Energy Derivatives: Preliminary Views on Energy Derivatives Trading and CFTC Oversight
Published: 2007-07-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Energy prices for crude oil, heating oil, unleaded gasoline, and natural gas have risen substantially since 2002, generating questions about the reasons for the increase. Some observers believe that the higher energy prices were solely due to supply and demand fundamentals while others believe that increased futures trading activity may also have contributed to higher prices. This testimony highlights GAO's preliminary findings related to (1) trends and patterns in the futures and physical energy markets and the effect of these trends on energy prices and (2) the Commodity Futures Trading Commission's (CFTC) regulatory and enforcement authority over derivatives markets. GAO analyzed futures and large trader reporting data; trading data obtained from the New York Mercantile Exchange (NYMEX) for crude oil, heating oil, unleaded gasoline, and natural gas; and various other sources of energy-related data. GAO also analyzed relevant academic and other studies on the subject and interviewed market participants, experts, and officials at relevant federal agencies.
section_title: What GAO Found
paragraphs: Rising energy prices have been attributed to a variety of factors, and recent trends in the futures and physical markets highlight the changes that have occurred in both markets from 2002 through 2006. Specifically: (1) inflation-adjusted energy prices in both the futures and physical markets increased by over 200 percent during this period for three of the four commodities we reviewed; (2) volatility (a measurement of the degree to which prices fluctuate over time) in energy futures prices generally remained above historic averages during the beginning of the time period but declined through 2006 for three of the four commodities we reviewed; and (3) the number of noncommercial participants in the futures markets including hedge funds, has grown; along with the volume of energy futures contracts traded; and the volume of energy derivatives traded outside traditional futures exchanges. At the same time these changes were occurring in the futures markets for energy commodities, tight supply and rising demand in the physical markets pushed prices higher. For example, while global demand for oil has risen at high rates, spare oil production capacity has fallen since 2002, and increased political instability in some of the major oil-producing countries has threatened the supply of oil. Refining capacity also has not expanded at the same pace as the demand for gasoline. The individual effect of these collective changes on energy prices is unclear, as many factors have combined to affect energy prices. Monitoring these changes will be important to protect the public and ensure market integrity. Based on its authority under the Commodity Exchange Act (CEA), CFTC primarily focuses its oversight on the operations of traditional futures exchanges, such as NYMEX, where energy futures are traded. However, energy derivatives are also traded on other markets, namely exempt commercial markets and over-the-counter (OTC) markets--both of which have experienced increased volumes in recent years. Exempt commercial markets are electronic trading facilities that trade exempt commodities between eligible participants, and OTC markets involve eligible parties that can enter into contracts directly off-exchange. Both of these markets are exempt from general CFTC oversight, but they are subject to the CEA's antimanipulation and antifraud provisions and CFTC enforcement of those provisions. Because of these varying levels of CFTC oversight, some market observers question whether CFTC needs broader authority over all derivative markets. CFTC generally believes that the commission has sufficient authority over OTC derivatives and exempt energy markets. However, CFTC has recently taken additional actions to clarify its authority to obtain information about pertinent off-exchange transactions.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our preliminary views on the  trading of derivatives for energy commodities such as natural gas and  crude oil. As energy prices have increased in recent years, the trading  volume of exchange-traded futures, off-exchange traded swaps, and other  types of derivatives have also experienced significant growth. Increased  energy prices generally have been attributed to normal market forces of  supply and demand, but these trends in energy derivatives markets have  raised questions about whether this trading activity has placed additional  upward pressure on the prices of physical energy commodities. The prices  of futures contracts, like those of all derivatives, are in large part based on  prices in the physical spot (cash) market where commodities are sold. At  the same time, buyers and sellers of natural gas, crude oil, gasoline, and  other energy products use exchange-traded futures prices, which are  published daily, when determining prices in the physical markets. The  extent to which off-exchange prices are used for determining prices of the  underlying commodity, however, is unclear. The growth in energy futures  trading since 2001 has in part been fueled by new market participants such  as hedge funds and by increased investment in commodity index funds,  which are funds whose prices are tied to the price of a basket of various  commodity futures.
