Order Code RL34555
Speculation and Energy Prices:
Legislative Responses
June 30, 2008
Mark Jickling
Specialist in Financial Economics
Government and Finance Division
Lynn J. Cunningham
Information Research Specialist
Knowledge Services Group

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Speculation and Energy Prices: Legislative Responses
Summary
While most observers recognize that the fundamentals of supply and demand
have contributed to record energy prices in 2008, many also believe that the price of
oil and other commodities includes a “speculative premium.” In other words,
speculators who seek to profit by forecasting price trends are blamed for driving
prices higher than is justified by fundamentals.
In theory, this should not happen. Speculation is not a new phenomenon in
futures markets — the futures exchanges are associations of professional speculators.
There are two benefits that arise from speculation and distinguish it from mere
gambling: first, speculators create a market where hedgers — producers or
commercial users of commodities — can offset price risk. Hedgers can use the
markets to lock in today’s price for transactions that will occur in the future,
shielding their businesses from unfavorable price changes. Second, a competitive
market where hedgers and speculators pool their information and trade on their
expectations of future prices is the best available mechanism to determine prices that
will clear markets and ensure efficient allocation of resources.
If one assumes that current prices are too high, that means that the market is not
performing its price discovery function well. There are several possible explanations
for why this might happen. First, there could be manipulation: are there traders in the
market — oil companies or hedge funds, perhaps — with so much market power that
they can dictate prices? The federal regulator, the Commodity Futures Trading
Commission (CFTC), monitors markets and has not found evidence that anyone is
manipulating prices. The CFTC has announced that investigations are in progress,
but generally manipulations in commodities markets cause short-lived price spikes,
not the kind of multi-year bull market that has been observed in oil prices since 2002.
Absent manipulation, the futures markets could set prices too high if a
speculative bubble were underway, similar to what happened during the dot-com
stock episode. If traders believe that the current price is too low, and take positions
accordingly, the price will rise. Eventually, however, prices should return to
fundamental values, perhaps with a sharp correction.
One area of concern is the increased participation in commodity markets of
institutional investors, such as pension funds, foundations, and endowments. Many
institutions have chosen to allocate a small part of their portfolio to commodities,
often in the form of an investment or contract that tracks a published commodity
price index, hoping to increase their returns and diversify portfolio risk. While these
decisions may be rational from each individual institution’s perspective, the
collective result is said to be an inflow of money out of proportion to the amounts
traditionally traded in commodities, with the effect of driving prices artificially high.
This report provides basic information and analysis on the issue of commodity
speculation and summarizes the numerous legislative proposals for controlling
excessive speculation. It will be updated as events warrant.

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Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Legislative Proposals: Closing Loopholes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Enron Loophole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The London Loophole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Swaps Loophole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Appendix. A Futures Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Legislative Proposals: Closing Loopholes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Enron Loophole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The London Loophole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Swaps Loophole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
List of Tables
Table 1. Summaries of Energy Futures and Speculation Bills . . . . . . . . . . . . . . . 9

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Speculation and Energy Prices:
Legislative Responses
Overview
Are oil speculators the messengers bearing bad news, or are they themselves the
bad news? The Commodity Futures Trading Commission (CFTC), which regulates
speculative trading in energy commodities, has found no evidence that prices are not
being set by the economic fundamentals of supply and demand. Many analysts agree,
arguing that long-term supply growth will have difficulty keeping up with demand.
Others, however, believe that changes in the fundamentals do not justify the recent
energy prices, and seek the cause for soaring prices in the futures and derivatives
markets, which are used by financial speculators as well as producers and
commercial users of energy commodities.
The energy futures markets, which date from the 1980s, involve two kinds of
traders. Hedgers — producers or commercial users of commodities — trade in
futures to offset price risk. They can use the markets to lock in today’s price for
transactions that will occur in the future, shielding their businesses from unfavorable
price changes.1 Most trading, however, is done by speculators seeking to profit by
forecasting price trends. Together, the trading decisions of hedgers and speculators
determine commodity prices: there is no better mechanism available for determining
prices that will clear markets and ensure efficient allocation of resources than a
competitive market where hedgers and speculators pool information and trade on
their expectations of future prices.
Since many transactions in the physical markets take place at prices generated
by the futures markets, speculators clearly play a large part in setting energy prices.
In theory, this should not drive prices away from the fundamental levels: if they trade
on faulty assumptions about supply and demand, other traders with superior
information — including those who deal in the physical commodities — should be
able to profit at their expense. In other words, there is no reason why speculation in
and of itself should cause prices to be artificially high.
Theory says increased speculation should produce more efficient pricing. In
practice, some observers, including oil company CEOs, OPEC ministers, and
investment bank analysts, now speak of a “speculative premium” in the price of oil.
This view implies that without speculation, prices could fall significantly without
disrupting current patterns of consumption and production. How could the price
discovery function of the energy derivatives market have broken?
1 See the Appendix for a description of the mechanics of a futures contract.

