Energy Derivatives: Preliminary Views on Energy Derivatives Trading and CFTC Oversight Page: 2 of 20
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SGAO
aAccountabiity Integrity-Reliability
Highlights
Highlights of GAO-07-1095T, testimony
before Subcommittee on General Farm
Commodities and Risk Management,
Committee on Agriculture, House of
Representatives
Why GAO Did This Study
Energy prices for crude oil, heating
oil, unleaded gasoline, and natural
gas have risen substantially since
2002, generating questions about
the reasons for the increase. Some
observers believe that the higher
energy prices were solely due to
supply and demand fundamentals
while others believe that increased
futures trading activity may also
have contributed to higher prices.
This testimony highlights GAO's
preliminary findings related to (1)
trends and patterns in the futures
and physical energy markets and
the effect of these trends on energy
prices and (2) the Commodity
Futures Trading Commission's
(CFTC) regulatory and
enforcement authority over
derivatives markets.
GAO analyzed futures and large
trader reporting data; trading data
obtained from the New York
Mercantile Exchange (NYMEX) for
crude oil, heating oil, unleaded
gasoline, and natural gas; and
various other sources of energy-
related data. GAO also analyzed
relevant academic and other
studies on the subject and
interviewed market participants,
experts, and officials at relevant
federal agencies.
This testimony is based on an
ongoing engagement, and therefore
GAO is making no
recommendations at this time.
www.gao.gov/cgi-bin/getrpt?GAO-07-1095T.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Orice M.
Williams at (202) 512-8678 or
williamso@ gao.gov.ENERGY DERIVATIVES
Preliminary Views on Energy Derivatives
Trading and CFTC Oversight
What GAO Found
Rising energy prices have been attributed to a variety of factors, and recent
trends in the futures and physical markets highlight the changes that have
occurred in both markets from 2002 through 2006. Specifically:
* Inflation-adjusted energy prices in both the futures and physical markets
increased by over 200 percent during this period for three of the four
commodities we reviewed.
* Volatility (a measurement of the degree to which prices fluctuate over
time) in energy futures prices generally remained above historic averages
during the beginning of the time period but declined through 2006 for three
of the four commodities we reviewed.
* The number of noncommercial participants in the futures markets
including hedge funds, has grown; along with the volume of energy futures
contracts traded; and the volume of energy derivatives traded outside
traditional futures exchanges.
At the same time these changes were occurring in the futures markets for
energy commodities, tight supply and rising demand in the physical markets
pushed prices higher. For example, while global demand for oil has risen at
high rates, spare oil production capacity has fallen since 2002, and increased
political instability in some of the major oil-producing countries has
threatened the supply of oil. Refining capacity also has not expanded at the
same pace as the demand for gasoline. The individual effect of these
collective changes on energy prices is unclear, as many factors have
combined to affect energy prices. Monitoring these changes will be
important to protect the public and ensure market integrity.
Based on its authority under the Commodity Exchange Act (CEA), CFTC
primarily focuses its oversight on the operations of traditional futures
exchanges, such as NYMEX, where energy futures are traded. However,
energy derivatives are also traded on other markets, namely exempt
commercial markets and over-the-counter (OTC) markets-both of which
have experienced increased volumes in recent years. Exempt commercial
markets are electronic trading facilities that trade exempt commodities
between eligible participants, and OTC markets involve eligible parties that
can enter into contracts directly off-exchange. Both of these markets are
exempt from general CFTC oversight, but they are subject to the CEA's
antimanipulation and antifraud provisions and CFTC enforcement of those
provisions. Because of these varying levels of CFTC oversight, some market
observers question whether CFTC needs broader authority over all
derivative markets. CFTC generally believes that the commission has
sufficient authority over OTC derivatives and exempt energy markets.
However, CFTC has recently taken additional actions to clarify its authority
to obtain information about pertinent off-exchange transactions.,United States Government Accountability Office
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United States. Government Accountability Office. Energy Derivatives: Preliminary Views on Energy Derivatives Trading and CFTC Oversight, text, July 12, 2007; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc294292/m1/2/: accessed April 24, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.