My testimony today is based on an ongoing engagement on trading activity  in energy derivatives markets—primarily the futures market—and the  oversight role of the Commodity Futures Trading Commission (CFTC).  Because of the broad interest in this subject, our ongoing work has been  initiated under the authority of the Comptroller General. My remarks  today present our preliminary views on (1) trends in the energy derivatives  and physical markets and the effect of those trends on energy prices, and  (2) the regulatory structure of the various markets where energy  commodities and derivatives are traded.
In conducting this work, we obtained and analyzed energy futures prices  and trading volumes from the New York Mercantile Exchange, Inc.  (NYMEX). Specifically, we collected data for crude oil, heating oil, natural  gas, and unleaded gas for the period January 2002 through December 2006.  We also obtained and analyzed data on market participants and the  outstanding trading positions of different categories of traders from CFTC.  In addition, we reviewed publicly available information, including  academic studies and reports and market data. Finally, we interviewed a  broad range of market participants and observers, representatives of  energy trading markets, and government regulators and agencies involved  with the energy markets. This work is being done in accordance with  generally accepted government auditing standards.
In summary, derivatives and physical markets for crude oil, unleaded  gasoline, heating oil, and natural gas have experienced substantial changes  in recent years. From January 2002 to July 2006, monthly average futures  and spot prices for crude oil, gasoline, and heating oil registered increases  of over 200 percent. The volatility of energy prices also generally  remained above historic averages for most of the period but declined  during 2006 to levels at or near the historical average. At the same time,  trading volumes for futures increased, at least in part because a growing  number of managed-money traders (including hedge funds) began to see  energy futures as attractive investment alternatives. While these changes  were occurring, the physical market was experiencing tight supply and  rising demand from increasing global demand, ongoing political instability  in oil-producing regions, limited refining capacity, and other ongoing  supply disruptions. Some observers believe that higher energy prices were  solely the result of supply and demand fundamentals while others believe  that increased futures trading activity may also have contributed to higher  prices. But the effect on energy prices of individual changes in these  markets is unclear, as many factors have combined to affect energy prices.  Monitoring these changes in the future will be important in protecting the  public and ensuring market integrity.
Energy derivatives are traded on futures exchanges, exempt commercial  markets, and over the counter (OTC). Some of these markets are subject  to CFTC oversight and some are largely unregulated. Under the  Commodity Exchange Act (CEA), CFTC regulatory oversight is focused on  the surveillance of futures exchanges, protecting the public, and ensuring  market integrity. CFTC does not, however, have oversight authority over  exempt commercial markets—electronic trading facilities that trade  exempt commodities, including energy commodities, on a principal-to- principal basis solely between persons that are eligible commercial  entities—and the volume of off-exchange transactions has increased  significantly in recent years. Also, certain parties—those who qualify as  eligible contract participants—can enter into contracts directly (over the  counter). Both the exempt commercial market and the OTC market are  exempt from general CFTC oversight. However, both markets are subject  to CFTC’s enforcement of the CEA’s antimanipulation and, where  applicable, antifraud provisions. Because of these varying levels of CFTC  oversight, some market observers question whether CFTC needs broader  authority over all derivative markets, particularly those involving exempt  commodities. CFTC generally believes that the commission has sufficient  authority over OTC derivatives and exempt energy markets. However,  CFTC has recently taken additional actions to clarify its authority to  obtain information about pertinent off-exchange transactions.
subsections: section_title: Background
paragraphs: Energy commodities are bought and sold on both the physical and  financial markets. The physical market includes the spot market where  products such as crude oil or gasoline are bought and sold for immediate  or near-term delivery by producers, wholesalers, and retailers. Spot  transactions take place between commercial participants for a particular  energy product for immediate delivery at a specific location. For example,  the U.S. spot market for West Texas Intermediate (WTI) crude oil is the  pipeline hub near Cushing, Oklahoma, while a major spot market for  natural gas operates at the Henry Hub near Erath, Louisiana. 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 at  other locations.
