analyze the factors that  currently affect, and that they expect to affect, the future supply and  demand for energy commodities. With that information, they buy or sell  energy commodity contracts on the basis of the price for which they  believe the commodity will sell at the delivery date. The futures markets,  in effect, distill the diverse views of market participants into a single price.  In turn, buyers and sellers of physical commodities consider those  predictions about future prices with other factors when setting prices on  the spot and retail markets.
A wide variety of participants hedge and speculate in energy derivatives  markets. For the exchange-traded futures markets, CFTC categorizes  traders in general terms as either commercial or noncommercial  participants. CFTC identifies several subcategories of participants within  the commercial category: producers, manufacturers, dealers/merchants,  and swaps/derivatives dealers. Dealers and merchants include, among  others, wholesalers, exporters and importers, shippers, and crude oil  marketers. Typical noncommercial traders are entities such as those that  manage money (“managed money traders”). These noncommercial traders  include, among others, commodity pool operators (CPO) and commodity  trading advisors (CTA), many of which advise or operate hedge funds.  Other noncommercial traders include floor brokers and unregistered  traders.
section_title: Relationship between Futures and Spot Prices
paragraphs: The prices for energy commodities in the futures and in the spot or  physical markets are closely linked because they are influenced by the  same market fundamentals in the long run. Prices in the physical spot and  futures markets for the four energy commodities we reviewed are highly  correlated and rose dramatically from 2002 to 2006. As shown in figure 1,  from January 2002 to July 2006, monthly average spot prices for crude oil,  gasoline, and heating oil increased by at least 220 percent. Natural gas  spot prices increased by more than 140 percent. At the same time that spot  prices increased, the futures prices for these commodities showed a  similar pattern of a sharp and sustained increase from January 2002 into  2006. For example, the price of crude oil futures increased from an  average of $22 per barrel in January 2002 to an average of $74 per barrel in  July 2006. Natural gas futures prices spiked rapidly in the fall of 2005 after  several strong hurricanes raised concerns about supply disruptions for the  winter of 2005-2006, then prices fell sharply due in part to a mild winter.  Prices in the spot and futures markets show similar patterns because  traders in those markets tend to rely on the same types of information  when entering into transactions.
The differences between futures and spot market prices for energy  commodities narrow and the prices converge when futures contracts near  expiration and physical delivery is required. As the expiration date nears,  the physical delivery provision of the contract and the ability of traders to  arbitrage combine to bring the futures and physical market prices  together. Arbitrage plays a crucial role in moderating or removing price  differences between spot and futures markets and contributes to the  convergence of futures and spot prices at expiration. For example, if the  price for a crude oil futures contract that would expire in 2 weeks were  $62 per barrel and the spot market price were $60 per barrel, a trader  could choose to buy oil now at the spot price and enter into a futures  contract to deliver oil in 2 weeks at the futures price, thereby making a   $2 profit. This and similar transactions by other traders would put  upward pressure on the spot price and downward pressure on the futures  price and move them toward convergence. Figure 2 provides an example  of how the price of the April 2006 crude oil futures contract and the spot  price for that commodity converged as the contract approached  expiration.
section_title: Changes in CFTC Oversight Authority and Resource Levels
paragraphs: Between the creation of CFTC in 1974 and the year 2000, the CEA  generally restricted commodity derivatives trading to futures and options  entered into on exchanges and made all transactions in futures contracts  subject to CFTC’s exclusive jurisdiction. However, in the late 1980s and  early 1990s, commercial entities began entering into nonstandardized, off- exchange derivative contracts that had pricing characteristics similar to  futures (i.e., pricing of the transactions derived from the prices of various  commodities), and the instruments were used for risk shifting. According  to CFTC officials, under exemptive authority provided in 1992  reauthorization legislation, CFTC announced that it would not take  enforcement action against qualified commercial entities engaged in  certain types of energy derivatives transactions, but the legality of  instruments not covered by the exemption (i.e., their status as futures  contracts subject to the CEA) remained unresolved.
In 2000, the CFMA amended the CEA to provide for both regulated  markets and markets largely exempt from regulation and to permit off- exchange trading of energy derivatives by qualified parties. The regulated  markets include futures exchanges that have self-regulatory surveillance  and monitoring responsibilities as self-regulatory organizations (SRO) and  by CFTC. CFTC’s primary mission includes preserving the integrity of  these futures markets and protecting market users and the public from  fraud, manipulation, and abusive practices related to the sale of  commodity futures and options. This mission is achieved through a  regulatory scheme that is based on federal oversight of industry self- regulation. The CEA also permits derivatives trading in markets that are  largely exempt from CFTC’s regulatory authority, including both OTC and  exempt commercial markets, subject to statutory requirements governing  the types of commodity and trader and the facility used for conducting the  trades. The President’s Working Group’s 1999 report on OTC derivatives  focused on changes to the CEA that in their view would “promote  innovation, competition, efficiency, and transparency in OTC derivatives  markets, to reduce systemic risk, and to allow the United States to  maintain leadership in these rapidly developing markets.” Derivatives on  energy commodities, which are within the act’s definition of “exempt  commodity,” may be traded in exempt commercial markets by eligible  commercial entities, a category of traders broadly defined in the CEA to  include firms with a commercial interest in the underlying commodity as  well as other sophisticated investors, such as hedge funds. Violations of  the CEA and CFTC regulations may be remedied by imposition of civil  monetary penalties, trading bans, restitution, and other appropriate relief.
In addition to CFTC oversight, futures exchanges accept self-regulatory  obligations as a condition of designation. For example, NYMEX, as an  SRO, is 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 exchange members for  financial soundness and other regulatory purposes. CFTC oversees SROs  to ensure that each has an effective self-regulatory program.
Within CFTC, three of the commission’s six major operating units actively  oversee futures exchanges and their derivatives clearing organizations.
The Division of Market Oversight approves and oversees the futures  exchanges, conducts its own market surveillance, conducts trade practice  reviews and investigations, and reviews exchange rules.
The Division of Clearing and Intermediary Oversight oversees, among  other things, derivatives clearing organizations and the registration of  intermediaries, which are persons such as futures commission merchants,  CPOs, or CTAs that act on the behalf of others in futures trading.
The Division of Enforcement investigates and prosecutes alleged  violations of the CEA and CFTC regulations.
At the beginning of fiscal year 2006, 167 (34 percent) of CFTC’s 490 full- time-equivalent (FTE) positions were allocated to the first two CFTC  divisions; at the beginning of fiscal year 2007, that allocation declined to  162 (35 percent) of CFTC’s 458 FTE positions. These staff monitor the  markets and market participants from CFTC’s headquarters in  Washington, D.C., as well as from field offices in New York; Chicago;  Kansas City; and, until recently, Minneapolis. About one-third of CFTC’s  staff are located in the field offices. At the beginning of fiscal year 2006,  132 (27 percent) of CFTC’s 490 FTE positions were allocated to the  Division of Enforcement; at the beginning of fiscal year 2007, that number  declined to 120 of CFTC’s 458 FTE positions. The 2007 data are estimated.  While CFTC staffing levels have declined, according to CFTC, futures and  options trading volume for all commodities has roughly doubled from  fiscal years 2002 to 2006 and is expected to continue to rise, as indicated in  figure 3.
section_title: Several Factors Have Caused Changes in the Energy Markets, Potentially Affecting Prices
paragraphs: Both physical and futures markets experienced a substantial amount of  change from 2002 through 2006. Reasonable arguments have been made  that events in both markets have contributed to rising energy prices, at  least in the short term, but opinions vary regarding the extent that recent  changes in the financial markets have influenced the prices of energy  products in the physical markets over the long term. Because of these  concurrent changes, identifying the causes of the increases in energy  prices in both the physical and futures markets for crude oil, unleaded  gasoline, heating oil, and natural gas is difficult. First, during this period,  the physical markets experienced tight supply and rising demand from  increasing global demand, ongoing political instability in oil-producing  regions, and other supply disruptions. Second, annual volatility of energy  prices remained above historic averages during the beginning of the period  (although during 2006, volatility generally declined to levels at or near the  historical average). Third, the volume of trading in energy futures  increased as growing numbers of managed money traders viewed energy  futures as attractive investment alternatives.
subsections: section_title: Tight Supply and Rising Demand for Physical Energy Commodities Contributed to the Increase in Futures and Spot Prices
paragraphs: The energy physical markets have undergone substantial change and  turmoil from 2002 through 2006, which affected prices in the spot and  futures markets. First, like many market observers and participants, we  found a number of fundamental supply and demand conditions that could  influence prices. Moreover, these parties have observed that the lack of  spare capacity in certain areas, such as production, transportation, and  storage, can affect prices. Second, over the short term, weather events  also were a significant cause of rising energy prices because of their  effects on energy supply, according to several of the market observers we  interviewed. Third, many market observers also identified geopolitical  uncertainty arising from the instability and insecurity of the world’s major  oil-producing regions as a major factor affecting energy prices. Concerns  about political events may manifest in the form of higher futures prices if  traders predict that an event—such as a strike within the industry or  pipeline sabotage by terrorists—will have an effect on future supply.  Finally, on the demand side, a significant factor noted by observers was  the increase in global consumption of petroleum products, primarily  among industrializing Asian nations such as China and India.
Analysis of world oil prices by EIA and us indicates that increases in crude  oil prices occur if political instability, terrorist acts, or natural disasters  create uncertainties about, or actual disruptions in, supply from countries  that produce or refine oil. For example, according to EIA, in the early  2000s, cutbacks in the Organization of the Petroleum Exporting Countries  (OPEC) production and rising demand caused oil prices to increase to  more than $30 per barrel, only to fall precipitously when the global  economy weakened following the September 11, 2001, crisis. Moreover,  as we reported in 2005, rapid growth in oil demand in Asia contributed to a  rise in crude oil prices to more than $50 per barrel during 2004.
According to EIA, world oil demand that was about 59 million barrels per  day in 1983 grew to more than 85 million barrels per day in 2006. The  United States consumes nearly one-quarter of this amount—or more than  20 million barrels per day in 2006—and its demand has grown about 1.5  percent per year since 1983. The rapid economic growth in Asia also has  stimulated a strong demand for energy commodities. For example, China  has overtaken Japan as the second-largest consumer of crude oil, after the  United States. According to EIA data, from 1983 to 2004, Chinese demand  grew from about 1.7 million barrels consumed per day to about 6.4 million  barrels consumed per day. This increase in the global demand for crude oil  is shown in figure 4.
