Every week, 2,000 - 3,000 Second District residents write to me about the issues pending before Congress, and I work hard to respond to each person as promptly and thoughtfully as possible.  On this "Letter of the Week" blog, I highlight constituent letters that are of general interest.  If you'd like to share your own views, please feel free to e-mail me at any time!

Dear Nancy,

 I'm all for Hearings on the Oil Speculation that has been occuring and negatively impacting the consumers. I would like to see that kind of speculation regulated please.

Sincerely,

Christian from Topeka, KS.

Dear Christian,

Thank you for writing to me about ordering the Commodity Futures Exchange Commission (CFTC) to eliminate excess speculation in the commodity markets.  As your representative, I both need and value your opinion.

Everybody is worried about the rising cost of gas.  The role speculation is playing in raising the price of gas has brought some heated debate.  Recently, the House Agriculture Committee (on which I sit) held three hearings on the topic.  We heard from a wide range of experts including institutional investors, economists, traders, business executives and consumer advocacy groups.  I’ve also spoken with the acting Chairman of the CFTC, Walter Lukken, nonpartisan experts from the Congressional Research Service and received lots of feedback from the people of the 2nd District of Kansas. 

The issue is complicated because our financial and futures markets are complicated.  One issue that has broad support is that the CFTC needs to have more funding, more staff and more authority over commodity markets.  This is the simplest and most direct solution available.  I believe excess speculation in the futures markets is playing a role in the rising prices of commodities.  I can’t tell you how much of a role it plays, and that is part of the problem.

There are currently futures markets that are not under the jurisdiction of the CFTC and we don’t know who is trading and how much they are trading in those markets.  For example, the “Enron Loophole” refers to transactions that occur outside of regulated markets in what are sometimes called “over the counter” (OTC) markets.  The Commodity Futures Modernization Act of 2000 exempted two types of commodities from CFTC oversight.  The first are OTC markets that do not occur within a trading exchange and the second are trades done on electronic markets.  More oil contracts are traded in these markets that have no CFTC oversight than on regulated markets.  While the recently passed Farm Bill I supported addressed the Enron Loophole for electronic trading facilities here in the United States, a significant portion of energy trading continues to be exempt from any CFTC action to curb excessive speculation.

There is also less transparency in foreign energy futures markets.  The “London Loophole” or “Dubai Loophole” refers to foreign markets U.S. companies and investors participate in which are not regulated by the CFTC.  Ordinarily, an exchange offering futures contracts to U.S. investors is required to register with the CFTC as a "designated contract market," and to comply with all applicable laws and regulations.  Unfortunately, a significant portion of U.S. based trades on an energy futures market occurs over the ICE Futures Europe market, which is regulated in the U.K. by the Financial Services Authority (FSA).  CFTC has no oversight over ICE Futures Europe even though U.S. traders and oil customers participate on this market.  They rely upon the FSA to transmit data on who participates in the market and how large the trades are in the ICE Futures Europe.

Opening up markets to more scrutiny will give the CFTC valuable information and help them determine and eliminate any manipulation of the market.  I support increasing transparency of the futures market and will push to give the CFTC the needed funding and authority for this purpose. 

I’m also considering legislation that would put new restrictions on index funds and specific “swap” trades.   In 2000, businesses that had a stake in the regulated futures market to hedge against energy prices, like airlines and trucking companies, accounted for 63% of the oil futures market.  Speculators accounted for 37%.  This April, speculators made up 71% of the regulated market.  Considerably more money is now flowing into the commodities market because it is being treated as an investment opportunity and not as a market for commodity buyers and sellers. 

I remain concerned about oil price increases over the past few years.  I also don’t want to push out legitimate traders from the market, or eliminate liquidity by removing buyers and sellers of commodity contracts.  Without liquidity, these markets will stop functioning and the price of commodities could further increase.  If we can bring transparency to the marketplace, we can then gather more information and make better decisions on next steps.   

As I continue to look into this situation, I will keep you updated.  Thank you again for writing me.  I hope you will keep in touch and let me know whenever I may be of further assistance. 

Sincerely,

Nancy Boyda
Member of Congress