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Regulation of Energy Derivatives , Record No.: RS21401, Date: May 12, 2008 1 (May 12, 2008)

handle is hein.tera/crser0088 and id is 1 raw text is: Order Code RS21401 Updated May 12, 2008 CRS Repo for Congress Regulation of Energy Derivatives Mark Jickling Specialist in Financial Economics Government and Finance Division Summary 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 collapsed in August 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). On the other hand, federal financial agencies have taken the position, in hearings and written statements, that market discipline and self-regulation are sufficient to deter price manipulation, and that new legislation is not required. 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) would 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. Energy derivatives - financial contracts whose value is linked to changes in the price of some energy product - are traded in several kinds of markets: the futures exchanges and the off-exchange, or over-the-counter market. The New York Mercantile Exchange (Nymex) is the leading U.S. market for futures contracts based on prices of crude oil, natural gas, heating oil, and gasoline. Futures exchanges - called designated contract markets - are regulated by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA). The CEA imposes a range of mandates on the exchanges (and on futures industry personnel) regarding record keeping (including an audit trail for all trades), registration requirements, market surveillance, financial standards, sales practices, handling of customer funds, and so on. Congressional Research Service <, The Library of Congress Prepared for Members and Committees of Congress

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