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CRS-2
Several explanations are possible. First, the market could be manipulated. Price
manipulation, which is illegal under the Commodity Exchange Act, involves
deliberate strategies by a trader or group of traders to push prices to artificial levels.
Since derivatives markets reward correct predictions about future prices,
manipulation can be very profitable. Most manipulations in the past have involved
short-lived price spikes, brought about by spreading false information, or concerted
buying or selling. Since 2002, the CFTC has brought 40 enforcement cases involving
manipulation, but these do not appear to explain the long-term energy price trends
observed in recent years.
It is rare, but possible, for a market to be rigged over a longer period of time —
examples include the Hunt brothers’ attempt to corner the silver market in 1979-1980
and the manipulation of the copper market by Yasuo Hamanaka of Sumitomo in the
mid-1990s — when a single trader amasses a dominant position in both physical
supplies and futures contracts and obtains enough market power to dictate prices.
The CFTC has not produced any evidence that such a grand-scale manipulation of
energy prices is underway, and has testified repeatedly that prices are being set
competitively.
In the absence of manipulation, another explanation for prices above
fundamental levels is a speculative bubble. If, as was the case in the dot-com stock
boom, a majority of traders become convinced that a “new era” of value has arrived,
they may bid up prices sharply in defiance of counter-arguments based on
fundamentals. Eventually, prices return to fundamental levels, often with a sudden
plunge. This is what many forecast for energy prices, including George Soros,
perhaps the best known speculator of the day.2
The bubble explanation is the same as the speculative premium argument. If
market participants are trading on mistaken ideas about the fundamentals, they may
set a price that is above the true price (which is the current market price minus the
speculative premium). However, there is no sure method for determining what the
true price is; the only observable price is the one the market generates.
Policy options to discourage speculation driven by irrational exuberance are
limited.3 Actions to reduce the amount of speculative trading, such as increasing the
margin requirements or restricting access to the markets, may not produce the desired
outcome. Higher margins raise trading costs, which should reduce trading volumes,
but there is no empirical evidence that this will reduce price volatility, or cause prices
to fall.4
2 Soros, however, argues that an energy “bust” may be forestalled by new regulation on
commodity index speculation by institutional investors. Testimony of George Soros before
the Senate Commerce Committee, June 3, 2008, available at [http://commerce.senate.gov/
public/_files/SorosFinalTestimony.pdf].
3 See CRS Report RL33666, Asset Bubbles: Economic Effects and Policy Options for the
Federal Reserve, by Marc Labonte.
4 Since everyone in futures markets trades on margin, traders anticipating a fall in prices will
be just as constrained as those expecting higher prices.

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Apart from the possibility that traders in general are getting the price wrong,
there is an argument that prices have been driven up by a change in the composition
of traders. In recent years, institutional investors — like pension funds, endowments,
and foundations — have increasingly chosen to allocate part of their portfolios to
commodities. This is rational from the point of view of the individual fund — it may
increase investment returns and diversify portfolio risks — but when many
institutions follow the same strategy at the same time, the effect can be that of a
bubble. A number of bills are aimed at reducing the incidence or impact of
institutional investment on the energy markets. These, and other proposals to
improve the regulation of derivatives markets, are summarized below.
Legislative Proposals: Closing Loopholes
Legislative approaches to ensuring that commodity prices are not manipulated
or distorted by excessive speculation focus on (1) extending regulatory control to
previously unregulated markets, (2) ensuring that speculators cannot use foreign
futures markets to avoid U.S. regulation, and (3) restraining the ability of institutional
investors (and others who do not deal in the physical commodities themselves) to
take large positions in commodities. These three areas are known respectively as the
“Enron loophole,” the “London loophole,” and the “swaps loophole.”
The Enron Loophole
The “Enron loophole” refers to a range of transactions that occur off the
regulated futures exchanges, in an “over-the-counter” (OTC) market where the
CFTC has had little regulatory jurisdiction, and from which it does not receive
comprehensive information about who is trading, in what volumes, and at what price.
The Commodity Futures Modernization Act (CFMA, P.L.106-554) created a
statutory exemption from CFTC regulation for certain contracts based on “exempt
commodities,” defined in the legislation as commodities that are neither agricultural
nor financial.5 Two types of energy derivative markets were thereby exempted: (1)
bilateral, negotiated transactions between two counterparties that are not executed on
a trading facility,6 and (2) trades done on an “electronic trading facility.” The CFMA
specified that these markets must not be accessible to small investors; all traders must
be “eligible contract participants” (financial institutions, units of government, or
businesses or individuals with substantial financial assets) or, in the case of the
electronic trading facility exemption, “eligible commercial entities” (eligible contract
participants who either deal in the physical commodity or regularly provide risk
management services to those who do).
5 See CRS Report RS21401, Regulation of Energy Derivatives, by Mark Jickling, for
information on the CFMA.
6 The term “trading facility” is defined in the Commodity Exchange Act as a person or group
of persons that constitutes, maintains, or provides a physical or electronic facility or system
in which multiple participants have the ability to execute or trade agreements, contracts, or
transactions by accepting bids and offers made by other participants that are open to
multiple participants in the facility or system.

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A substantial volume of over-the-counter energy trading makes use of these
exemptions. There is a large market in energy swaps, where investment banks like
Goldman Sachs and Morgan Stanley offer contracts linked to energy prices. The
OTC market in swaps has also evolved towards an exchange model, where contracts
are traded rapidly over an electronic network, and may be backed by a clearing house.
The best known of these electronic trading facilities is operated by Intercontinental
Exchange Inc (ICE).7 The ICE over-the-counter market handles a volume of natural
gas contracts roughly equal in size to that handled by Nymex, the largest energy
futures exchange.
A Government Accountability Office report in October 2007 noted the growth
of the OTC market and raised questions about whether the federal regulator had the
information it needed to ensure that markets were free of fraud and manipulation.8
In the same month, the CFTC issued a report recommending legislative action to
increase the transparency of energy markets.9
In May 2008, with the farm bill (H.R. 2419, P.L. 110-234), Congress passed
legislation that generally follows the CFTC’s recommendations and potentially
brings part of the OTC market under CFTC regulation. The new law affects
electronic trading facilities handling contracts in exempt commodities (primarily
energy or metals). If the CFTC determines that a contract traded on such a facility
plays a significant price discovery role, that is, if the prices it generates are used as
reference points for other transactions and markets, the facility will come under
CFTC regulation. The market will have to register with the CFTC, and demonstrate
its capacity to comply with several core principles. The principles and requirements
include maintaining and enforcing rules against manipulation, establishing position
limits or accountability levels to prevent excessive speculation, and providing the
CFTC with daily reports on large traders’ positions.
The provisions of the Farm Bill, however, do not affect the unregulated status
of energy contracts that are not entered into on a trading facility, in other words, the
swap market in exempt commodities. Thus, the argument is made that the Enron
loophole has been only partially closed. A number of bills propose to end the
statutory exemption for OTC energy trades altogether, by putting energy commodities
on the same regulatory basis as agricultural commodities. Under current law,
derivative contracts based on farm commodities may only be traded on a regulated
exchange, unless the CFTC issues an exemption.10 The CFTC is authorized to grant
such exemptions on a case-by-case basis, after determining that the contract would
not be against the public interest.
7 ICE is a publicly traded firm, based in Atlanta, that also owns the largest regulated energy
futures market in Europe, ICE Futures Europe (formerly the International Petroleum
Exchange, located in London).
8 U.S. Government Accountability Office, Trends in Energy Derivatives Markets Raise
Questions about CFTC’s Oversight, GAO 08-25, October 2007, 83 p.
9 U.S. Commodity Futures Trading Commission, Report on the Oversight of Trading on
Regulated Futures Exchanges and Exempt Commercial Markets, October 2007, 23 p.
10 Exemptive authority is provided by section 4(c) of the Commodity Exchange Act.