The growth in demand does not, by itself, lead to higher prices for crude  oil or any other energy commodity. For example, if the growth in demand  were exceeded by a growth in supply, prices would fall, with other things  remaining constant. However, according to EIA, the growth in demand  outpaced the growth in supply, even with spare production capacity  included in supply. Spare production capacity is surplus oil that can be  produced and brought to the market relatively quickly to rebalance the  market if there were a supply disruption anywhere in the world oil market.  EIA estimates that global spare production capacity in 2006 was about       1.3 million barrels per day (see fig. 5). Most of that capacity was  concentrated in the 12 OPEC countries that supply about 40 percent of the  world’s oil, primarily Saudi Arabia. This compared with spare capacity of  about 10 million barrels per day in the mid-1980s, or of about 5.6 million  barrels a day as recently as 2002. Analysis by EIA indicates that the growth  of oil production in non-OPEC nations, which produce most of the world’s  oil and include countries such as Canada, China, Mexico, Norway, Russia,  the United Kingdom, and the United States, has slowed relative to the  growth in demand, and these nations have virtually no spare production  capacity. As a commodity that is produced and traded worldwide, crude  oil prices could be affected by the value of the U.S. dollar on open  currency markets. For example, because crude oil is typically  denominated in U.S. dollars, the payments that oil-producing countries  receive for their oil also are denominated in U.S. dollars. As a result, a  weak U.S. dollar decreases the value of the oil sold at a given price, and  oil-producing countries may wish to increase prices for their crude oil to  maintain purchasing power in the face of a weakening U.S. dollar, to the  extent they can.
Major weather and political events also can lead to supply disruptions and  higher prices. In its analysis, EIA has cited the following examples:    Hurricanes Katrina and Rita removed about 450,000 barrels per day from  the world oil market from June 2005 to June 2006.
Instability in major OPEC oil-producing countries, such as Iran, Iraq,  Nigeria, and Venezuela, has lowered production and increased the risk of  future production shortfalls.
Oil production in Russia, a major driver of non-OPEC supply growth  during the early 2000s, was adversely affected by a worsened investment  climate as the government raised export and extraction taxes.
The supply of crude oil affects the supply of gasoline and heating oil, and,  just as production capacity affects the supply of crude oil, refining  capacity affects the supply of products distilled from crude oil. As we have  reported, refining capacity in the United States has not expanded at the  same pace as the demand for gasoline. Despite a growth in the capacity  of existing gasoline refineries, the growth in demand has meant that  refineries have been running at an average of more than 93 percent of  production capacity since the mid-1990s, compared with about 78 percent  in the 1980s. Higher utilization rates can increase operating costs and lead  to prices being higher than otherwise would be expected, as occurred in  the second half of the 1990s.
Another factor affecting the supply, and therefore the price, of petroleum  products is the amount held in inventory. Inventory is particularly crucial  to the supply and demand balance because it can provide a cushion  against price spikes if, for example, a refinery outage temporarily disrupts  production. We have reported that, as in other industries, the petroleum  products industry has adopted “just-in-time” delivery processes to reduce  costs, leading to a downward trend in the level of gasoline inventories in  the United States. For example, in the early 1980s, private companies held  stocks of gasoline in excess of 35 days of average U.S. consumption; while  in 2004, those stocks were equivalent to less than 25 days consumption.  Lower costs of holding inventories may reduce gasoline prices, but lower  levels of inventories also may cause prices to be more volatile because  when a supply disruption occurs or there is an increase in demand, there  are fewer stocks of readily available gasoline from which to draw, thereby  putting upward pressure on prices. Others have noted that higher prices  for future delivery of oil have induced oil companies to buy more oil and  place it in storage. They concluded that this practice has created a  situation where oil prices are high despite high levels of oil in inventory.
In addition to the supply and demand factors that generally apply to all  energy commodities, there are specific conditions that apply to particular  commodities. For example, to meet national air quality standards under  the Clean Air Act, as amended, many states have mandated the use of  special gasoline blends—so-called “boutique fuels.” As we have recently  reported, there is a general consensus that higher costs associated with  supplying special gasoline blends contributed to higher gasoline prices,  either because of more frequent or more severe supply disruptions or  because higher costs are likely passed on, at least in part, to consumers.  As another example, according to EIA, the recent phaseout of a chemical  used to improve gasoline performance—methyl tertiary butyl ether— increased the price of U.S. gasoline, in part because the chemical was  replaced by ethanol, a more costly additive. As in the futures markets, the  physical markets have undergone substantial changes that can affect  prices. These specific factors affecting particular commodities, when  combined with the general supply and demand conditions, contribute to  increased energy prices and price volatility. However, market participants  and other observers disagree on whether high energy prices were solely  due to supply and demand fundamentals or whether increased futures  trading activity also was fueling higher prices.
section_title: The Effects of Relatively High but Falling Volatility and a Growing Volume of Derivatives Trading on Energy Prices Are Unclear
paragraphs: The changes occurring in the physical markets have not happened in  isolation; they have been accompanied by advances in technology,  relatively high but falling volatility in energy futures prices, and a growing  volume of trading in the derivatives markets. The effects of these changes  on energy prices are not clear.
Although energy futures prices increased from 2002 to 2006 (see fig. 1), the  relative volatility of those prices for three of the four commodities  generally declined. As shown in figure 6, the annual historical volatilities— measured using the relative change in daily prices of energy futures—from  2000 through 2006 generally were above or near their long-term averages,  although crude oil and heating oil declined below the average and gasoline  declined slightly. As we have reported, futures prices typically reflect the  effects of such world events on the price of crude oil. Political instability  and terrorist acts in countries that supply oil create uncertainties about  future supplies, which is reflected in futures prices in anticipation of an oil  shortage and expected higher prices in the future. Conversely, news about  a new oil discovery that would increase world oil supply could result in  lower futures prices. In other words, futures traders’ expectations of what  may happen to world oil supply and demand influence their price  decisions.
The annual volatility of natural gas fluctuated more widely than that of the  other three commodities and increased in 2006, even though prices largely  declined from the levels reached in 2005. EIA has stated that the volatility  of natural gas prices is due to factors in the physical marketplace, such as  changing weather, producers’ inability to move natural gas quickly to areas  in response to quickly rising demand, and limited local storage. A research  director for a consumer advocacy organization who studied natural gas  prices concluded that increased trading by speculators had increased  volatility and prices. CFTC also has studied this issue and found that  natural gas prices from August 2003 through August 2004 did not appear to  be determined by any single category of market participant, although joint  demand and supply of contracts by all participants clearly affected the  change in price. In other words, managed money traders’ activity  (including hedge funds), by itself, did not have a significant effect on price  changes.
While some often equate higher prices with higher volatility, an increase in  futures contract prices does not necessarily mean that volatility will  increase in a similar manner, and an increase in volatility does not  necessarily mean that prices will rise. Price volatility measures the  variability rather than the direction of price changes and is based on the  standard deviation of those changes. Therefore, if futures contract prices  change at a steady rate, the prices may have lower volatility than if large  swings in prices occurred.
At the same time that prices were rising and volatility was generally above  or near long-term averages, futures markets also experienced an increase  in the number of large noncommercial participants, such as managed  money traders. The trends in price and volatility made the energy  derivatives markets attractive for an increasing number of traders looking  to either hedge against those changes or profit from them. According to  CFTC large trader data, from July 2003 to December 2006, crude oil  futures and options contracts experienced the most dramatic increase as  the average number of noncommercial traders grew from about 125 to  about 286. As shown in figure 7, over a similar period, the average number  of noncommercial traders also showed an upward but less dramatic trend  for unleaded gasoline, heating oil, and natural gas.
Some market participants and observers have concluded that large  purchases of oil futures contracts by speculators in effect have created an  additional demand for oil that has led to higher prices; others disagree.  The Senate’s Permanent Subcommittee on Investigations, Committee on  Homeland Security and Governmental Affairs, issued a staff report in June  2006 that concluded that the traditional forces of supply and demand  could not fully account for increases in the prices of energy commodities.  Also, according to an energy firm, an investment bank, an academic, and  hedge fund officials, increasing numbers of speculative traders in the  market and rising trading volume placed upward pressure on futures  prices. However, others, including investment bank and CFTC officials,  have argued that speculators did not increase prices, but they provided  liquidity and dampened volatility. Moreover, other investment banks,  energy firms, and FERC officials told us that speculative trading in the  futures markets can contribute to short-term price movements in the  physical markets. However, they did not believe it was possible to sustain  a speculative “bubble” over time because the two markets are linked and  both respond to information regarding changes in supply and demand  caused by such factors as the weather or geopolitical events. Therefore, in  their view, speculation could not lead to artificially high or low prices over  a long period.
Within the noncommercial trader category, the largest increases came  from managed money traders—which generally trade for their own  accounts rather than for others. Specifically, for crude oil, the average  number of managed money traders that trade daily increased significantly  from about 62 in July 2003 to about 128 in December 2006. At the same  time, the number of smaller traders also grew significantly from an  average of about 26 per day in July 2003 to an average of about 111 per day  in December 2006. The number of managed money traders and smaller  traders for unleaded gasoline, heating oil, and natural gas also increased  similarly during that period. The number of commercial futures traders  generally did not increase in a fashion similar to that of noncommercial  traders.
As the number of traders has increased, so has the trading volume on  NYMEX for all energy futures contracts, particularly crude oil and natural  gas, as shown in figure 8. From 2001 through 2006, the average daily  contract volume for crude oil increased by 90 percent and for natural gas  increased by 93 percent. However, unleaded gasoline and heating oil  experienced less dramatic growth in their trading volumes during this  period.
Along with the strong growth of energy futures trading, the amount of  energy derivatives traded outside of exchanges also appears to have  increased significantly. However, comprehensive data on the trading  volume of energy-related OTC derivatives are not available because OTC  energy markets are not regulated. The Bank for International Settlements  publishes data on worldwide OTC derivative trading volume for broader  groupings of commodities that can be used as a rough proxy for trends in  the trading volume of OTC energy derivatives. According to these data,  the notional amounts outstanding of OTC commodity derivatives— excluding precious metals, such as gold—grew by 854 percent from  December 2001 through December 2005. From December 2004 through  December 2005, the notional amount outstanding increased by 214 percent  to more than $3.2 trillion. Despite the lack of comprehensive energy- specific data on OTC derivatives, the recent experience of individual  trading facilities revealed the growth of energy derivatives trading outside  of futures exchanges. For example, according to an annual financial  statement of the IntercontinentalExchange (ICE), the volume of contracts  traded on ICE—including financially settled derivatives and physical  contracts—increased by 438 percent, from more than 24 million contracts  in 2003 to more than 130 million in 2006.
