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Close the London Loophole Act Gives CFTC Clear Authority Over U.S. Commodities Traded on Foreign Exchanges

Senators push to put a ‘cop on the beat’ to crack down on manipulation and excessive speculation

WASHINGTON – Senator Carl Levin (D-MI), Senators Dianne Feinstein (D-CA), Dick Durbin (D-IL), Byron Dorgan (D-ND) and Jeff Bingaman (D-NM) today introduced the Close the London Loophole Act, which would ensure that the Commodity Futures Trading Commission (CFTC) has the same authority to detect, prevent, and punish manipulation and excessive speculation for traders in the United States who trade crude U.S. oil or other energy commodities on foreign commodity exchanges as the CFTC has for traders who trade on U.S. exchanges.

“Closing the London loophole would ensure that our government has what it needs to protect American markets from manipulation and excessive speculation, no matter where U.S. energy commodities are traded,” said Senator Levin. “With this new authority, U.S. traders would no longer be able to avoid the cop on the beat by routing their trades through a foreign exchange. Skyrocketing prices for energy and food – and the immense pain they are causing for American consumers – make it more important than ever that we crack down on manipulation and rampant speculation in our energy markets.”

“Traders are increasingly turning to offshore markets to electronically trade U.S. energy futures – in order to evade American market oversight and speculation limits. We cannot sit back and allow this so-called ‘London Loophole’ to develop before our eyes – especially given the skyrocketing costs of oil and gas,” said Senator Feinstein. “So, we need to take steps immediately to protect all U.S. energy commodities from fraud, manipulation and excessive speculation – whether they are traded on domestic or international markets.”

“While gas prices climb every day, the understaffed and underfunded CFTC is virtually powerless to stop it,” said Senator Durbin. “We need to give the agency in charge of investigating and regulating the oil market the resources and authority they need to do their job effectively. At this point, we simply don’t know what role speculation or manipulation is playing in price increases and with a market that is producing $4 or $5 gallons of gas, we simply can't waste any more time before getting to the bottom of this.”

“There is a frenzy of speculation in the energy futures market,” said Senator Dorgan. “While American consumers are paying sky-high gas prices, speculators are raking in money hand over fist. We need tough legislation that gives some teeth to the CFTC to reign in this rampant speculation.”

Under current law, the CFTC obtains the information it needs to detect price manipulation and excessive speculation involving U.S. energy trades on foreign exchanges only through voluntary data-sharing agreements it arranges with the relevant foreign regulators. In many instances, the CFTC can take action against a U.S. trader on a foreign exchange to prevent manipulation or excessive speculation only with the cooperation and consent of the foreign regulator.

The Close the London Loophole Act would strengthen CFTC oversight by providing the CFTC with clear legal authority, as well as a clear legal obligation, to obtain trading data from foreign exchanges operating in the United States through direct trading terminals. The bill would also enable the CFTC to act on its own authority and initiative to prevent manipulation or excessive speculation by U.S. traders directing trades through foreign exchanges.

In addition, Section 3 of the bill – which Senators Levin and Feinstein previously introduced as a separate bill, S. 2995 – would increase U.S. access to foreign exchange trading data and strengthen oversight of the trading of U.S. energy commodities no matter where that trading occurs. This provision would require the CFTC, prior to allowing a foreign exchange to establish direct trading terminals located in this country, to obtain an agreement from that foreign exchange to impose speculative limits and reporting requirements on traders of U.S. energy commodities comparable to the requirements imposed by the CFTC on U.S. exchanges.

The Close the London Loophole Act would compliment recent legislation the Congress passed, over the President’s veto, to close the Enron loophole. This loophole, enacted into law in 2000 at the behest of Enron and other commodity traders, had allowed large traders to buy and sell energy commodities on U.S. electronic markets without CFTC oversight. Passed last month as part of the farm bill, this legislation gave the CFTC the authority and mandate to police U.S. electronic exchanges to stop price manipulation and excessive speculation.  

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