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The London Loophole
Unlike the Enron loophole, which addresses the distinction between the
regulated exchange markets and the unregulated OTC market, the “London loophole”
refers to differences in the oversight of regulated markets in different countries. The
U.K. counterpart to Nymex, the leading U.S. energy futures market, is ICE Futures
Europe, which is regulated in the U.K. by the Financial Services Authority (FSA).
For several years, the U.K. exchange has been offering energy futures contracts
in the United States, via electronic terminals. 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.
However, in the case of ICE Futures Europe, the CFTC has waived that requirement,
by means of a series of no-action letters, on the grounds that the U.K. market is
already regulated at home, and that requiring it to register with the CFTC would be
duplicative and add little in terms of market or customer protections.11
Initially, the U.K. market offered electronic access to U.S. traders to its most
popular contract, a futures contract based on the price of Brent Crude oil, produced
in the North Sea. After the market was acquired by ICE, however, it introduced a
“look-alike” contract that was identical to Nymex’s West Texas Intermediate crude
oil future. This contract, which could be settled by making or taking delivery of
physical crude oil in the United States, now trades in significant volumes —
transactions that would presumably take place on the Nymex otherwise.12
With concern over high and volatile energy prices, there has been more scrutiny
of ICE Futures Europe’s activities in the United States. Can traders avoid speculative
position limits by trading on ICE, in addition to (or instead of) Nymex? Does the
CFTC receive the same information from ICE Futures Europe about large trading
positions that could be a source of manipulation or instability (if they were liquidated
suddenly)?
A number of bills propose to close the London loophole, either by requiring
foreign boards of trades (exchanges) to comply with all U.S. registration and
regulatory requirements if they offer contracts that can be settled by physical delivery
within the United States, or by making CFTC relief from such requirements and
regulation contingent upon a finding that (1) it will receive from the foreign market
information that is comparable or identical to what it receives from domestic
exchanges and (2) the foreign market is subject to a regulatory regime that is
comparable to the CFTC’s.
11 The first no-action letter was issued in 1999, when the market was known as the
International Petroleum Exchange. When the IPE was acquired by ICE (a U.S. firm), in
2001, the waiver continued, and was modified several times.
12 In 2007, Nymex traded 121.5 million WTI futures contracts, while ICE Futures Europe
traded 51.4 million. “Volume Surges Again,” Futures Industry Magazine, March/April
2008, p. 23.

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In the case of ICE Futures Europe, the CFTC announced that it had amended the
“no-action relief letter” under which ICE Futures Europe is permitted direct access
to U.S. customers. The amended letter conditions direct access on ICE Futures
Europe’s adoption of equivalent U.S. position limits and accountability levels on its
West Texas Intermediate crude oil contract, which is linked to the New York
Mercantile Exchange crude oil contract.13 This agreement complements a 2006
memorandum of understanding with the FSA providing for sharing of trading
information.14
The CFTC’s agreement with ICE appears to fulfill the purposes of several of the
bills, but only with respect to the London market. However, the CFTC has issued
other no-action letters granting regulatory waivers to foreign markets, including the
Dubai Mercantile Exchange (a joint venture with Nymex), permitting it to offer
contracts in the United States (to be cleared by Nymex).15
The Swaps Loophole
The view that excessive speculation is driving up energy prices is widely held,
but controversial. The question of whether current prices are justified by
fundamental factors of supply and demand, or whether irrational exuberance has
created a bubble in energy prices (similar to what was observed in dot-com stocks in
the late 1990s), is beyond the scope of this report. However, testimony presented to
Congress has identified a recent trend in financial markets that some argue may be
putting upward pressure on prices — decisions by institutional investors, such as
pension funds, foundations, or endowments, to allocate a part of their portfolio to
commodities.16
From the point of view of a fund manager, investment in commodities may be
very attractive under current market conditions. Average returns on stocks and bonds
have been relatively low for the past few years, and there is little optimism that they
will improve in the near term. Commodities, on the other hand have been the “hot
sector.” While commodity investment is recognized as being highly risky, a risky
asset in a large, diversified portfolio does not necessarily increase overall portfolio
risk. The risk of a downturn in commodity prices is not generally correlated with
risks in stocks or bonds; in some cases, there may be an inverse relationship. For
13 U.S. Commodity Futures Trading Commission, “CFTC Conditions Foreign Access on
Adoption of Position Limits on London Crude Oil Contract,” Release 5511-08, June 17,
2008.
14 Online at [http://www.cftc.gov/newsroom/generalpressreleases/2006/pr5259-06.html].
15 U.S. Commodity Futures Trading Commission, “CFTC Grants Relief to NYMEX in
Connection with Clearing Contracts Traded on the Dubai Mercantile Exchange DME
Trading System to be Available in U.S.,” Release 5339-07, May 25, 2007; and “CFTC
Grants Exemption to NYMEX in Connection with Three New Contracts to be Traded on the
Dubai Mercantile Exchange,” Release 5495-08, May 1, 2008.
16 Testimony of Michael W. Masters before the Senate Committee on Homeland Security
and Governmental Affairs, May 20, 2008, available at [http://hsgac.senate.gov/public/_files/
052008Masters.pdf].