While some market observers believed that managed money traders were  exerting upward pressure on prices by predominantly buying futures  contracts, CFTC data reveal that, from the middle of 2003 through the end  of 2006, the trading activity of managed money participants became  increasingly balanced between buying and selling. According to basic  futures market theory, a trader speculating and holding an outstanding  position to buy the commodity—a long open interest position—expects  that the price of the commodity will rise, while a trader holding an  outstanding position to sell the commodity—a short open interest  position—expects that the price will decline. As shown in figure 9,  according to CFTC data, from July 2003 through December 2003 managed  money traders’ ratio of long open interest in crude oil to short open  interest was about 2.5:1, suggesting a strong expectation that prices would  rise, on average, throughout that period, which they did. By 2006, this ratio  fell to 1.2:1, suggesting that managed money traders as a whole were more  evenly divided in their expectations about future prices. Managed money  trading in unleaded gasoline, heating oil, and natural gas showed similar  trends. Although for natural gas, open interest was more often short than  long, suggesting a general expectation that prices would decline, which  largely did not occur until 2006. Also, the relatively high percentage of  open interest for natural gas held by these traders in 2006—surging to just  over 40 percent—was perhaps due to the increased volatility of natural gas  futures prices from 2005 to 2006, which provided traders with more  opportunities for profit (or loss).
section_title: CFTC Oversees Exchanges and Has Limited Authority over Other Derivatives Markets
paragraphs: Energy products are traded on multiple markets, which are subject to  varying levels of CFTC oversight and regulation. Under the CEA, CFTC  regulatory oversight is focused on conducting the surveillance of futures  exchanges, protecting the public, and ensuring market integrity. CFTC  collects and analyzes trading position information on futures exchanges,  which is central to this oversight. The information is subsequently  published at highly aggregated levels in the commission’s COT reports,  and it helps to provide transparency to the market. However, these public  reports have been criticized because the informational categories for  traders do not accurately reflect energy market activity. While CFTC’s  oversight is focused on futures exchanges, the number of exempt  commercial markets for trading energy commodities, which are not  subject to general CFTC oversight, have grown. However, traders in these  markets are subject to the CEA’s antimanipulation and, where applicable,  antifraud provisions. Also, exempt commercial markets must provide  CFTC with data for certain contracts and notify CFTC if cash markets use  exempt market prices to price their transactions (although that has not  occurred). Energy products also are traded off exchange (referred to as  OTC) and are not subject to direct CFTC oversight and regulation.  However, as we have previously noted, certain types of off-exchange  transactions are subject to antifraud and the antimanipulation provisions  of the CEA, which CFTC has the authority to enforce. In addition, contract  participants may be subject to other regulatory authority on the basis of  their role in the physical market. To enhance its ability to detect and deter  price manipulations, CFTC has published for comment a proposal to  amend part 18 of its regulations to obtain from traders that have large  (reportable) positions in an exchange-traded commodity information  about their off-exchange positions in the same commodity. CFTC also  held a hearing in September 2007 to examine trading on regulated  exchanges and exempt commercial markets, which included an  assessment of price discovery and the implications for CFTC oversight.
subsections: section_title: CFTC Has General Oversight Authority over Futures Exchanges, but Its Publicly Reported Information on These Exchanges Has Not Kept Pace with Changing Market Conditions
paragraphs: Under the CEA, CFTC has general oversight authority over futures  exchanges such as NYMEX. These exchanges receive CFTC approval to  list futures and options contracts for trading and are subject to direct  CFTC regulation and oversight. To be a regulated futures exchange, an  exchange must demonstrate to CFTC that the exchange complies with   (1) the criteria for designation under section 5(b) of the CEA for, among  other things, the prevention of market manipulation, fair and equitable  trading, the conduct of trading facilities, and the financial integrity of  transactions conducted on the board; (2) the set of core principles under  section 5(d) of the act establishing their regulatory responsibilities; and   (3) the provisions on application procedures of part 38 of the CFTC rules.  According to CFTC officials, following procedures in the CEA, these  exchanges may list new contracts, after certifying that they are in  compliance with certain core principles, including ascertaining that the  contracts are not readily susceptible to manipulation and monitoring  trading to prevent price manipulation.
CFTC’s oversight is focused on fulfilling three strategic goals relating to  futures exchanges. First, to ensure the economic vitality of the commodity  futures and options markets, CFTC conducts its own direct market  surveillance and also reviews on an oversight basis the surveillance efforts  of these exchanges. According to CFTC officials, the commission monitors  trading activity in futures markets and uses these trading data to analyze  large positions that might be used to manipulate futures markets. In its  oversight role, CFTC reviews new futures contracts to assess  susceptibility to manipulation. To list a new futures contract, an exchange  must file a written self-certification with CFTC and, if requested, must  provide additional evidence, information, or data to CFTC on whether the  contact satisfies CEA requirements and the commission’s regulations or  policies. Second, to protect market users and the public, CFTC has  promoted sales practices and other customer protection rules applicable  to futures commission merchants and other registered intermediaries. In  this connection, CFTC closely monitors the enforcement of registration  and other requirements by the National Futures Association, which is an  SRO responsible for regulating all firms and individuals conducting futures  business with public customers. Third, to ensure the market’s financial  integrity, CFTC reviews the audit and financial surveillance activities of  SROs. It also periodically reviews registered derivatives clearing  organizations to ensure that they are effectively monitoring risks and  protecting customer funds.
CFTC provides the public information on open interest in exchange-traded  futures and options by commercial and noncommercial traders for various  commodities in its weekly COT reports, which are relied upon by the  public. Changing market conditions caused CFTC in 2006 to reassess COT  reporting and its value to the public. A trading entity generally gets  classified as commercial by filing a statement with CFTC that it is  commercially “engaged in business activities hedged by the use of the  futures or option markets.” To ensure that traders are classified with  accuracy and consistency, commission staff review this self-classification  and may reclassify a trader if staff have additional information about the  trader’s use of the markets. A trader may be classified as commercial in  some commodities and as noncommercial in other commodities. A single  trading entity cannot be classified as both commercial and noncommercial  in the same commodity. Nonetheless, a multifunctional organization that  has more than one trading entity may have each trading entity classified  separately in a commodity. For example, a financial organization trading  in financial futures may have a banking entity whose positions are  classified as commercial and have a separate money-management entity  whose positions are classified as noncommercial. “In addition, the Commission will begin publishing a supplemental COT report that  includes, in a separate category, the positions of commodity index traders in certain  physical commodity futures markets. These so-called ‘Index Traders’ will be drawn from  both the current Noncommercial and the Commercial categories. Coming from the  Noncommercial category will be managed funds, pension funds and other institutional  investors that generally seek exposure to commodity prices as an asset class in an  unleveraged and passively managed manner using a standardized commodity index.
Coming from the Commercial category will be entities whose positions predominantly  reflect hedging of OTC transactions involving commodity indices—for example, swap  dealers holding long futures positions to hedge short OTC commodity index exposure  opposite institutional traders such as pension funds. These latter position holders are those  traders described in the request for comments as ‘non-traditional commercials.’”
CFTC stated that the pilot program for reporting of commodity index  trading did not include energy and metals markets because the large trader  data currently available to the commission would not permit an accurate  breakout of index trading in these markets. According to CFTC, swap  dealers, who use futures markets to hedge commodity index transactions  in the OTC market, conduct most trading of commodity index-related  futures. However, these swap dealers also may engage in OTC derivative  transactions on energy or metals prices directly and conduct cash  transactions in the underlying energy or metals markets. As a result of  these activities, the overall futures positions held by swap dealers in  energy and metal futures markets may not necessarily correspond closely  with the hedging of OTC commodity index transactions. The commission  stated that including these traders in the new index trader category would  not enhance market transparency. Furthermore, it did not want to delay  publication of the new COT report while it continues to study whether it is  feasible to publish meaningful reports for other markets. The objective of  the pilot program is to improve the transparency of an evolving market by  separately reporting the positions of index traders. Similarly, the  increasing volume of off-exchange trading in energy derivatives and the  recent volatility of energy commodity prices justify considering whether a  COT category of futures positions held by participants in off-exchange  energy markets also could enhance transparency. CFTC said it will assess  the relevance and usefulness of the new reporting and study whether it is  possible and appropriate to expand the supplemental report to include  data for other physical commodity futures markets.
Significant changes in the energy markets also may lead CFTC to further  examine the usefulness, accuracy, and relevance of reported information  to users. According to CFTC officials, energy trading has seen the entry of  new market participants. For example, investment banks, hedge funds,  and swaps dealers have become significant market participants. Moreover,  according to industry analysts and representatives from investment banks  and large oil companies, some commercial participants only hedge, some  only speculate, and others both hedge and speculate in the energy  markets. While some commercial participants may hedge and speculate in  the same energy market, CFTC classifies these entities as commercial  participants. CFTC has not been able to identify new categories for traders  of energy commodities. Such reporting can distort the accuracy and  relevance of reported information to users and the public, thereby limiting  the usefulness of the information reported to the public as well as  information used by traders.
section_title: CFTC Authority over Exempt Commercial Markets Consists of Enforcing the Antifraud and Antimanipulation Provisions of the CEA and Administering Certain Reporting Requirements
paragraphs: In contrast to the direct oversight provided to futures exchange, exempt  commercial markets are not subject to CFTC’s general oversight authority.  According to CFTC officials, as these markets have grown in prominence,  some market observers have questioned their role in the energy markets.  Trading energy derivatives on exempt commercial markets is permissible  only for eligible commercial entities. While not subject to general CFTC  oversight, these markets are subject to CFTC rule 36.3, which provides for  the dissemination of exempt commercial market trading data should  exempt commercial market prices be used to price cash markets and  contains notification, recordkeeping, and reporting requirements. Also,  exempt commercial market participants are subject to CFTC’s  enforcement authority for the antimanipulation and antifraud provisions  of the CEA. These markets are not required to register with CFTC, but  must notify CFTC that they are operating as an exempt commercial  market and comply with certain CFTC informational, recordkeeping, and  other requirements.
Specifically, CFTC promulgated rule 36.3 under two subsections of the  CEA. One subsection authorizes CFTC to prescribe rules if necessary to  ensure the timely dissemination of price, trading volume, and other trading  data for a derivative traded on an exempt commercial market if the  commission determines that the electronic trading facility used by the  market performs a significant price discovery function for transactions in  the cash market for the commodity underlying the derivative. The other  subsection establishes notification, recordkeeping, and reporting  requirements for exempt commercial markets. The rule requires, among  other things, that the electronic trading facility in an exempt commercial  market must notify CFTC of its reliance on the exemption and provide  CFTC with price, quantity, and other data on contracts that average five or  more trades a day over the most recent quarter for which they are relying  on the CEA exemption. The facility also must maintain a record of  allegations or complaints they receive concerning instances of suspected  fraud or manipulation and provide CFTC with a copy of the record. CFTC  officials said that the reports include transaction-level data, such as  quantity and price, for all trades in products meeting the criteria, but not  the identities of counterparties to the trades. These officials said that three  exempt commercial markets—ICE, the Natural Gas Exchange, and ICAP— currently provide the rule 36.3 trade information reports; in the past, the  Optionable and ChemConnect exempt commercial markets also provided  these reports. For example, ICE officials told us that for their OTC  activities they keep records for all of the products traded on their  platform, and report to CFTC on liquid markets (those averaging five  trades a day) and any complaints received from market participants. ICE  officials said that CFTC often asks ICE for detailed information about  participants that are putting up bids and offers and about all of the trades  executed in a day.
CFTC officials said that the other electronic exchanges have provided  notice that they are operating in reliance on the CEA exemption, but they  have not provided rule 36.3 trade information reports. CFTC officials  explained that an electronic exchange only has to provide information  reports if it meets the threshold for reporting, which includes averaging  five trades per day in the relevant contract. These officials also said that  they do not actively check to determine whether the thresholds are being  met.
To date, no exempt commercial market or CFTC has determined if cash  markets for energy commodities routinely use exempt market prices to  price their transactions. According to CFTC officials, an exempt  commercial market or CFTC may determine, using certain criteria, if the  market serves such a price discovery function. Exempt markets that serve  such a function become subject to certain public reporting requirements.  According to CFTC officials, the commission has not made such a  determination for two reasons. First, they said that the only consequence  of serving a price discovery function under current law is that the exempt  commercial market must publish its prices. They noted that this is a  circular argument because it is the public availability of pricing  information that enables the exempt commercial market to serve a price  discovery function. Second, they said that this is a low priority. In their  view, the current fiscal situation does not allow CFTC to send its  economists into the field on matters such as this that would not go before  the commission. Also in their view, even if the markets served a price  discovery function, no significant consequence would entail because of  the circularity argument. However, in light of the growth of trading on ICE  and the lessons learned from the Amaranth crisis, CFTC held a hearing in  September 2007 to examine trading on regulated exchanges and exempt  commercial markets. The hearings included an assessment of price  discovery in these markets and the implications for CFTC oversight of  these markets.