In addition to the cash markets, derivatives based on energy commodities  are traded in financial markets. The value of the derivative contract  depends on the performance of the underlying asset—for example, crude  oil or natural gas. Derivatives include futures, options, and swaps. Energy  futures include standardized exchange-traded contracts for future delivery  of a specific crude oil, heating oil, natural gas, or gasoline product at a  particular spot market location. An exchange designated by CFTC as a  contract market standardizes the contracts, which participants cannot  modify. The owner of an energy futures contract is obligated to buy or sell  the commodity at a specified price and future date. However, the  contractual obligation may be removed at any time before the contract  expiration date if the owner sells or purchases other contracts with terms  that offset the original contract. In practice, most futures contracts on  NYMEX are liquidated via offset, so that physical delivery of the  underlying commodity is relatively rare.
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 are privately negotiated contracts that involve an ongoing exchange  of one or more assets, liabilities, or payments for a specified time period.  Like futures, options can be traded on an exchange designated by CFTC as  a contract market. Both swaps and options can be traded off-exchange if  the transactions involve qualifying commodities and the participants  satisfy statutory requirements. Options and futures are used to buy and  sell a wide range of energy, agricultural, financial, and other commodities  for future delivery.
Market participants use futures markets to offset the risk caused by  changes in prices, to discover commodity prices, and to 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 they face  from price changes in the physical market. Exempt commercial markets  and OTC derivatives can serve the same function. 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. To manage  price risk, market participants may shift it to others more willing to  assume the risk or to those having different risk situations. For example, if  a petroleum refiner wants to lower its risk of losing money because of  price volatility, it could lock in a price by selling futures contracts to  deliver the gasoline in 6 months at a guaranteed price. Without futures  contracts to manage risk, producers, refiners, and others would likely face  greater uncertainty.
The futures market also helps buyers and sellers determine, or “discover,”  the price of commodities in the physical markets, thus linking the two  markets together. Price discovery is facilitated when (1) participants have  current information about the fundamental market forces of supply and  demand, (2) large numbers of participants are active in the market, and (3)  the market is transparent. Market participants monitor and analyze a  myriad of information on the factors that currently affect and that they  expect to affect the supply of and demand for energy commodities. With  that information, participants buy or sell an energy commodity contract at  the price they believe the commodity will sell for on the delivery date. The  futures market, in effect, distills the diverse views of market participants  into a single price. In turn, buyers and sellers of physical commodities may  consider those predictions about future prices, among other factors, when  setting prices on the spot and retail markets.
Other participants, such as investment banks and hedge funds, which do  not have a commercial interest in the underlying commodities, use the  futures market strictly for profit. These speculators provide liquidity to the  market but also take on risks that other participants, such as hedgers, seek  to avoid. In addition, arbitrageurs attempt to make a profit by  simultaneously entering into several transactions in multiple markets in an  effort to benefit from price discrepancies across these markets.
section_title: Multiple Factors in the Derivatives and Physical Markets Have Impacted Energy Prices
paragraphs: Both derivatives and physical markets experienced a substantial amount  of change from 2002 through 2006. These changes have been occurring  simultaneously, and the specific effect of any one of these changes on  energy prices is unclear.
subsections: section_title: The Energy Futures Markets Experienced Rising Prices, High Volatility, Increased Trading Volume, and Growth in Some Types of Traders
paragraphs: Several recent trends in the futures markets have raised concerns among  some market observers that these conditions may have contributed to  higher physical energy prices. Specifically from January 2002 to July 2006,  the futures markets experienced higher prices, relatively higher volatility,  increased trading volume, and growth in some types of traders. During this  period, monthly average spot prices for crude oil, gasoline, and heating oil  increased by over 200 percent, and natural gas spot prices increased by  over 140 percent. At the same time that spot prices were increasing, the  futures prices for these commodities showed a similar pattern, with a  sharp and sustained increase. For example, the price of crude oil futures  increased from an average of $22 per barrel in January 2002 to $74 in July  2006. At the same time, the annual historical volatilities—measured using  the relative change in daily prices of energy futures—between 2000 and  2006 generally were above or near their long-term averages, although  crude oil and heating oil declined below the average and gasoline declined  slightly at the end of that period. We also found that 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. Although higher volatility is often equated  with higher prices, this pattern illustrates that an increase in volatility does  not necessarily mean that price levels will increase. In other words, price  volatility measures the variability of prices rather than the direction of the  price changes.