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CRS-7
example, if the price of oil drops suddenly, the institution may lose money on its
commodity investment, but the price change will be good for its transportation
stocks.
Institutional investors may take positions in commodities in a number of ways,
but they do not generally trade on the futures exchanges directly. Instead, they use
an intermediary, such as a commodity index fund or an OTC swap contract that is
structured to match the return of a published index of commodity prices.17 As a
result of this investment strategy, institutional investors in commodities are often
called “index traders.”
While the decision of an individual pension fund to put 3%-4% of its portfolio
in commodities may appear entirely rational, some observers argue that the aggregate
impact of institutional index trading has been to overwhelm the commodity markets,
because of the disproportion between the amount of money held by pension funds
and others and the amounts that have traditionally been traded in the energy futures
market. In other words, index investing is seen as excessive speculation. One
particular feature of index trading is the focus of several legislative proposals: the
“swaps loophole.”
The CFTC and the exchanges maintain position limits or accountability levels
that apply to speculative traders. Speculators either face a ceiling on the number of
contracts they may own, or, if they breach a position accountability level, they must
explain to the exchange why they are accumulating such a large position. The
purpose of the speculative limits is to prevent manipulation by speculators with very
large positions, and to limit the market impact in cases where losses force speculators
to liquidate their positions suddenly.
Position limits do not apply to hedgers, those who use the futures markets to
offset price risk arising from their dealings in the underlying commodity. Hedgers
are allowed to take positions commensurate with their commercial interests. The
rationale for exempting them from position limits is that when they have a hedged
position, they have no incentive to manipulate the market: any gains in their futures
position will be offset by losses in their physical transactions, and vice versa. (They
use the futures markets to lock in today’s price, meaning that subsequent price
changes do not affect them.)
Traditionally, hedgers have been thought of as those who are active in the
physical commodity markets — in the energy market, these would be oil producers,
refiners, transporters, and industrial users such as airlines and utilities. With the rise
of index trading, however, the definition of hedger has broadened. Both the CFTC
and Nymex now extend exemptions from speculative position limits to swaps dealers
17 Examples of such indices are the Dow Jones-AIG Commodity Index, or the Goldman
Sachs Commodity Index, which are variously weighted among farm products, energy
commodities, and metals. A swap contract is a derivative economically equivalent to a
futures contract: two parties agree to exchange payments over the life of a contract that are
linked to a price, index, or other variable. Depending on which way the underlying variable
moves, the cash flows will be net positive for one counterparty, and negative for the other.

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CRS-8
who are using the futures exchanges to hedge price risk arising from a financial
contract with an institutional investor.
In other words, a pension fund wishing to invest in commodities may go to a
swaps dealer18 and enter into a contract that will pay returns equal to the percentage
increase in an index of commodity prices. In economic terms, this is equivalent to
a long position in futures, which will gain value if the underlying commodity price
rises. The swap dealer has, in effect, taken the short side of the trade: it will lose
money if prices rise.
The swap dealer is exposed to price risk, and may wish to offset that risk by
purchasing exchange-traded futures contracts. Because the dealer is using the futures
market to hedge the risk of the swap, the exchanges and the CFTC exempt it from
position limits, even though it does not deal in the physical commodity. The
rationale is the same as for traditional hedgers: since the swap dealer will gain on its
futures position whatever it loses on the swap, and vice versa, it has no incentive to
manipulate futures prices.
The effect of this “swaps loophole,” however, is to let the ultimate customer —
the institutional investors who are clearly speculating on commodity prices — to take
larger positions than they would be able to do if they traded directly on the futures
exchanges, where they might be constrained by speculative position limits. Hence
the description of institutional investors’ index trading as excessive speculation.
A number of bills propose to constrain the ability of institutional investors to use
the swaps loophole. They would limit the definition of “bona fide hedger” to those
who deal in the physical commodity or prohibit trading in OTC energy contracts by
those who do not deal in the physical commodity.
Table 1 provides summaries of all legislation that bears on the regulation of
energy speculations.
18 The major swap dealers in energy markets are investment banks like Goldman Sachs and
Morgan Stanley.

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Table 1. Summaries of Energy Futures and Speculation Bills
Bill Number
Status
Summary
/Sponsor
H.Res. 1278
Referred to the Committee
Expresses the sense of the House that the United States should lead an international diplomatic
(Rep. Petri)
on Foreign Affairs
initiative to limit inefficient speculation on international energy exchanges through the adoption of
international standards for energy futures trading margin requirements as an appropriate means of
ensuring access to reliable and affordable supplies of crude oil.
H.Res. 1289
Referred to the House
Urges the CFTC to require institutional investors to abide by position limits already established for
(Rep. Shays)
Committee on Agriculture
the greater crude oil trading community, and
urges the President to direct the CFTC to work with the United Kingdom Financial Services
Authority to establish position limits on oil futures traded on the Intercontinental Exchange that are
similar to those that apply to traders on the New York Mercantile Exchange.
H.R. 594
Referred to House
Prevent Unfair Manipulation of Prices Act of 2007. Creates a new regulatory category, “included
(Rep. Stupak)
Subcommittee on General
energy transactions,” encompassing over-the-counter transactions in energy derivatives that play a
Farm Commodities and
significant role in determining prices paid in the cash market for the underlying commodities. Sets
Risk Management
forth reporting and recordkeeping requirements for included energy transactions, requiring that
certain information about price and trading volumes (as well as other information the CFTC needs
to prevent and detect price manipulation) be made available to regulators and/or the public.
Clarifies prohibitions against commodity fraud and manipulation, and increases civil and criminal
penalties for violations.

