RS21401 - Regulation of Energy Derivatives
7-Jul-2008; Mark Jickling; 6 p.
Update: Previous Releases:
April 9, 2008
October 22, 2007
June 19, 2006
April 21, 2006
Abstract: After the collapse of Enron Corp. in late 2001, that company’s activities came under intense scrutiny. Much of its business consisted of trading financial contracts whose value was derived from changes in energy prices. Enron’s derivatives trading was largely “over-the-counter” (OTC) and unregulated: little information about transactions was available. Trading in energy derivatives rebounded after a post-Enron slump, and much of the market remains unregulated. This “regulatory gap” strikes some observers as dangerous for two reasons. First, the absence of government oversight may facilitate abusive trading or price manipulation. A June 2007 report by the Senate Permanent Subcommittee on Investigations concluded that excessive speculation by the Amaranth hedge fund, which failed in 2006, had distorted natural gas prices. Second, the failure of a large derivatives dealer could conceivably trigger disruptions of supplies and prices in physical energy markets (though the effect was minor in the Enron case).
A number of bills before the 110th Congress would give the Commodity Futures Trading Commission (CFTC) enhanced authority to regulate certain energy trades on markets other than the regulated futures exchanges. H.R. 2419 (the Farm Bill), enacted as P.L. 110-234 on May 22, 2008, over the President’s veto, will impose exchange-like regulations on electronic over-the-counter markets that play a significant role in setting energy prices. This report summarizes energy derivatives regulation and proposed legislation. It will be updated as developments warrant.