Since 2001, 17 facilities have notified CFTC that they had begun operating  as exempt commercial markets (see table 1). According to CFTC officials,  11 of these markets currently offer, or had offered, transactions in energy  products, with 8 now operational. Some of these markets have become  important players in the trading of energy products. ICE, in addition to the  exempt swap contracts it trades in its capacity as an exempt commercial  market, is the trading platform for physical commodities, including spot  and forward contracts, which routinely involve delivery. According to  CFTC officials, some in the industry assert that ICE is the trading platform  for an estimated 70 percent of the spot trading for natural gas. Another  exempt commercial market, ChemConnect, advertises that data and news  providers, such as Bloomberg and Dow Jones Energy Services, rely on it  to provide accurate, timely information on energy products. Furthermore,  the Web site for the HoustonStreet Exchange indicates that it serves as an  electronic trading facility for crude oil and refined products also traded on  NYMEX. While there has been significant growth in the number of  electronic exchanges, CFTC officials said that they receive trade  information reports from only 2—ICE and the Natural Gas Exchange.  According to CFTC officials, they have no evidence that the others meet  the minimum threshold trading volume for reporting.
section_title: Although CFTC Can Enforce Antimanipulation and Applicable Antifraud Provisions of the CEA in OTC Energy Derivatives Markets and Exempt Commercial Markets, Views Vary about the Sufficiency of Its Regulatory Authority with Respect to Off-Exchange Energy Derivatives
paragraphs: Energy derivatives also may be traded OTC, under the conditions and  restrictions in the CEA for exempt commodities. The act exempts from  most of its provisions transactions in exempt commodities into which  large market participants enter and that are not traded on a trading  facility. In addition, the act exempts from most of its provisions  transactions in exempt commodities traded on an electronic trading  facility, as long as large commercial traders (defined in the act as “eligible  commercial entities”) enter into them on a principal-to-principal basis.  Bilateral OTC derivatives contacts are viewed as private transactions  between sophisticated counterparties, and there is no requirement for  parties involved in OTC transactions to disclose details of their  transactions. Because OTC derivatives are contractual agreements, each  party is subject to and assumes the risk of nonperformance by its  counterparty. This is different from exchange-traded derivatives, where a  central clearinghouse stands behind every trade. Thus, according to  officials of the International Swaps and Derivatives Association, in the  OTC context it is vitally important that one has confidence in the  creditworthiness and trustworthiness of one’s counterparty. While these  markets generally are not subject to direct CFTC oversight, CFTC has the  authority to enforce antifraud and antimanipulation provisions of the CEA  in connection with transactions in exempt commodities that take place  through an electronic trading facility, and that are entered bilaterally  without being subject to negotiation. Several of the enforcement actions  filed by CFTC since 2001 addressed the use of false reporting in an attempt  to manipulate energy prices on NYMEX.
In addition to being subject to certain provisions of the CEA, the  participants in these contracts may be subject to other regulatory  authorities on the basis of their activities in the physical market. For  example, certain actions—such as the buying and selling of a physical  energy commodity by traders, such as hedge funds—may fall under the  regulatory authority of FERC, which regulates the interstate transmission  of physical commodities, such as natural gas, oil, and electricity, to protect  energy consumers. Also, certain OTC derivative activities conducted by  commercial banks are subject to oversight by the appropriate bank  regulator. For example, commercial banks that engage in OTC derivatives  are overseen by their relevant regulator, such as the Office of Comptroller  of the Currency or the Board of Governors of the Federal Reserve System  with respect to how their derivatives trading satisfies requirements of the  banking laws. Likewise, SEC also has oversight authority over investment  banks’ activities that fall under its regulatory purview. These regulators do  not regulate the specific transactions or maintain oversight of OTC  derivatives as a class of instruments or markets; they regulate the entities  that enter into the contracts or that act as dealers, counterparties, or both.
While some observers have called for more oversight of OTC derivatives,  most notably for CFTC to be given greater oversight authority of this  market, others oppose any such action as unnecessary. Supporters of  more CFTC oversight authority believe that regulating OTC derivatives  markets is needed to protect the regulated markets and protect consumers  from potential abuse and possible manipulation. One of their concerns is  that because there is little information available about the size of this  market or the terms of the contracts, CFTC may not be assured that  trading on the OTC market is not adversely affecting the regulated markets  and, ultimately, consumers. Specifically, some have mentioned that, unlike  trading on a regulated exchange, OTC derivatives are not subject to any  routine reporting requirements. Some have suggested that a combination  of quantitative and qualitative information (such as whether derivatives  are used mainly for trading or hedging purposes, and notional amounts by  derivatives category) be collected.
However others, including the President’s Working Group, have concluded  that OTC derivatives generally are not subject to manipulation because  contracts are settled in cash on the basis of a rate or price determined in a  separate, highly liquid market and these OTC transactions do not serve a  significant price discovery function. The Working Group also noted that if  electronic markets were to develop and serve a price discovery function,  then consideration should be given to enacting a limited regulatory regime  aimed at enhancing market transparency and efficiency through CFTC, as  the regulator of exchange-traded derivatives.
However, because of the lack of reported data about this market,  addressing concerns about its function and effect on regulated markets  and entities would be a challenge. CFTC officials have said that they have  reason to believe these off-exchange activities affect prices determined on  a regulated exchange. In a June 2007 Federal Register release clarifying its  large trader reporting authority, CFTC noted that having data about the  off-exchange positions of traders with large positions on regulated futures  exchanges could enhance the commission’s ability to deter and prevent  price manipulation or any other disruptions to the integrity of the  regulated futures markets. According to CFTC officials, the commission  also has proposed amendments to clarify its authority under the CEA to  collect information and bring fraud actions in principal-to-principal  transactions in these markets, thus enhancing CFTC’s ability to enforce  antifraud provisions of the CEA.
Also, in August 2007, CFTC announced plans to conduct a hearing to begin  examining more closely the trading on regulated exchanges and exempt  commercial markets. The September 2007 hearing focused on a number of  issues, including  the current tiered regulatory approach established by the CFMA and  whether this model is beneficial; the similarities and differences between exempt commercial markets and  regulated exchanges, and the associated regulatory risks of each market;  and the types of regulatory or legislative changes that might be appropriate to  address any identified risks.
section_title: CFTC Engages in Surveillance Activities and Enforcement Activities, but the Effectiveness of these Activities Is Largely Uncertain
paragraphs: CFTC provides oversight for commodity futures markets through routine  surveillance, analysis of market data, and inquiries of market participants  and others. The commission uses information gathered from surveillance  activities to identify unusual trading activity and possible market abuse. In  particular, CFTC’s LTRS provides essential information for surveillance,  and LTRS provides information on the majority of all trading activity on  futures exchanges. CFTC staff also rely on data from other sources and on  their experience to identify potential problems, reporting unresolved  potential market problems to the commission. NYMEX also conducts its  own surveillance activities. According to CFTC and industry officials,  CFTC and NYMEX contact traders to collect additional information about  questionable trading practices. CFTC staff also said that they routinely  investigate traders with large open positions, but the staff added that they  do not routinely maintain information about such inquiries, thereby  making it difficult to determine the usefulness and extent of these  activities. In addition, CFTC coordinates its surveillance activities with  other federal, state, and foreign authorities. While CFTC’s surveillance  authority is limited to futures exchanges, the commission’s enforcement  authority for manipulation and fraud extends to both exchange-based  trading and off-exchange trading in exempt commodities, such as energy  products. According to data provided by CFTC, in recent years, it has used  its enforcement authority to file enforcement actions for almost 300 cases,  more than 30 of which involved energy-related commodities. However, as  with programs operating in regulatory environments where performance is  not easily measurable, evaluating the effectiveness of CFTC’s enforcement  activities is challenging because of the lack of effective outcome-based  performance measures. CFTC’s enforcement program received mixed  ratings in a recent OMB review because CFTC could not fully demonstrate  the effectiveness of its enforcement activities.
subsections: section_title: CFTC Oversight Includes Surveillance of Energy Futures Trading, but the Full Extent of Follow-up Activities Is Uncertain
paragraphs: CFTC conducts regular market surveillance and oversight of energy  trading on NYMEX and other futures exchanges. These activities include  focusing on detecting and preventing disruptive practices before they  occur and keeping the CFTC commissioners informed of possible  manipulation or abuse. In addition to conducting direct surveillance of  trading in energy futures markets on NYMEX, CFTC focuses on NYMEX’s  compliance with appropriate CEA core principles, including monitoring of  trading to prevent price manipulation and enforcing position limits and  position accountability rules. In conducting its own surveillance activities,  NYMEX may bring enforcement actions when violations are found. CFTC  staff also investigate traders with large open positions and document cases  of improper trading.
subsections: section_title: CFTC Oversees Trading on Futures Exchanges
paragraphs: According to CFTC officials, CFTC staff at three regional offices provide  much of the market oversight and monitor daily trading activity. For  instance, CFTC’s New York Regional Office employs seven economists,  who look for unusual trading and potential market manipulations in all  futures contracts traded on New York futures exchanges. The New York  regional staff obtain information from both market participants and  NYMEX to monitor energy trading activity. New York CFTC staff stated  that each morning, about 160 firms electronically submit large trader  position data from the previous day to CFTC. CFTC headquarters receives  these data and makes them available on a network to its field offices. Staff  review these data for potential errors or omissions and then populate the  LTRS, a database that staff use in conducting their surveillance activities.
CFTC staff also said that they rely on the commission’s integrated  surveillance system (ISS), which contains surveillance data that CFTC has  collected from the futures exchanges, clearing members, foreign brokers,  and large traders. According to CFTC’s 2005 performance and  accountability report, ISS is a critical application to support futures and  options data market surveillance. This system provides continuously  updated trading data on holders of large futures and option positions that  CFTC staff uses daily to monitor futures and option trading, detect  potential problems, and identify trends in the marketplace. According to  CFTC officials, ISS also is used to facilitate analysis of data received from  exempt markets as a result of special calls for information. For example,  pursuant to separate special calls issued in April, September, and  December, 2006, ICE now continuously provides the commission with  large trader position data. The commission also issued enforcement- related special calls seeking data for two individual ICE market  participants in September 2006 and February 2007.
The LTRS, which is part of ISS, is a comprehensive system for collecting  information on market participants, a key information source for CFTC’s  market surveillance program and essential for monitoring markets and  identifying and resolving potential problems involving market congestion,  manipulation, and speculative position limits. Congestion may occur  when traders holding short positions are attempting to cover their  positions but are unable to find an adequate supply of contracts provided  by traders with long positions or by new sellers willing to enter the  market, except at sharply higher prices. In conducting their daily  surveillance activities, CFTC officials said they analyze the trading data for  indications that individual traders may be attempting to manipulate the  market. This activity involves (1) looking for traders having unusually  large market positions relative to open interest—the total number of  futures contracts that have been entered into and not yet liquidated by an  offsetting transaction or fulfilled by delivery—and deliverable supply and  (2) examining the potential for disruption at expiration and sharp moves in  the market. If certain positions pose concerns to CFTC staff, they can  request additional information from a reporting firm or trader about  trading and delivery activity.