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Bill Number
Status
Summary
/Sponsor
H.R. 2419
P.L. 110-234 enacted May
Food Conservation and Energy Act of 2008 (the Farm Bill). Title XIII included provisions
(Rep. Peterson)
22, 2008, over the
reauthorizing the CFTC and creates a new regulatory regime for certain OTC energy derivatives
President’s veto
markets, subjecting them to a number of exchange-like regulations. The provisions apply to
“electronic trading facilities” — markets where multiple buyers and sellers are able to post orders
and execute transactions over an electronic network. If the CFTC determines that a contract traded
on these markets, previously exempt from most regulation, plays a significant role in setting the
price of the underlying commodity, they will be required to register with the CFTC and comply with
several regulatory core principles aimed at curbing manipulation and excessive speculation
(including the establishment and enforcement of position limits). They will be required to publish
and/or report to the CFTC information relating to prices, trading volume, and size of positions held
by speculators and hedgers.
These new regulatory requirements apply only to electronic markets that have come to resemble the
regulated futures exchanges. Bilateral OTC derivative contracts between two principals (e.g.,
between a swap dealer and an institutional investor), that are not executed on a trading facility
where multiple bids and offers are displayed, will continue to be largely exempt from CFTC
regulation.
H.R. 3009
Referred to House
Market Transparency Reporting of United States Transactions Act of 2007. Imposes reporting
(Rep. Barrow)
Subcommittee on General
requirements on OTC contracts in natural gas. The information to be disclosed shall be sufficient to
Farm Commodities and
enable the CFTC to assess the overall trading activities, potential market power, and concentration
Risk Management
of positions held by the largest traders. The CFTC shall publish a report setting out the information
received, in aggregate form.

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Bill Number
Status
Summary
/Sponsor
H.R. 4066
Referred to House
Close the Enron Loophole Act. Defines a new regulated entity — “energy trading facility” — an
(Rep. Welch)
Committee on Agriculture
OTC market that plays a significant role in price discovery. Requires energy trading facilities
(ETFs) to register with the CFTC, and sets out criteria for registration, including the capacity to
monitor trading to prevent manipulation and excessive speculation. ETFs must also establish and
enforce speculative position limits that are comparable to the limits that apply to regulated futures
exchanges, and must publish data on trading volumes and prices.
Also imposes reporting and recordkeeping requirements on transactions on foreign futures
exchanges that involve delivery of energy commodities within the United States, where such
transactions are executed on terminals located in the U.S.
H.R. 6130
Referred to the Committee
Calls for an interagency study of the effects of speculation in the futures markets (including foreign
(Rep. Barton)
on Agriculture, and in
futures markets) for natural gas, crude oil, and gasoline on cash market and retail prices for the
addition to the Committee
commodities.
on Energy and Commerce
Directs the CFTC to issue a regulation setting out how it determines whether futures and derivatives
regulation in a foreign country is comparable to U.S. regulation of those markets.
H.R. 6264
Referred to the House
Limits over-the-counter derivative transactions in energy commodities (defined as crude oil, heating
(Rep. Larson)
Committee on Agriculture
oil, gasoline, or diesel fuel) to persons whom the CFTC has certified as having the capacity to
produce, manufacture, or accept physical delivery of the commodity.

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CRS-12
Bill Number
Status
Summary
/Sponsor
H.R. 6279
Referred to the House
Oil Speculation Reduction Act of 2008. Prohibits the CFTC from exempting from U.S. regulation a
(Rep. Chabot)
Committee on Agriculture
foreign board of trade that offers contracts in crude oil to be physically delivered in the United
States, unless (1) the foreign market applies principles or requirements daily publication of trading
information and position limits or accountability levels for speculators that are comparable to those
applied by U.S. exchanges, (2) provides the CFTC with information about large trading positions
comparable to what the CFTC receives from U.S. markets, and (3) imposes margin requirements
that are comparable to those in U.S. markets and sufficient to reduce excessive speculation and
protect consumers.
CFTC shall, within 18 months of enactment, review waivers of regulation already extended to
foreign exchanges, and shall report to Congress within 12 months on the implementation of this act.
H.R. 6284
Referred to the House
Authorizes the CFTC to apply anti-manipulation and certain other provisions of the Commodity
(Rep. Matheson)
Committee on Agriculture
Exchange Act to persons located in the United States trading on foreign futures exchanges, and to
require such person to limit, reduce, or liquidate any position to prevent or reduce the threat of price
manipulation, excessive speculation, price distortion, or disruption of delivery or the cash settlement
process.
Limits the CFTC’s authority to exempt foreign futures markets that offer contracts based on “an
energy commodity that is physically delivered in the United States” from U.S. regulation. Before
granting such relief from regulation, CFTC must determine that the foreign market applies
principles regarding the publication of trading information and position limits or accountability
levels for speculators that are comparable to U.S. law and regulation, and that the CFTC receives
from the foreign market the same information regarding large trader positions that it receives from
U.S. exchanges. Requires the CFTC to reevaluate within 18 months any foreign markets to which it
has previously granted relief from U.S. registration requirements.

