CFTC Again Expands Its Turf Into Foreign Markets

U.S. commodities regulator Gary Gensler said Thursday that his agency's oversight powers will now literally touch down on foreign soil, another sign of the aggressive push to tighten financial market regulation.

The U.S. Commodity Futures Trading Commission's latest tweak to a three-year-old agreement with U.K. regulators will let both agencies conduct on-site exchange visits and give the CFTC direct access to audit trail data to help survey all foreign futures contracts that settle against U.S. prices.

The move aims to close what may remain of the so-called "London loophole," amid divergent policy moves by the CFTC and the U.K. Financial Services Authority, or FSA. The agencies on Thursday trumpeted an extension of their existing cooperation to include the sharing of advanced notices of exchange rule changes and disciplinary notices.

The FSA, which regulates ICE Futures Europe, signaled in a recent August meeting with U.S. officials it does not see a need to impose speculative position limits on its side of the Atlantic.

However, that represents a sticking point for concerned U.S. authorities who believe cross-border and cross-market regulation are both essential to tackling the problem.

The new transatlantic deal will allow the London-based ICE Futures Europe unit of IntercontinentalExchange Inc. (ICE) to continue offering traders access to its electronic terminals in the U.S.

The ICE unit, one of the largest oil trading venues, has also been targeted by U.S. lawmakers wary of the FSA acting as the first line of defense in oversight, rather than the CFTC.

The moves comes as the U.S. government's revamps U.S. financial regulation in the wake of the global economic crisis. Part of that effort has entailed meetings with foreign regulators to ensure that any new regulations installed in the U.S. are comparable abroad so that big Wall Street firms don't migrate to lesser regulated countries.

It also represents Gensler's latest attempts to crack down on excessive speculation, which some critics blame for causing oil prices to skyrocket last year. The agency is planning to impose sweeping new trading limits for speculators on crude oil and other energy products.

Despite those differences, however, the CFTC's ability to nail down an even stricter agreement with ICE Futures Europe and the FSA shows a willingness on the part of foreign regulators to work with the U.S. - even if it means at times they must share some turf.

The four ICE derivatives contracts being targeted by the CFTC are cash-settled against U.S. futures contracts such as West Texas Intermediate crude oil, which are traded on the New York Mercantile Exchange.

That has raised concerns among U.S. lawmakers and some others who feared American traders could skirt position limits on NYMEX's crude oil futures contracts by trading look-alike contracts on ICE's London exchange. Those critics dubbed the problem "The London Loophole."

For years, the CFTC has allowed foreign exchanges to offer U.S. traders access to their electronic terminals through "no-action" letters, which are issued by staff to firms who seek exemptions from regulations without the fear of enforcement action.

Up until about last year, the letters were granted in many cases by CFTC officials without even first paying a visit to the foreign exchanges requesting them.

ICE Futures Europe has been among the many exchanges to operate under the terms of a no-action letter over the years, but it came under fire in 2006 after announcing it planned to offer the U.S. look-alike contracts.

The CFTC, FSA and ICE struck an agreement at the time that would allow the CFTC to receive large trader data on those contracts each week, but the issue came up again last year when oil prices rose to $145 a barrel.

The CFTC, then under Republican leadership, strengthened the agreement to require ICE to agree to impose the same equivalent trading limits that NYMEX imposes on its look-alike contracts.

Still, lawmakers at the time, including Sen. Maria Cantwell, D-Wash., found the agreement unacceptable because it left oversight of the contracts largely to European regulators. Cantwell has been asking Gensler ever since he was installed at the CFTC to revoke ICE's no-action letter.

"This is definitely a reaction to the table-pounding [lawmakers] have done in regards to the London loophole," said Craig Pirrong, director of the Global Energy Management Institute at the University of Houston.

This newest arrangement now gives the CFTC and the FSA each a more hands-on regulatory approach.

Sen. Cantwell, in an interview with Dow Jones Thursday, reacted cautiously, saying it's clear that "Gensler is trying to build a stronger regulatory house" at the CFTC.

"There are some aspects of this that are good," she said, citing the position limits and other regulatory requirements that are equivalent on NYMEX. "But I think we still have to see that the structure that he is proposing really does produce results," she added, noting that NYMEX still has both self-regulation and CFTC oversight.

Aside from the few contracts offered by ICE, no other exchange in the world with a CFTC no-action letter offers U.S.-linked contracts.

If any arise in the future, however, the CFTC made an internal policy decision in January stating that future look-alike contracts will be subject to the same regulations as those imposed on ICE Futures Europe.

As pressure continues to build on Capitol Hill for the CFTC to tighten oversight of derivatives markets, Pirrong said further conflicts between U.S. and U.K. financial authorities may be unavoidable.

"At this stage, the things that the CFTC was asking for, the FSA felt were reasonable," he said. "But I can see it coming to a point, because of political pressures, where the FSA will say no."

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; [e-mail]

(Lananh Nguyen in London contributed to this article)