CFTC staff also analyze trading using data from other sources. CFTC  officials said that the staff look at price movements and price  relationships—especially in the natural gas, crude oil, heating oil, and  unleaded gasoline markets—using commercial information sources, such  as Bloomberg, Gas Daily, Reuters, and other market sources. They also  obtain information about traders by monitoring their Web sites and use  NYMEX’s and EIA’s Web sites and Lexis-Nexis, as well as firms’ Web sites.  CFTC staff said that they are in regular contact with exchange officials,  who have data on clearing members and trading activity. They also obtain  surveillance information from other units within the commission and from  tips by the public.
While CFTC data and other market collections are focused on identifying  potential market disruptions and manipulations, staff also rely on their  experience to identify potential problems. According to CFTC staff, the  New York Regional Office staff assigned to surveillance of energy trading  have many years of experience, either doing surveillance work for CFTC  or in the futures industry, in general. Experienced staff are needed  because, according to CFTC staff, analyzing market data is an art as well  as a science. CFTC staff referred to the traditional test for manipulation  set forth in the commission’s Indiana Farm decision as a commonly  recognized statement of the elements that are necessary to prove  manipulation.
According to CFTC staff, when a potential market problem has been  identified, surveillance staff generally contact the exchange or traders to  gather additional information. They said that surveillance staff may ask  exchange employees, brokers, or traders questions to confirm positions  and determine the intent of traders. They added that staff may express  concern about the size of positions or possible actions by traders and  caution traders to act responsibly. According to the staff, CFTC’s Division  of Market Oversight may issue a warning letter or make a referral to the  Division of Enforcement to conduct a nonpublic investigation into the  trading activity. Markets where surveillance problems have not been  resolved may be included in reports presented to the commission at  weekly surveillance meetings. These reports provide information on  traders with the four largest long and short positions; other market  information, including delivery information; and background on the  contact. According to CFTC staff, CFTC commissioners review the  reports; discuss the situations with surveillance staff; and, if appropriate,  consider other possible remedial actions, such as suggesting that the  exchange take emergency action. If necessary, the commission itself may  take emergency action.
If these actions do not resolve the issue or if an exchange fails to resolve a  problem by taking actions that the commission deems appropriate, CFTC  can order an exchange to take emergency actions. These actions include  limiting trading, imposing or reducing limits on positions, requiring the  liquidation of positions, extending a delivery period, or suspending  trading. The commission has taken such emergency actions four times in  its history, but never for energy markets.
In addition to CFTC’s surveillance of NYMEX and trading on the exchange,  NYMEX conducts its own surveillance activities and, if violations are  found, brings its own enforcement actions. NYMEX is responsible for  enforcing its own standards and CFTC’s standards embodied in its rules  governing the exchange, and its surveillance program is designed to  monitor for possible manipulation by market participants. If NYMEX staff  find potential violations, they will gather information and, if needed, take  enforcement actions. For example, according to officials at a large refiner,  NYMEX staff call them nearly every month about a large trade to make  sure that their physical (or wet) barrels have moved and that their trade is  not a price-setting mechanism or market ploy. Refiner officials added that  even though NYMEX staff know they are a big refiner, they will examine  their trades to see the actual signed contract to make sure it is valid. In  their view, NYMEX staff are vigilant, as they should be. Officials from a  hedge fund also said that both NYMEX and CFTC staff monitor their  positions carefully and, as a speculator, would be notified immediately by  NYMEX and CFTC if they were over the trading limits on any day. When  asked about what weaknesses in the structure, monitoring, or  enforcement mechanisms of derivative markets might allow for market  manipulation, one market observer responded that he was not aware of  any such weaknesses. Appendix III contains detailed discussion of  NYMEX surveillance activities and enforcement actions.
section_title: Actions Taken by CFTC Staff to Inquire about Potential Problems May Not Always Be Documented
paragraphs: CFTC staff routinely make inquiries about traders with large open  positions approaching expiration, but formal records of their findings are  only kept in cases where there is evidence of improper trading. If LTRS  data reveal that a trader has a large open market position that could  disrupt markets if it were not closed before expiration, CFTC staff would  contact the trader to determine why the trader had the position and what  plans the trader had to close the position before expiration or to ensure  that the trader was able to take delivery. If the traders provided a  reasonable explanation for the position and a reasonable delivery or  liquidation strategy, staff said that no further action would be required.  CFTC staff said they would document such contacts on the basis of their  importance in either informal notes, e-mails to supervisors, or informal  memorandums. No formal record would be made of the inquiry, according  to one CFTC official, unless there was a signal indicating improper trading  activity. Without such data, CFTC’s measures of the effectiveness of its  actions to combat fraud and manipulation in the markets will not reflect  this surveillance activity, and CFTC management might miss opportunities  to both identify trends in activities or markets and better target its limited  resources.
CFTC staff added that all surveillance projects and activities that require a  minimum number of hours of work are tracked by quarterly statistical  reports, including those futures expirations with large trader or  deliverable supply problems. They said that expirations are routinely  monitored by economists and reviewed with their supervisors through  weekly surveillance reports. Economists are responsible for the analytical  review of cash and futures market developments, including the assessment  of supply and demand factors, basis and spread relationships, the  adequacy of deliverable supply, large trader positions and position  changes, large trader histories, and the potential for group trader activity.  CFTC staff said that their economists keep their supervisors and the  commission informed of potential problems as they arise.
section_title: CFTC Coordinates Its Surveillance and Oversight Activities with Others
paragraphs: In addition to keeping CFTC commissioners apprised of surveillance  activities and specific cases that may require action, CFTC coordinates its  surveillance and oversight activities with other federal agencies, states’  attorneys general, and foreign regulators. CFTC officials told us that  through the Division of Enforcement’s Office of Cooperative Enforcement,  which was created in 2002, they conduct outreach efforts to other  financial regulators at the federal and state levels. Specifically, CFTC and  FERC coordinate oversight and enforcement activities and have a  memorandum of understanding that provides for the exchange of data.  FERC regulates the interstate transmission of natural gas, oil, and  electricity, and it audits natural gas sellers’ compliance with the protocols  outlined by FERC for reporting sales to index publishers like Platts, a  company that compiles information on oil, natural gas, and electricity and  other energy commodities and provides industry reports on commodity  prices. If futures transactions are thought to affect transactions within  FERC’s jurisdiction, then FERC and CFTC may coordinate their oversight  and enforcement work by sharing data as provided in the memorandum. In  pursuing potential market abuse cases, such as individuals trying to  manipulate energy spot prices to benefit their futures market positions,  FERC officials said that FERC will tend to take the lead when abuses  occur in the physical markets. FERC officials also said that CFTC will tend  to take the lead when abuses occur in the futures markets. In July 2007,  FERC filed two market manipulation cases that, according to a  commission announcement, was the first time the agency used its  enforcement authority under the Energy Policy Act of 2005 and its former  market manipulation rule. According to CFTC officials, CFTC has filed 38  cases over the past 6 years that have focused on conduct in both the cash  and futures markets (see app. IV). CFTC and FERC also may work with  DOJ on certain cases.
In addition, CFTC officials said that, on occasion and when warranted by  the circumstances, CFTC has shared large trader information with certain  agencies, such as the Department of the Treasury, the Board of Governors  of the Federal Reserve System, and the Federal Reserve Bank of New  York, to address issues of common concern to the agencies. For example,  in the aftermath of the financial difficulties in 1998 of Long Term Capital  Management, a large hedge fund, CFTC shared information on the hedge  fund’s exchange trading activity with members of the President’s Working  Group. Because coordinating requires judgments about what information  would need to be and could be shared and about how best to share it, we  concluded in a 1999 report that the regulators are in the best position to  determine the most effective ways to enhance their coordination. CFTC  also shares information with other members of the President’s Corporate  Fraud Task Force at their quarterly meetings on antifraud cases.
section_title: CFTC Energy-Related Enforcement Actions Generally Involved False Reporting and Attempted Manipulation, and Enforcement Actions Often Are Coordinated with Other Authorities
paragraphs: CFTC’s Division of Enforcement is charged with enforcing the  antimanipulation sections of the CEA, including sections 6(c), 6(d), and  9(a)(2). In particular, section 9(a)(2) sets forth the commission’s  antimanipulation and false reporting authority in cash and futures  markets. In determining whether violative conduct has occurred, CFTC  officials told us that the Division of Enforcement has broad investigatory  authority to obtain records and testimony, including subpoena authority,  under a commission order. They added that upon conclusion of an  investigation, which is routinely nonpublic, the division may recommend  enforcement action if warranted.
The enforcement actions CFTC has taken in its energy-related cases  generally have involved false public reporting as a method of attempting to  manipulate prices on both the NYMEX futures market and the off- exchange markets. CFTC officials said that from October 2000 to  September 2005, the commission initiated 287 enforcement cases and  more than 30 of these cases involved energy trading, including actions  against Enron and others. For example, according to CFTC data, from  2001 through 2005, CFTC levied fines totaling $305 million in actions  alleging attempted manipulation of the price of natural gas (see app. IV for  more detailed information). Most of these cases charged attempted  manipulation by means of falsely reporting natural gas trading information  to energy index firms, such as Platts, that calculate surveys or indexes of  natural gas prices for various physical delivery points (hubs) throughout  the United States. Generally, these cases involved allegations of various  defendants knowingly disseminating false information in an effort to skew  the indexes for their financial benefit or for other reasons. Participants in  the natural gas markets use the indexes for price discovery and assessing  price risk. Many of the actions were initiated on the basis of information  that came from sources other than CFTC surveillance activities, or those  of NYMEX, because they involved activities outside of NYMEX. As one  major oil company official told us, in his view, CFTC and FERC vigorously  pursued attempts by traders to manipulate the market.
Most recently, on August 1, 2007, the commission entered an order  imposing a $1 million penalty against Marathon Petroleum Company, LLC,  for attempting to manipulate spot cash crude prices by attempting to  influence the Platts market assessment. On July 25, 2007, the commission  commenced an action against Amaranth and others for attempted  manipulation of NYMEX natural gas futures prices. Also on July 26, 2007,  the commission commenced an enforcement action on Energy Transfer  Partners, L.P., and others for attempted manipulation of physical natural  gas prices.