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CRS-13
Bill Number
Status
Summary
/Sponsor
H.R. 6330
Referred to the Committee
Prevent Unfair Manipulation of Prices Act of 2008. Specifies that “energy commodities” (as
(Rep. Stupak)
on Agriculture, and to the
defined) are not exempt commodities. As a result, trading in OTC contracts in energy commodities
Committee on Energy and
would not be exempted from regulation by statute, but would require CFTC approval on a case-by-
Commerce
case basis, which could be granted only after 60-day notification to Congress and a public comment
period. Bilateral OTC energy contracts (not executed on a trading facility) would be subject to
reporting and recordkeeping requirements.
Foreign futures markets offering contracts in the United States, with a delivery point in the United
States, would be subject to U.S. regulation.
The definition of “bona fide hedger” would exclude those hedging price risk arising from energy
swaps. The CFTC would be required to publish certain information about trading strategies that
track commodity price indexes, including the size of positions and the total value of index
speculation.
Provides FERC with cease-and-desist authority to freeze the assets of companies prosecuted under
its anti-manipulation authority.

---

CRS-14
Bill Number
Status
Summary
/Sponsor
H.R. 6334
Referred to the House
Expresses the sense of the House that the President should request emergency appropriations for the
(Rep. Etheridge)
Committee on Agriculture
CFTC in FY2008, in order to hire 100 additional employees to monitor and improve enforcement in
energy markets.
Directs the CFTC, before granting relief from U.S. registration and regulatory requirements to any
foreign market offering contracts involving delivery of energy commodities in the United States, to
determine that the foreign market applies regulations regarding publication of trading data and
position limits that are comparable to U.S. regulations, and that the foreign market supplies the
CFTC with the same type of information about large speculative and hedging positions that the
CFTC now obtains from U.S. exchanges.
Directs the CFTC to publish monthly data on the positions of index funds (and other passive, long-
only positions) in energy markets, including the total amount of such investments and the size of
speculative positions compared to those of hedgers who deal in the physical commodities.
H.R. 6341
Referred to the House
Energy Markets Anti-Manipulation and Integrity Restoration Act . Removes “energy commodities”
(Rep. Van Hollen)
Committee on Agriculture
(as defined) from the category of exempt commodities, thus ending the statutory exemption from
CFTC regulation for OTC energy contracts.
Specifies that a board of trade, exchange, or market shall not be considered to be foreign if it has a
trading affiliate or trading infrastructure located in the United States; and a contract of sale of an
energy commodity for future delivery in the United States, which is a significant price discovery
contract (as determined by the CFTC) for the energy commodity, is executed or traded on or through
the board of trade, exchange, or market.

---

CRS-15
Bill Number
Status
Summary
/Sponsor
H.R. 6349
Referred to the House
Increasing Transparency and Accountability in Oil Prices Act of 2008. Expresses the sense of the
(Rep. J. Marshall)
Committee on Agriculture
House that the President should request emergency appropriations for the CFTC, to fund 100 new
positions to oversee energy futures market speculation and help restore public confidence.
Establishes the Office of Inspector General as an independent office within the CFTC.
Calls for a GAO study of international regulation of energy derivatives.
Limits the CFTC’s authority to exempt foreign futures markets that offer contracts based on “an
energy commodity that is physically delivered in the United States” from U.S. regulation. Before
granting such relief from regulation, CFTC must determine that the foreign market applies
principles regarding the publication of trading information and position limits or accountability
levels for speculators that are comparable to U.S. law and regulation, and that the CFTC receives
from the foreign market the same information regarding large trader positions that it receives from
U.S. exchanges. Requires the CFTC to reevaluate within 18 months any foreign markets to which it
has previously granted relief from U.S. registration requirements. Expands CFTC jurisdiction over
certain trades by U.S. persons executed on foreign markets.
Directs the CFTC to require detailed reporting from swaps dealers and index traders, and to review
index trading to ensure that it does not adversely impact the price discovery process. Requires the
CFTC to publish monthly data on the number and total of index funds and data on speculative
positions relative to bona fide physical hedger positions.

---

CRS-16
Bill Number
Status
Summary
/Sponsor
H.R. 6372
Referred to the House
Commodity Futures Restoration Act. Removes energy commodities (as defined) from the class of
(Rep. Hill)
Committee on Agriculture
exempt commodities. Puts energy swaps on the same regulatory basis as agricultural commodity
swaps.
A futures exchange shall not be considered foreign if (1) it has an affiliate located in the United
States, (2) it trades a contract settled by delivery in the United States, or (3) it trades a significant
price discovery contract.
Exemptions from position limits for bona fide hedgers shall not apply to swaps involving energy
commodities.
Directs the CFTC to report to Congress within 90 days of enactment on margin levels and position
limits applicable to energy commodities.
H.R. 6377
Passed the House, June 26,
Energy Markets Emergency Act of 2008. Directs the CFTC to utilize all its authority, including its
(Rep. Peterson)
2008
emergency powers, to:
(1) curb immediately the role of excessive speculation in any contract market within the jurisdiction
and control of the Commodity Futures Trading Commission, on or through which energy futures or
swaps are traded; and
(2) eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations or
unwarranted changes in prices, or other unlawful activity that is causing major market disturbances
that prevent the market from accurately reflecting the forces of supply and demand for energy
commodities.

---

CRS-17
Bill Number
Status
Summary
/Sponsor
S. 577
Referred to the Senate
Oil and Gas Traders Oversight Act of 2007. Amends the Commodity Exchange Act to prescribe
(Sen. Feinstein)
Committee on Agriculture,
reporting and recordkeeping requirements for positions involving energy commodities (a
Nutrition, and Forestry
commodity or the derivatives of a commodity used primarily as a source of energy).
Directs the Commodity Futures Trading Commission to subject to the requirements of this Act a
contract, agreement, or transaction for future delivery in an energy commodity.
S. 2058
Referred to the Senate
Close the Enron Loophole Act. Defines a new regulated entity — “energy trading facility” — an
(Sen. Levin)
Committee on Agriculture,
OTC market that plays a significant role in price discovery. Requires energy trading facilities
Nutrition, and Forestry
(ETFs) to register with the CFTC, and sets out criteria for registration, including the capacity to
monitor trading to prevent manipulation and excessive speculation. ETFs must also establish and
enforce speculative position limits that are comparable to the limits that apply to regulated futures
exchanges, and must publish data on trading volumes and prices.
Also imposes reporting and recordkeeping requirements on transactions on foreign futures
exchanges that involve delivery of energy commodities within the United States, where such
transactions are executed on terminals located in the U.S.