We also observed that at the same time that prices were rising and that  volatility was generally above or near long-term averages, futures markets  saw an increase in the number of noncommercial traders such as managed  money traders, including hedge funds. The trends in prices and volatility  made the energy derivatives markets attractive for the growing number of  traders that were looking to either hedge against those changes or profit  from them. Using CFTC’s large trader data, we found that from July 2003  to December 2006 crude oil futures and options contracts experienced the  most dramatic increase, with the average number of noncommercial  traders more than doubling from about 125 to about 286. As shown in  figure 1, while the growth was less dramatic in the other commodities, the  average number of noncommercial traders also showed an upward trend  for unleaded gasoline, heating oil, and natural gas.
Not surprisingly, our preliminary work also revealed that as the number of  traders increased, so did the trading volume on NYMEX for all energy  futures contracts, particularly crude oil and natural gas. Average daily  contract volume for crude oil increased by 90 percent from 2001 through  2006, and natural gas increased by just over 90 percent. Unleaded gasoline  and heating oil experienced less dramatic growth in their trading volumes  over this period.
Another notable trend, but one that is much more difficult to quantify, was  the apparently significant increase in the amount of energy derivatives  traded outside exchanges. Trading in these markets is much less  transparent, and comprehensive data are not available because these  energy markets are not regulated. While the Bank for International  Settlements publishes data on worldwide OTC derivative trading volume  for broad groupings of commodities, this format can be used only 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  over 850 percent from December 2001 to December 2005. In the year from  December 2004 to December 2005 alone, the notional amount outstanding  increased by more than 200 percent to over $3.2 trillion. Despite the lack  of comprehensive energy-specific data on OTC derivatives, the recent  experience of individual trading facilities further reveals the growth of  energy derivatives trading outside of futures exchanges. For example,  according to its annual financial statements, the volume of non-futures  energy contracts traded on the Intercontinental Exchange, also known as  ICE, including financially settled derivatives and physical contracts,  increased by over 400 percent to over 130 million contracts in 2006.
Further, while some market observers believe that managed money  traders were exerting upward pressure on prices by predominantly buying  futures contracts, CFTC data we analyzed revealed that from the middle of  2003 through the end of 2006, the trading activity of managed money  participants became increasingly balanced between buying (those that  expect prices to go up) and selling (those that expect prices to go down).  That is, our preliminary view of these data suggests that managed money  traders as a whole were more or less evenly divided in their expectations  about future prices than they had been in the past.
We found that views were mixed about whether these trends had any  upward pressure on prices. Some market participants and observers have  concluded that large purchases of oil futures contracts by speculators  could have created an additional demand for oil that could lead to higher  prices. Contrary to this viewpoint, some federal agencies and other market  observers took the position that speculative trading activity did not have a  significant impact on prices. For example, an April 2005 CFTC study of the  markets concluded that increased trading by speculative traders, including  hedge funds, did not lead to higher energy prices or volatility. This study  also argued that hedge funds provided increased liquidity to the market  and dampened volatility. Still others told us that while speculative trading  in the futures market could contribute to short-term price movements in  the physical markets, they did not believe it was possible to sustain a  speculative “bubble” over time, because the two markets were linked and  both responded to information about changes in supply and demand  caused by such factors as the weather or geographical events. In the view  of these observers and market participants, speculation could not lead to  artificially high or low prices over a long period of time.
section_title: Various Patterns in the Physical Markets Also Explain Rising Energy Prices
paragraphs: The developments in the derivatives markets in recent years have not  occurred in isolation. Conditions in the physical markets were also  undergoing changes that could help explain increases in both derivative  and physical commodity prices. As we have reported, futures prices  typically reflect the effects of world events on the price of the underlying  commodity such as crude oil. For example, political instability and  terrorist acts in countries that supply oil create uncertainties about future  supplies that are 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 bids.