Regarding energy futures, CFTC coordinates its enforcement activities  with NYMEX officials and various other federal, state, and foreign  authorities. CFTC staff stated that they meet periodically with NYMEX  Compliance Department officials to discuss enforcement activities, as  appropriate, and have formal quarterly meetings to discuss mutual  involvement in specific cases, including energy products. In addition to  coordinating energy enforcement matters with NYMEX, as a regulator of  derivatives trading, CFTC often will work with the regulator of the  underlying commodity or affected market, whether the Department of  Agriculture, FERC, or Treasury. CFTC does not have criminal authority  but often works with DOJ on those cases involving violations of the CEA  that DOJ believes warrant criminal prosecution. DOJ officials stated that  their focus has been on natural gas cases, which began with cases  involving Enron. According to DOJ officials, their role complemented the  regulatory roles of FERC and CFTC, and they have an effective working  relationship with CFTC in terms of sharing case information. For example,  pursuant to a memorandum of understanding with CFTC, in May 2006,  FERC obtained information about trading in natural gas futures contracts  that FERC used in support of an enforcement action against Amaranth  that was initiated in July 2007. On July 25, 2007, CFTC filed an action in  the United States District Court for the Southern District of New York  against Amaranth Advisors, L.L.C., Amaranth Advisors (Calgary) ULC, and  Brian Hunter alleging, among other things, that the defendants  intentionally and unlawfully attempted to manipulate the price of natural  gas futures contracts on NYMEX on February 24, 2006, and April 26, 2006.
In another case, on June 28, 2006, CFTC brought an enforcement action  against BP Products North America, Inc., alleging, among other things,  that BP cornered the physical propane market and manipulated the price  of propane in February 2004. Also on June 28, 2006, DOJ announced that  a former BP trader had pled guilty to conspiracy to manipulate and corner  the physical propane market. FTC also has exercised its authority in the  energy arena. Since 1980, FTC’s focus in energy has been in reviewing  mergers and acquisitions for anticompetitive behavior and investigating  instances of possible collusion, price fixing, and other anticompetitive  conduct. However, FTC staff told us that they generally did not coordinate  their work with CFTC, but added that they would turn over any evidence  of futures manipulation to CFTC. CFTC staff said that, as appropriate,  CFTC also coordinates its antifraud enforcement activities with states’  attorneys general, who often will assist in a case by acting as a co-plaintiff  with CFTC. In turn, CFTC may detail an attorney to a state. CFTC staff  said that they also may work with international authorities, such as the  United Kingdom’s Financial Services Authority, on cases involving  activities in more than one nation.
section_title: CFTC’s Enforcement Program Received a Mixed OMB Rating but Lacks Effective Outcome-Based Performance Measures
paragraphs: Although CFTC has undertaken enforcement actions and levied fines,  OMB’s most recent 2004 Program Assessment Rating Tool (PART)  assessment of the CFTC enforcement program was mixed. OMB designed  PART to provide a consistent approach to assessing federal programs in  the executive budget formulation process. PART is a standard series of  questions meant to serve as a diagnostic performance tool, drawing on  available program performance and evaluation information to form  conclusions about program benefits and recommend adjustments that may  improve results. In the assessment, OMB rated the enforcement program  as “Results Not Demonstrated” and said that the enforcement program  lacked performance measures that illustrate whether the program meets  its overall objective. However, CFTC’s existing performance measures  show that it brings substantive cases in a timely manner and “is well  designed to meet its objectives [of protecting commodity futures and  options market users and the public from fraud, manipulation, and abusive  practices related to the sale of certain commodities through the  enforcement of laws against such practices] and to maximize the use of its  resources.” According to the PART assessment, the enforcement program  has a clear purpose, addresses the public interest by ensuring adherence  to the CEA and CFTC’s regulations, is not duplicative of other government  programs, is free of major design flaws, and is effectively targeted so that  the resources address the program’s purposes. OMB scored CFTC at 100  percent for the dimensions of both program purpose and design and  program management, 71 percent for planning, and 67 percent for results  and accountability. Compared with the other 96 programs that OMB  identified as similar to CFTC’s program, the comparable programs have  much lower average scores for the dimensions of purpose and design   (82 percent), program management (84 percent), and results and  accountability (50 percent) and have a similar score for planning   (73 percent).
CFTC’s score of 71 percent for the planning dimension reflected OMB’s  assessment that CFTC included performance measures in its annual  reports; used the actual results it achieved during the preceding fiscal year  as a baseline for all of its performance measures and strove to set  ambitious targets for its performance; was scrutinized on a regular basis  by CFTC’s Office of the Inspector General; had budget requests that were  explicitly tied to accomplishment of the annual and long-term  performance goals, and resource needs that were presented completely  and transparently in the program’s budget; and had taken meaningful steps  to correct its strategic planning deficiencies. However, OMB also  concluded that regarding the strategic planning dimension, the program  had a limited number of long-term performance outcome measures that  did not fully reflect the program’s goals, and that the long-term measures  and targets did not fully reflect the program’s purposes. These measures  included  the percentage growth in market volume,  the increase in the numbers of exchanges and clearinghouses, the percentages of SROs and clearing organizations that complied with the  requirement to enforce their rules, and the percentage decreases in both the number of customers who lost funds  because of alleged wrongdoing and the amount of funds that these  customers lost.
CFTC enforcement staff stated that they face challenges in establishing  measures to determine whether the enforcement program achieves its goal  of deterring people from engaging in market manipulation or other abusive  behavior.
According to OMB, CFTC’s score of 67 percent on the program results and  accountability dimension reflected its assessment that CFTC’s  enforcement program had demonstrated both (1) improved time  efficiencies and cost-effectiveness in achieving its program goals and  (2) our several evaluations of CFTC indicating that it was effective and  achieving results. OMB also reported that for fiscal year 2004, the  enforcement program met all of its outcome measures and came close to  meeting all of its output measures, with one exception. OMB further stated  that the outcome-related measures established for enforcement do not  fully reflect progress on meeting the program’s overall goals.
While CFTC satisfied most but not all of OMB’s PART criteria, it has fallen  short in its ability to develop long-term performance outcome measures  that are reflective of its program’s goals and purposes. As OMB identified,  CFTC has substituted proxy measures for outcome measures: that is, using  measures such as percentage growth in market volume and increase in the  number of exchanges and clearinghouses as proxies for protecting market  integrity, and percentage decreases in both the number of customers who  lost funds because of alleged wrongdoing as proxies for both protecting  market integrity and consumers. We have found that managers in a  regulatory environment where programs and activities are not easily  measurable, as is the case with CFTC enforcement, have reported that it is  particularly challenging to measure outcome-oriented performance and  collect useful data. However, there are a number of other ways to  evaluate program effectiveness, such as using expert panel reviews,  customer service surveys, and process and outcome evaluations. We have  found with other programs that the form of the evaluations reflect  differences in program structure and anticipated outcomes, and that the  evaluations are designed around the programs and what they aim to  achieve. Without utilizing these or other methods to evaluate program  effectiveness, CFTC is unable to demonstrate whether its enforcement  program is meeting its overall objectives.
section_title: Conclusions
paragraphs: The rise in energy prices can be and has been attributed to a variety of  factors. From January 2002 through June 2006, the physical and  derivatives markets both underwent substantial change and evolution. The  physical energy markets experienced tight supply and increasing global  demand, ongoing political instability in oil-producing regions, and other  supply disruptions, which affected the prices of energy products. At the  same time, increasing numbers of and different types of market  participants were trading futures in search of higher returns, thereby  increasing contract volume. Substantial growth in the exempt commercial  and OTC markets also occurred. Determining the impact of any one factor  is complicated because price changes in the physical and futures markets  are closely linked and in the long run are influenced by the same market  fundamentals. Generally, futures prices reflect traders’ views of the impact  of changes in the physical markets and spot prices are affected by these  expressed views and vice versa. Given this interrelationship, it is not  surprising that some market observers point to the changes in the energy  futures and other derivatives markets as a possible explanation for price  increases, while others, primarily the regulators, look to changes in the  physical markets to explain the increases. However, given the changes in  both markets, attributing causality to any one factor—much less a  particular type of trading activity—is difficult. Regardless of the reason for  the increases in prices, ongoing monitoring of both markets is warranted  to ensure that the public interest is being protected as well as the integrity  of the markets.
Related to concerns about rising prices, some market observers and others  have questioned whether CFTC’s authority is broad enough to protect  investors from fraudulent, manipulative, and abusive practices. The scope  of CFTC’s authority varies, depending on the market where the commodity  is traded. Some markets are available for retail trading and receive direct  CFTC oversight, while others are limited to professional traders (such as  OTC energy derivatives markets) and receive less oversight. Other markets  are largely unregulated. Given the changes in these markets in general and  the growth in off-exchange trading in particular as well as ongoing  questions about the relationship between exchange-traded and off- exchange markets, a reexamination of the scope of CFTC’s authority is  warranted. The results of CFTC’s hearings on its existing regulatory  structure and the similarities and differences between exchange-traded  and exempt markets may be instructive for such a reexamination. While  participants on all sides of this issue have perspectives that call for further  consideration, these are public policy decisions that ultimately will be  made by Congress. Unless resolved, questions will continue about the  scope of CFTC’s authority.
In the interim, we have identified a number of process issues that CFTC  can address to strengthen its enforcement and surveillance programs.
First, CFTC has attempted to provide the public with more meaningful  information through the COT reports. While this effort has expanded the  reporting for some agricultural commodities, it has remained virtually  unchanged for energy commodities that have a high level of public and  industry interest. Not having complete information on trading in energy  commodities impairs the ability of traders to make fully informed  decisions.
Second, CFTC’s oversight of regulated exchanges involves a range of  surveillance activities that have resulted in a number of commission- related enforcement actions. However, CFTC does not maintain complete  records of its surveillance activities. Currently, the commission does not  maintain written records on all surveillance follow-up activities,  particularly in instances where no potential violation was found. Without  such records, CFTC staff cannot fully demonstrate the actions they are  taking to combat fraud and manipulation in the markets.
Third, as is the case with most enforcement agencies, CFTC has had  limited success in identifying meaningful outcome-based performance  measures. However, agencies can use a variety of methods to evaluate  program effectiveness, such as expert panel reviews, customer service  surveys, and process and outcome evaluations. Without meaningful  measures for program effectiveness, CFTC may be missing opportunities  to identify significant trends in certain activities or markets and to better  target its limited resources.
section_title: Matter for Congressional Consideration
paragraphs: In light of recent developments in derivatives markets and as part of  CFTC’s reauthorization process, Congress should consider further  exploring whether the current regulatory structure for energy derivatives,  in particular for those traded in exempt commercial markets, provides  adequately for fair trading and accurate pricing of energy commodities.
section_title: Recommendations for Executive Action
paragraphs: To improve the oversight and available information on energy futures  trading, we recommend that the Acting CFTC Chairman take the following  three actions:  reexamine the classifications in the COT reports to determine if the  commercial and noncommercial trading categories should be refined to  improve the accuracy and relevance of public information provided to the  energy futures markets;   explore ways to routinely maintain written records of inquiries into  possible improper trading activity and the results of these inquiries to  more fully determine the usefulness and extent of CFTC’s surveillance,  antifraud, and antimanipulation authorities; and   examine ways to more fully demonstrate the effectiveness of CFTC  enforcement activities by developing additional outcome-related  performance measures that more fully reflect progress in meeting the  program’s overall goals.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Commodity Futures Trading  Commission for comment. In its written comments, CFTC said that the  commission will reexamine classifications in the COT reports. CFTC also  said that the commission will explore additional recordkeeping  procedures for its staff, but that it must balance the time required for such  additional tasks against the need to undertake market surveillance by an  already-stretched surveillance staff. CFTC added that it has included the  development of measures to evaluate the effectiveness of its enforcement  program in its most recent strategic plan. The commission’s comments are  reprinted in appendix V. CFTC staff provided technical comments and  corrections that we have incorporated in this report where appropriate.