---

CRS-18
Bill Number
Status
Summary
/Sponsor
S. 2991
Placed on Senate
Consumer-First Energy Act of 2008 - Sec. 501 limits the CFTC’s authority to exempt foreign
(Sen. Reid)
Legislative Calendar under
futures markets that offer contracts based on “an energy commodity that is physically delivered in
General Orders
the United States” from U.S. regulation. Before granting such relief from regulation, CFTC must
determine that the foreign market applies principles regarding the publication of trading information
and position limits or accountability levels for speculators that are comparable to U.S. law and
regulation, and that the CFTC receives from the foreign market the same information regarding
large trader positions that it receives from U.S. exchanges. Requires the CFTC to reevaluate any
foreign markets to which it has previously granted relief from U.S. registration requirements.
Sec. 502 directs the CFTC to issue within 90 days of enactment regulations setting “ a substantial
increase in margin levels for crude oil traded on any trading facility” under CFTC’s jurisdiction.
Calls for CFTC and GAO to conduct separate studies on the impact of increases in margin
requirements.
S. 2995
Referred to the Committee
Oil Trading Transparency Act. Limits the CFTC’s authority to exempt foreign futures markets that
(Sen. Levin)
on Agriculture, Nutrition,
offer contracts based on “an energy commodity that is physically delivered in the United States”
and Forestry
from U.S. regulation. Before granting such relief from regulation, CFTC must determine that the
foreign market applies principles regarding position limits or accountability levels for speculators
and publication of trading information that are comparable to U.S. law and regulation, and that the
CFTC receives from the foreign market the same information regarding large trader positions that it
receives from U.S. exchanges. Requires the CFTC to reevaluate any foreign markets to which it has
previously granted relief from U.S. registration requirements.
S. 3044
Motion to proceed to
Consumer-First Energy Act of 2008. Includes provisions related to foreign futures markets and an
(Sen. Reid)
measure considered in
increase in oil futures margins identical to S. 2991.
Senate

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CRS-19
Bill Number
Status
Summary
/Sponsor
S. 3081
Referred to the Committee
Establishes a Petroleum Industry Antitrust Task Force within the Department of Justice to examine,
(Sen. Kerry)
on the Judiciary
among other issues, the existence and effects of any anticompetitive manipulation in futures markets
or other trading exchanges relating to petroleum or petroleum products.
S. 3122
Referred to the Senate
Policing United States Oil Commodities Markets Act of 2008. Requires foreign markets “that
(Sen. Cantwell)
Committee on Agriculture,
operate trading terminals in the United States, on which are traded contracts that serve a price
Nutrition, and Forestry
discovery function for any energy commodity that is delivered in the United States” to register with
the CFTC as designated contract markets (or regulated exchanges). Also applies to markets to
which CFTC has already granted relief from registration requirements.
S. 3129
Referred to the Committee
Close the London Loophole Act of 2008. Authorizes the CFTC to apply anti-manipulation and
(Sen. Levin et al.)
on Agriculture, Nutrition,
certain other provisions of the Commodity Exchange Act to persons located in the United States
and Forestry
trading on foreign futures exchanges, and to require such person to limit, reduce, or liquidate any
position to prevent or reduce the threat of price manipulation, excessive speculation, price
distortion, or disruption of delivery or the cash settlement process.
Limits the CFTC’s authority to exempt foreign futures markets that offer contracts based on “an
energy commodity that is physically delivered in the United States” from U.S. regulation. Before
granting such relief from regulation, CFTC must determine that the foreign market applies
principles regarding the publication of trading information and position limits or accountability
levels for speculators that are comparable to U.S. law and regulation, and that the CFTC receives
from the foreign market the same information regarding large trader positions that it receives from
U.S. exchanges. Requires the CFTC to reevaluate within 18 months any foreign markets to which it
has previously granted relief from U.S. registration requirements.

---

CRS-20
Bill Number
Status
Summary
/Sponsor
S. 3130
Referred to the Committee
Increasing Transparency and Accountability in Oil Prices Act. Expresses the sense of the Senate
(Sen. Durbin)
on Agriculture, Nutrition,
favoring a supplemental appropriation to increase the CFTC’s resources, including the hiring of 100
and Forestry
new employees to monitor energy futures markets. Establishes the Office of Inspector general as an
independent office within the CFTC. Directs GAO to study the international regime for regulating
the trading of energy commodity futures and derivatives.
Includes provisions related to foreign futures markets identical to S. 2991.
S. 3131
Referred to the Senate
Oil Speculation Control Act of 2008. Makes institutional investors who trade in energy contracts
(Sens. Feinstein
Committee on Agriculture,
but do not take or make physical delivery of energy commodities subject to speculative position
and Stevens)
Nutrition, and Forestry
limits or accountability levels. Defines “bona fide hedging transactions” as those related to price
risk arising from physical energy transactions.
Establishes the Office of Inspector general as an independent office within the CFTC.
Extends large trader reporting requirements to index traders, swap dealers, and institutional
investors. Directs the CFTC to review the trading practices of index traders, swap dealers, and
institutional investors in markets under CFTC jurisdiction to ensure that such practices are not
impeding the price discovery process, to gather information, and to assess the adequacy of current
regulation of such trading practices.
Directs the CFTC to use its emergency authority to impose a 60-day freeze to prevent institutional
investors from increasing the size of their positions in energy commodity futures or commodity
future index funds.