According to the Energy Information Administration (EIA), world oil  demand has grown from about 59 million barrels per day in 1983 to more  than 85 million barrels per day in 2006 (fig. 2). While the United States  accounts for about a quarter of this demand, rapid economic growth in  Asia has also stimulated a strong demand for energy commodities. For  example, EIA data shows that from 1983 to 2004, China’s average daily  demand for crude oil increased almost fourfold.
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, 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 is a supply disruption anywhere in the world oil market. As  shown in figure 3, EIA estimates that global spare production capacity in  2006 was about 1.3 million barrels per day, compared with spare capability  of about 10 million barrels per day in the mid-1980s and 5.6 million barrels  a day as recently as 2002.
Major weather and political events can also 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 oil-producing countries of the Organization of   Petroleum Exporting Countries (OPEC), such as Iraq and Nigeria, have  lowered production in some cases and increased the risk of future  production shortfalls in others.
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 those 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. Inventory, another factor  affecting supplies and therefore prices, is particularly crucial to the supply  and demand balance, because it can provide a cushion against price spikes  if, for example, production is temporarily disrupted by a refinery outage or  other event. Trends toward lower levels of inventory may reduce the costs  of producing gasoline, but such trends may also cause prices to be more  volatile. That is, when a supply disruption occurs or there is an increase in  demand, there are fewer stocks of readily available gasoline to draw on,  putting upward pressure on prices. However, others noted a different  trend for crude oil inventories.  That is, prices have remained high despite  patterns of higher levels of oil in inventory.
In addition to the supply and demand factors that generally apply to all  energy commodities, specific developments can affect particular  commodities. For instance, the growth of special gasoline blends—so- called “boutique fuels”—can affect the price of gasoline. As we have  reported, it is generally agreed that the 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 the costs were likely passed on, at least in part, to consumers.
Like the futures market, the physical market has undergone substantial  changes that could affect prices. But market participants and other  observers disagree about the impact of these changes on increasing energy  prices. Some observers believe that higher energy prices were solely the  result of supply and demand fundamentals, while others believe that  increased futures trading activity contributed to higher prices. Another  consideration is that the value of the U.S. dollar on open currency markets  could also affect crude oil prices. For example, because crude oil is  typically denominated in U.S. dollars, the payments that oil-producing  countries receive for their oil are also 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 in order to maintain the purchasing power in the face of a  weakening U.S. dollar. The relative effect of each of these changes remains  unclear, however, because all of the changes were occurring  simultaneously. Monitoring these trends and patterns in the future will be  important in order to better understand their effects, protect the public,  and ensure market integrity.
section_title: CFTC Oversees Exchanges and Has Some Authority over Other Derivatives Markets
paragraphs: Energy products are traded on multiple markets, some of which are  subject to varying levels of CFTC oversight and some of which are not.  This difference in oversight has caused some market observers to question  whether CFTC needs broader oversight authority. As we have seen, under  the CEA CFTC’s regulatory authority is focused on overseeing futures  exchanges, protecting the public, and ensuring market integrity. But in  recent years two additional venues for trading energy futures contracts  that are not subject to direct CFTC oversight have grown and become  increasingly important—exempt commercial markets and OTC markets.  However, traders in these markets are subject to the CEA’s  antimanipulation and antifraud provisions, which CFTC has the authority  to enforce. Also, exempt commercial markets must provide CFTC with  data for certain contracts.
Futures exchanges such as NYMEX are subject to direct CFTC regulation  and oversight. CFTC generally focuses on fulfilling three strategic goals  related to these exchanges. First, to ensure the economic vitality of the  commodity futures and options markets, CFTC conducts its own direct  market surveillance and also reviews the surveillance efforts of the  exchanges. Second, to protect market users and the public, CFTC  promotes sales practice and other customer protection rules that apply to  futures commission merchants and other registered intermediaries.  Finally, to ensure the market’s financial integrity, CFTC reviews the audit  and financial surveillance activities of self-regulatory organizations.