We will provide copies of this report to interested congressional  committees. We are also sending a copy of this report to the Acting  Chairman of the Commodity Futures Trading Commission, the Secretary  of the Department of Energy, the Chairman of the Federal Energy  Regulatory Commission, the Chairman of the Federal Trade Commission,  the Acting U.S. Attorney General, and the Chairman of the Securities and  Exchange Commission. We will make copies available to others upon  request. In addition, this report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (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 report. GAO staff who made major contributions to this report  are listed in appendix VI.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine trends and patterns of trading activity in the energy  derivatives markets and physical markets, we analyzed data on futures,  spot, and over-the-counter (OTC) derivative markets. We gathered  information on spot prices for crude oil, unleaded gasoline, heating oil,  and natural gas from the U.S. Department of Energy’s Energy Information  Administration (EIA). We obtained daily futures settlement prices and  average daily volume data for the four commodities from the New York  Mercantile Exchange, Inc. (NYMEX). We collected data on the size of the  global OTC commodity derivatives market—including energy, but  excluding precious metals—from the Bank for International Settlements.  We also obtained information on the numbers of participants and  outstanding positions in energy futures markets by different categories of  traders from the Commodity Futures Trading Commission (CFTC). These  CFTC data cover the period from July 2003 through December 2006. We  determined that data from these sources were sufficiently reliable for the  purposes of this report.
We used monthly averages of the EIA spot prices and NYMEX futures  prices to depict price trends over the past 20 years and illustrate the strong  relationship between spot and futures prices. Also, we adjusted the prices  to remove the effects of inflation so that prices would be comparable  across years. We also adjusted the prices using monthly deflation factors  that we derived from the seasonally adjusted implicit price deflator for  gross domestic product from the Bureau of Economic Analysis, as of  February 28, 2007.
We used the futures price data obtained from NYMEX to calculate the  volatility of energy futures prices. These data covered the period from  January 1987 through December 2006 for crude oil, unleaded gasoline, and  heating oil. The period for natural gas was from April 1990 through  December 2006, when that contract began trading on NYMEX. We  calculated the historical volatility of the futures prices as the standard  deviation of the natural logarithm of relative changes in daily settlement  prices. Monthly volatility figures were calculated from the trading days of  each month and expressed on an annual basis. We annualized the monthly  figures by multiplying daily volatility by the square root of 250, which  represents an approximation of the number of trading days in a year. We  also calculated annual volatility for each of the four commodities as the  average of the monthly mean volatilities. We used the front month futures  contract—that is, the nearest traded contract month—because it is the  most frequently used maturity for measuring price and volatility and is the  most heavily traded contract.
To identify the opinions of market participants and analysts about the  effect of energy derivatives trading on prices, we interviewed officials  from CFTC, the Federal Energy Regulatory Commission, and EIA;  managers from trading facilities, including NYMEX and the  IntercontinentalExchange (ICE); academics knowledgeable about energy  and finance; and market participants representing investment banks,  hedge funds, and oil producers and refiners. We selected banks to  interview on the basis of their perceived level of involvement in energy  markets. The hedge funds we interviewed were identified through the  assistance of the Managed Funds Association—a membership organization  representing the hedge fund industry—which contacted its members  involved in energy trading to identify hedge funds who were willing to be  interviewed. We selected oil producers and refiners on the basis of their  size and role in U.S. energy markets. We also gathered information from  several trade associations, including those representing users of energy  commodities, and interviewed former CFTC officials. Although we  gathered the views of a wide range of market participants and observers,  these sources do not necessarily represent the views of all market  participants and observers. We also reviewed studies by governmental and  nongovernmental observers, including CFTC; NYMEX; the Senate’s  Permanent Subcommittee on Investigations, Committee on Homeland  Security and Governmental Affairs; and a report prepared for the attorneys  general of four midwestern states. In addition, we reviewed public  statements from relevant government officials, such as the current Federal  Reserve chairman and his predecessor. To understand the effects of  supply and demand conditions in the physical energy markets, we  examined data and analysis from EIA and prior GAO reports.
To examine CFTC’s resources and authority for protecting market users  from fraudulent, manipulative, and abusive practices in the trading of  energy futures contracts, we describe CFTC’s current and past regulatory  authority and approach by reviewing the Commodity Exchange Act (CEA),  as amended; CFTC’s President’s Budget and Performance Plan for fiscal  year 2007; CFTC’s 2004 Annual Report; and other information from CFTC.  We obtained information on CFTC’s regulatory role and the exempt  commercial and OTC markets from officials at CFTC, EIA, and NYMEX  and from market participants. In addition, we reviewed information on  CFTC’s regulatory role contained in the Federal Register and  congressional hearing testimony. To describe the concerns regarding OTC  derivative trading and the scope of CFTC’s regulatory authority, we  obtained information from federal agency officials and an industry trade  association. To describe the hedging and speculative trading of market  participants, we reviewed various reports that addressed those concerns,  and we interviewed several market participants.
To examine how CFTC monitors and detects market abuses in the trading  of energy futures, and enforcement actions taken in response to identified  abuses, we gathered information from officials at CFTC headquarters and  the New York Regional Office. We reviewed CFTC regulations and other  documents on its surveillance and enforcement programs and observed a  CFTC monthly surveillance meeting. We gathered information from  market participants and experts regarding CFTC’s oversight activities. To  examine CFTC’s enforcement program and how CFTC coordinates with  other regulators and authorities, we gathered and analyzed data on CFTC’s  enforcement cases, interviewed CFTC and other federal agency officials  and staff on coordination activities and agreements, and reviewed CFTC  Office of the Inspector General reports. We also reviewed the Office of  Management and Budget’s PART assessment of CFTC’s enforcement  program.
section_title: Appendix II: Types of Contracts and Transactions for Energy Commodities in the Physical and Financial Markets
paragraphs: Appendix II: Types of Contracts and  Transactions for Energy Commodities in the  Physical and Financial Markets Bilateral over-the-counter (OTC) transactions for immediate delivery or near-term  delivery and payment representing a specific price and location. Industry analysts  publish price data gathered from market participants.
Bilateral OTC transactions in which the seller agrees to deliver to the buyer a specified  quantity and quality of an asset or a commodity at a specified date at an agreed-upon  price or pricing formula and where delivery is contemplated.
Futures contracts are standardized contracts for a specific product at a specific  location, where delivery is not usually made and contracts are offset prior to expiration.  Transactions are executed on an exchange regulated by the Commodity Futures  Trading Commission (CFTC), such as the New York Mercantile Exchange. The  exchange publicly disseminates price and other data.
Options on futures contracts are contracts that give a buyer the right, but not the  obligation, to buy or sell a specific quantity of futures contracts within a designated  period at a designated price.
As in the United States, standardized contracts for a specific product at a specific  location, where delivery is not usually made and contracts are usually offset prior to  expiration. Sales are executed on an exchange, such as the IntercontinentalExchange  (ICE) Futures in London that is subject to regulation by the U.K. Financial Services  Authority.
Foreign boards of trade are able to provide direct access to U.S. market participants  by obtaining “no-action” relief from CFTC staff.
Standardized contracts for a specific product at a specific location, where delivery is  not usually contemplated because contracts are usually offset prior to expiration or are  cash settled and are based on prices from a regulated futures exchange or another  source. Transactions are executed on an electronic trading platform, such as ICE,  involving “eligible commercial entities.” Exempt commercial markets may offer a  clearing service for certain derivatives contracts.
Exempt commercial markets may offer trading both in contracts that are subject to the  Commodity Exchange Act and contracts that are not.
Derivatives contracts that are privately negotiated, bilateral contracts between eligible  counter parties, often involving a swap dealer. The contracts are financially settled and  are based on prices from a regulated futures exchange or another source.
OTC swaps are a promise between two parties to make a series of payments to each  other, of which at least one series is based on a commodity price.
OTC options: OTC markets also offer options to buy or sell other assets.
section_title: Appendix III: New York Mercantile Exchange Surveillance and Enforcement Activities
subsections: section_title: NYMEX Conducts Surveillance of Both Market and Trading Activities
paragraphs: Under CFTC regulations, NYMEX is responsible for establishing and  enforcing rules governing its member conduct and trading, preventing  market manipulation, ensuring that futures industry professionals meet  qualifications, and examining members for financial strength. In carrying  out these responsibilities, NYMEX officials told us that NYMEX’s  surveillance program is designed to monitor market and trade practices.  They said that NYMEX relies on automated detailed information for each  transaction to identify the buyer, seller, and clearing members who  maintain customer accounts, and to identify whether a person is a member  of NYMEX. The market surveillance activities focus on monitoring for  possible manipulation by market participants. Specifically, NYMEX  officials monitor large trader data, the “street book” speculative position  limits and accountability levels, exemptions to speculative position limits,  position concentrations, and the relationship between cash and futures  prices. A speculative position limit is the maximum net position that a  market participant may hold in a specified contract month of a listed  NYMEX contract, and is set by NYMEX. Market participants that are bona  fide hedgers are eligible to apply for, and receive under certain conditions,  limited exemptions from speculative position limits.
NYMEX officials said that they monitor speculative position limits, and if a  limit is about to be reached or has been hit, they record the overage and  contact the customer to find out if there is a logical explanation for the  overage that is linked to a bona fide commercial exposure. They added  that if there is a logical explanation, the customer may be allowed to keep  the position and file for a formal exemption; however, if there is no logical  explanation, then NYMEX officials will direct the position to be reduced.  The officials said they follow such directives with a warning letter to the  customer. If the position is not reduced, the officials said that another  warning letter is then to be issued. As a final step, NYMEX could hold a  hearing before its business conduct committee to deny the customer  access to the exchange. However, this has never happened, according to  NYMEX officials. They also said that customers may obtain exemptions to  speculative position limits on a case-by-case basis and for a period of 12  months. The officials said that exemptions are not given if they could  disrupt the markets, and that the exemptions are monitored for possible  changing circumstances, such as reorganizations or Moody’s downgrading  a party’s equity rating.
NYMEX also monitors trading by customers using multiple brokers. For  example, NYMEX officials stated that large oil companies may use several  brokers to trade—that is, each broker may trade using its own account to  hide what it is doing from other companies. However, NYMEX officials  said that all of the company’s accounts are aggregated, and that its staff  will analyze the trading and large trader data and contact the customer if  there are any surveillance issues. In addition, NYMEX has established the  maximum daily trading limits for each commodity contract. These limits  are the maximum price advance or decline from the prior day’s settlement  price and, if exceeded, trading stops for a period. NYMEX officials said  that the exchange has changed these limits over the years, and the officials  could not recall the last time a trading limit was reached. Furthermore, the  limits were completely eliminated for NYMEX’s New York Commodity  Exchange (COMEX) division, which trades precious metals. According to  NYMEX officials, suspending trading would give traders time to count and  balance their positions before resuming trading. Unfortunately, the  officials continued, if trading on NYMEX is suspended, the price discovery  mechanism on which the OTC and cash markets depend is also  suspended. They added that CFTC does not provide any requirements for  price limits and, in fact, favors ongoing price discovery.