---

CRS-21
Bill Number
Status
Summary
/Sponsor
S. 3134
Referred to the Committee
Removes energy commodities (as defined) from the class of exempt commodities. Transactions in
(Sen. B. Nelson)
on Agriculture, Nutrition,
energy commodities will be subject to the same degree of regulation under the Commodity
and Forestry
Exchange Act as agricultural commodities. That is, there will no longer be a statutory exemption
for OTC energy trades.
S. 3183
Referred to the Committee
Directs the CFTC to use its authority to eliminate manipulation and speculation from the petroleum
(Sen. Dorgan)
on Agriculture, Nutrition,
futures market. Requires the CFTC to distinguish between “legitimate hedge trading” —
and Forestry
transactions involving commercial producers and consumers of physical petroleum products — and
all other trades.
Requires the CFTC to revoke or modify all prior actions or decisions, (including exemptions from
position limits for trading other than legitimate hedge trading) that prevent the CFTC from
protecting legitimate hedge trades and discouraging speculative trades.

Requires the CFTC to order an increase in petroleum futures margin requirements to at least 25%
for trades not classified as legitimate hedge trading.

Requires the CFTC to convene an international working group of regulators to ensure the protection
of petroleum futures market from excessive speculation and world wide forum shopping.
S 3185
Referred to the Committee
Identical to H.R. 6330.
(Sen. Cantwell)
on Agriculture, Nutrition,
and Forestry

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CRS-22
Bill Number
Status
Summary
/Sponsor
S. 3202
Placed on Senate
Gas Price Reduction Act of 2008. (Title IV — Energy Commodity Markets.) Directs the President’s
(Sen. McConnell)
Legislative Calendar under
Working Group on Financial Markets to study the international regulation of energy derivatives.
General Orders. Calendar
No. 854
Bars the CFTC from permitting direct access by U.S. investors to foreign futures markets trading
contracts that settle on prices of U.S. contracts, unless those markets (1) publish trading data
comparable to U.S. futures exchanges, (2) adopt position limits comparable to U.S. limits, and (3)
provide the CFTC with large trader reports comparable to what the CFTC receives from U.S.
markets.
Directs the CFTC to set reporting requirements for swap dealers and index traders, and to publish
monthly aggregate figures on index investing and other passive, long-only strategies in energy and
agricultural commodities.
Directs the CFTC to hire 100 new employees for monitoring and enforcement in energy markets,
and authorizes appropriations for this purpose.
S. 3205
Referred to the Committee
A bill to direct the Commodity Futures Trading Commission to utilize all its authority, including its
(Sen. Cantwell)
on Agriculture, Nutrition,
emergency powers, to curb immediately the role of excessive speculation in any contract market
and Forestry
within the jurisdiction and control of the Commodity Futures Trading Commission, on or through
which energy futures or swaps are traded, and to eliminate excessive speculation, price distortion,
sudden or unreasonable fluctuations or unwarranted changes in prices, or other unlawful activity that
is causing major market disturbances that prevent the market from accurately reflecting the forces of
supply and demand for energy commodities.

---

CRS-23
Appendix. A Futures Contract
The Mechanics of a Futures Contract
An oil futures contract represents 1,000 barrels of oil, but neither party to the contract
need ever possess the actual commodity. (Contracts may be settled by physical delivery, but
in practice the vast majority are settled in cash.) When a contract is made today, one party
(called the “long”) agrees to buy oil at a future date from the other (the “short”). Contracts are
available with different maturities, designated by expiration months, but the size is always the
same. (In oil, a contract expires every month.) The price at which this future transaction is to
take place is the current market price. Assuming the price of oil is $135 per barrel, the long
trader is committed to buy at that price, and the short is obliged to sell.
Assume that tomorrow the price of oil goes to $140/barrel. The long trader now has the
advantage: he is entitled to buy for $135 oil that is now worth $140. His profit is $5,000 (the
$5 per barrel increase times the 1,000 barrels specified in the contract). The short has lost the
identical amount: she is obliged to sell oil for less than the going price.
If, on the following day, the price goes to $145, the long gains another $5,000. The short,
down a total of $10,000, may reconsider her investment strategy and decide to exit the market.
She can do this at any time by entering into an offsetting, or opposite transaction. That is, she
purchases a long contract with the same expiration date. Her obligation (on paper) is now to
sell 1,000 barrels (according to the first contract) and to buy 1,000 barrels (the second contract)
when both contracts expire simultaneously. Whatever price prevails at that time, the net effect
of the two transaction will be zero. The short’s position is said to be “evened out” — she is out
of the market.
The short’s decision to exit does not affect the long, who may prefer to ride with the trend.
This is because all contracts are assumed by the exchange’s clearing house, which becomes the
opposite party on each trade, and guarantees payment. The ability to enter and exit the market
by offset, without having to make or take delivery of the physical commodity, permits trading
strategies based on short-term price expectations. While some traders may keep a long or short
position open for weeks or months, others buy and sell within a time frame of minutes or
seconds.
The exchange clearing house, which guarantees all trades, also controls traders’ funds.
Before entering into the trade described above, both long and short would have been required
to deposit an initial margin payment of $11,813. (The amount is set by the exchange; the figure
is current as of June 30, 2008.) All contracts are priced, or “marked-to-market,” each day. The
long trader above would have had his $10,000 gain credited to his margin account, while the
short would have had to make additional “maintenance” margin payments to cover her losses.
It is worth noting that her two-day $10,000 loss represents 85% of her original investment, that
is, her initial margin deposit of $11,813: the risks of futures speculation are high. When traders
exit the market, any funds remaining in their margin accounts are returned. (Other transaction
costs, such as brokerage commissions and exchange fees, are not returnable.)
Options on futures are also available for many futures contracts. The holder of an option
has the right (but not the obligation) to enter into a long or short futures contract over the life
of the option. The option will only be exercised if price movements are favorable to the option
buyer, that is, if the underlying futures contract would be profitable. The seller of the option
receives a payment (called a premium) for granting this right. The seller profits if the option
is not exercised by the buyer.
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