CFTC conducts regular market surveillance and oversight of energy  trading on NYMEX and other futures exchanges. Oversight activities  include:    detecting and preventing disruptive practices before they occur and  keeping the CFTC commissioners informed of possible manipulation or  abuse;    monitoring NYMEX’s compliance with CFTC reporting requirements  and its enforcement of speculative position limits;  investigating traders with large open positions; and    documenting cases of improper trading.
In contrast to the direct oversight it provides to futures exchanges, CFTC  does not have general oversight authority over exempt commercial  markets, where qualified entities may trade through an electronic trading  facility. According to CFTC officials, these markets have grown in  prominence in recent years. Some market observers have questioned their  role in the energy markets and the lack of transparency about their trading  activities. Trading energy derivatives on exempt commercial markets is  permissible only for 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. These markets are not subject to CFTC’s general direct  oversight but are required to maintain communication with CFTC. Among  other things, an exempt commercial market must notify CFTC that it is  operating as an exempt commercial market and must comply with certain  CFTC informational, record-keeping, and other requirements.
Energy derivatives also may be traded OTC rather than via an electronic  trading facility. OTC derivatives are private transactions between  sophisticated counterparties, and there is no requirement for parties  involved in these transactions to disclose information about their  transactions. Derivatives transactions in both exempt commercial markets  and OTC markets are bilateral contractual agreements in which each party  is subject to and assumes the risk of nonperformance by its counterparty.  These agreements differ from derivatives traded on an exchange where a  central clearinghouse stands behind every trade.
While some observers have called for more oversight of OTC derivatives,  most notably for CFTC to be given greater oversight authority over this  market, others consider such action unnecessary. Supporters of more  CFTC oversight authority believe that more transparency and  accountability would better protect the regulated markets and consumers  from potential abuse and possible manipulation. Some question how CFTC  can be assured that trading on the OTC market is not adversely affecting  the regulated markets and ultimately consumers, given the lack of  information about OTC trading. However, in 1999 the President’s Working  Group on Financial Markets concluded that OTC derivatives generally  were not subject to manipulation because contracts were settled in cash  based on a rate or price determined in a separate highly liquid market and  did not serve a significant price discovery function. Moreover, the market  is limited to professional counterparties that do not need the protections  against manipulation that CEA provides to retail investors. Finally, the  group has recently noted that if there are concerns about CFTC’s  authority, CFTC’s enforcement actions against energy companies are  evidence that the CFTC has adequate tools to combat fraud and  manipulation when it is detected.
The lack of reported data about off-exchange markets makes addressing  concerns about the function and effect of these markets on regulated  markets and entities challenging. CFTC officials have said that while they  have reason to believe these off-exchange activities can affect prices  determined on a regulated exchange, they also generally believe that the  commission has sufficient authority over OTC derivatives and exempt  energy markets. However, CFTC has recently begun to take steps to clarify  its authority to obtain information about pertinent off-exchange  transactions. In a June 2007 proposed rulemaking, 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 has also proposed amendments to clarify its authority  under the CEA to collect information and to bring fraud actions in  principal-to-principal transactions in these markets, enhancing CFTC’s  ability to enforce antifraud provisions of CEA.
In closing, our work to date shows that the derivatives and physical  markets have both undergone substantial change and evolution. Given the  changes in both markets, causality is unclear, and the situation warrants  ongoing review and analysis. We commend the Subcommittee’s efforts in  this area. Along with the overall concern about rising prices, questions  have also been raised about CFTC’s authority to protect investors from  fraudulent, manipulative, and abusive practices. CFTC generally believes  that the commission has sufficient authority over OTC derivatives and  exempt energy markets. However, CFTC has taken an important step by  clarifying its authority to obtain information about pertinent off-exchange  transactions.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions that you or other Members of the Subcommittee  might have.
section_title: GAO Contacts
paragraphs: For further information about this testimony, please contact Orice M.  Williams on (202) 512-8678 or at williamso@gao.gov.
section_title: Staff Acknowledgments
paragraphs: Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. Individuals making  key contributions include John Wanska (Assistant Director), Kevin Averyt,  Ross Campbell, Emily Chalmers, John Forrester, and Paul Thompson.
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