In addition to market surveillance, NYMEX conducts trade practice  surveillance. According to NYMEX officials, this surveillance focuses on  persons who handle contract orders either on the trading floor or  electronically, as well as on persons and firms engaging in proprietary  trading for their own accounts. NYMEX seeks to identify trading practice  abuses, such as prearranged trading, front running, providing tips on  proprietary information, and accommodating trades. Prearranged trading  is the noncompetitive trading between brokers in accordance with an  expressed or implied agreement or understanding and is a violation of  CEA and CFTC regulations. Front running is taking a futures or option  position based on, for example, a customer order in the same or related  future or option. This practice is also known as trading ahead.  Accommodation trading is noncompetitive trading entered into by a  trader, usually to assist another with illegal trades. NYMEX officials stated  that trade practice surveillance information may be used as part of market  surveillance, but this surveillance is not as focused on price movements  and involves different types of monitoring, such as physically observing  floor trading by people entering orders, and, in effect, is similar to “police  on the beat.” The officials added that with their recent use of the Chicago  Mercantile Exchange’s Globex electronic trading system to trade energy  futures, their trade practice surveillance system is changing, with more  emphasis on monitoring access to, and activity on, the Globex system in  NYMEX contracts.
section_title: NYMEX Uses Information from Surveillance Activities and Other Sources for Enforcement Cases
paragraphs: As a self-regulatory organization (SRO), NYMEX has the authority to  pursue instances of suspected manipulation or other attempts of  fraudulent or abusive trading. NYMEX officials stated that the exchange  conducts its own enforcement activities, and CFTC expects NYMEX as an  SRO to handle issues relating to exchange members. However, NYMEX  will request CFTC’s assistance if needed, especially for issues relating to  nonexchange members. If NYMEX officials become aware of potentially  abusive practices outside of their authority, they will notify the  appropriate federal regulator, such as CFTC. Information from NYMEX  surveillance activities and other sources is used to investigate potential  abuses. Other sources of information include referrals from CFTC, traders,  and customers. NYMEX officials investigate these referrals; if there is  evidence of wrongdoing, they may open an investigation case. For each  case that is pursued, they record information, including the source of the  referral and investigation activities. Interviews conducted during an  investigation may be taped and transcribed. From January 2000 through  May 2006, NYMEX opened 706 investigations. However, if a referral did  not result in a case that was pursued, NYMEX does not document how  each referral was handled. For example, if a referral regarding a trade  resulted in a NYMEX official making a telephone call and finding that  there was no apparent violation, NYMEX officials said staff would not  create a written record to log how the referral was handled or the result of  the inquiry.
NYMEX officials told us that when NYMEX pursues a case, such as  prearranged trading, the case is brought before the exchange’s business  conduct committee (BCC). According to NYMEX, the BCC (which  includes three public members and other committee members), is  structured in a manner analogous to a grand jury proceeding and  determines, on the basis of the evidence in an investigative report and any  written response from the person accused in the case, whether there is a  reasonable basis to believe an exchange rule violation occurred. NYMEX  officials told us that a BCC meeting is scheduled for every other month;  however, in some months, there are no cases to discuss and no meetings  are held. They added that the BCC hears about two or three dozen cases  annually. Once a case is heard, the BCC may then direct the compliance  department to issue a complaint, or, in the case of minor violations, a  written warning. The person named in the complaint has 10 days to  respond, and he or she may make a settlement offer at any time prior to  the conclusion of a hearing. Settlement offers must be approved by  NYMEX’s board of directors. From January 2000 through May 2006,  NYMEX opened more than 700 investigations, most involving trading  violations, and, of those, 125 were BCC-issued complaints (see table 2).
Settlement of NYMEX complaints may result in settlement offers, fines, or  disciplinary actions. Settlement offers exceeding $25,000, or cases  contested by the respondent, are referred to NYMEX’s adjudication  committee for settlement consideration or for a full disciplinary hearing.  The adjudication committee is authorized to conduct hearings where the  facts of the case are presented and argued by the respondent or their  attorney and exchange compliance counsel. At the conclusion of the  hearing, the committee issues a decision regarding any sanctions.  Sanctions can include a cease-and-desist order, a fine of up to $250,000 for  each rule violation, suspension, or expulsion from membership. For  example, NYMEX settled a $100,000 case on Morgan Stanley in 2002, a  $2.5 million case on BP Product North America, Inc., in 2003, and a  $300,000 case on Shell in 2005. NYMEX officials stated that no one has  been expelled from the exchange since 1998 for failure to pay a fine.  According to the officials, the adjudication committee is scheduled to  meet at least once a month. They added that about 40 percent of the cases  are resolved at adjudication and cases rarely go to a full hearing. If a  hearing does occur, the decisions can be appealed to NYMEX’s appeals  committee, which makes a final determination within the exchange. Cases  then can be appealed further to CFTC, but cases involving an appeal of an  exchange appeals committee decision rarely are contested or proceed to a  hearing. NYMEX officials said that the commission rarely, if ever,  overturns a NYMEX ruling. NYMEX publishes its final disciplinary actions  of the exchange. All settlements or adjudications are published in its  monthly publication The Open Interest (formerly, Barrels, Bars and  BTUs) and sent to the National Futures Association, where they are  included in the publicly accessible disciplinary log called “BASIC,” which  contains reports from all U.S. futures exchanges and from CFTC. Warning  letters are not reported, but they are used internally in prosecuting  disciplinary cases. NYMEX also reports its enforcement actions to CFTC.
To maintain its designation as a contract market, NYMEX must  demonstrate to CFTC its capacity to comply with the CEA’s core  principles. In addition, CFTC conducts rule enforcement reviews and  publicly reports on how NYMEX exercises its enforcement authority and  other areas of operations. In 2004, CFTC reported that NYMEX’s  disciplinary program provided reasonable sanctions for a majority of the  cases where the exchange took disciplinary action, and that its dispute  resolution program had fair and equitable procedures. The report was  generally positive and reported that NYMEX’s procedures provided for the  recording and safe storage of trade information. Furthermore, NYMEX’s  surveillance of trade practices was deemed to be adequate, with thorough  and well-documented investigations. NYMEX officials told us that a CFTC  rule enforcement review was recently initiated at the exchange.
section_title: Appendix IV: Commodity Futures Trading Commission’s Energy-Related Enforcement Actions, August 2001 - September 2006
paragraphs: Table 3 reflects information obtained from CFTC showing the energy- related enforcement actions it took by CFTC from August 2001 through  September 2006. The enforcement cases were against individuals and  companies, and the information used to initiate the investigation  originated from both within CFTC and from outside of the commission.  The actions mostly focused on attempts to manipulate energy commodity  prices through alleged attempts of false reporting; some also involved  alleged wash sales or trades—transactions intended to give the  appearance that purchases and sales have been made, without incurring  market risk or changing the trader’s market position, prearranged trading,  and recordkeeping violations. CFTC’s information also shows a wide  range of civil monetary penalties.
section_title: Appendix V: Comments from the Commodity Futures Trading Commission
section_title: Appendix VI: GAO Contract and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Godwin Agbara, Kevin Averyt,  Ross Campbell, Emily Chalmers, Jordan Corey, Patrick Dynes, Philip  Farah, John Forrester, Austin Kelly, Marc Molino, Paul Thompson, Rich  Tsuhara, and John Wanska (retired, Assistant Director) made key  contributions to this report.
section_title: Related GAO Products
paragraphs: Energy Markets: Factors Contributing to Higher Gasoline Prices.   GAO-06-412T. Washington, D.C.: February 1, 2006.
Natural Gas and Electricity Markets: Federal Government Actions to  Improve Private Price Indices and Stakeholder Reaction. GAO-06-275.  Washington, D.C.: December 15, 2005.
SEC and CFTC Penalties: Continued Progress Made in Collection  Efforts, but Greater SEC Management Attention Is Needed. GAO-05-670.  Washington, D.C.: August 31, 2005.
Mutual Fund Industry: SEC’s Revised Examination Approach Offers  Potential Benefits, but Significant Oversight Challenges Remain.   GAO-05-415. Washington, D.C.: August 17, 2005.
National Energy Policy: Inventory of Major Federal Energy Programs  and Status of Policy Recommendations. GAO-05-379. Washington, D.C.:  June 10, 2005.
Motor Fuels: Understanding the Factors That Influence the Retail Price  of Gasoline. GAO-05-525SP. Washington, D.C.: May 2005.
Mutual Fund Trading Abuses: SEC Consistently Applied Procedures in  Setting Penalties, but Could Strengthen Certain Internal Controls.   GAO-05-385. Washington, D.C.: May 16, 2005.
Financial Regulation: Industry Changes Prompt Need to Reconsider U.S.  Regulatory Structure. GAO-05-61. Washington, D.C.: October 6, 2004.
Natural Gas: Domestic Nitrogen Fertilizer Production Depends on  Natural Gas Availability and Prices. GAO-03-1148. Washington, D.C.:  September 30, 2003.
SEC and CFTC Fines Follow-up: Collection Programs Are Improving,  but Further Steps Are Warranted. GAO-03-795. Washington, D.C.: July 15,  2003.
Natural Gas: Analysis of Changes in Market Price. GAO-03-46.  Washington, D.C.: December 18, 2002.
SEC and CFTC: Most Fines Collected, but Improvements Needed in the  Use of Treasury’s Collection Service. GAO-01-900. Washington, D.C.:   July 16, 2001.
Energy Markets: Results of Studies Assessing High Electricity Prices in  California. GAO-01-857. Washington, D.C.: June 29, 2001.
Commodity Exchange Act: Issues Related to the Regulation of Electronic  Trading Systems. GAO/GGD-00-99. Washington, D.C.: May 5, 2000.
CFTC and SEC: Issues Related to the Shad-Johnson Jurisdictional  Accord. GAO/GGD-00-89. Washington, D.C.: April 6, 2000.
Financial Regulatory Coordination: The Role and Functioning of the  President’s Working Group. GAO/GGD-00-46. Washington, D.C.: January  21, 2000.
The Commodity Exchange Act: Issues Related to the Commodity Futures  Trading Commission’s Reauthorization. GAO/GGD-99-74. Washington,  D.C.: May 5, 1999.
CFTC Enforcement: Actions Taken to Strengthen the Division of  Enforcement. GAO/GGD-98-193. Washington, D.C.: August 28, 1998.
OTC Derivatives: Additional Oversight Could Reduce Costly Sales  Practice Disputes. GAO/GGD-98-5. Washington, D.C.: October 2, 1997.
CFTC/SEC Enforcement Programs: Status and Potential Impact of a  Merger. GAO/T-GGD-96-36. Washington, D.C.: October 25, 1995.
Financial Market Regulation: Benefits and Risks of Merging SEC and  CFTC. GAO/T-GGD-95-153. Washington, D.C.: May 3, 1995.
Energy Security and Policy: Analysis of the Pricing of Crude Oil and  Petroleum Products. GAO/RCED-93-17. Washington, D.C.: March 19, 1993.
Securities and Futures: How the Markets Developed and How They Are  Regulated. GAO/GGD-86-26. Washington, D.C.: May 15, 1986.