In the regulators’ spotlight: Arbitrage, OTC derivatives, and … stored oil?

Beginning Thursday, the IEA is holding a two-day meeting in Tokyo with regulators, researchers and banks from around the world to discuss oil price formation and market volatility.

Day two is still wrapping up and press weren’t allowed on the first day; plus, the meeting is held under Chatham House rules – so the coverage was limited. However Scott O’Malia, one of five CFTC commissioners, in a speech prepared for the meeting took aim at oil withheld from the market, including in floating storage,  reports Reuters:

The CFTC commissioner said publishing data on oil in-transit would increase knowledge of what is being stored at sea or withheld from the market.

O’Malia also questioned whether certain traders who buy oil only to put it directly into storage are trying to “extract money from consumers and producers.”

He also believes OTC reforms, already approved by the US House of Representatives, will likely be passed this year. But, O’Malia added:

“It is critical that this legislation doesn’t open new opportunities for regulatory arbitrage,” O’Malia said, noting the need for consistent rules across the global OTC market, which is estimated at $600 trillion.

However a summary of discussion points published by the IEA indicates that all participants agreed, unsurprisingly, on a much softer line:

Although a wide variety of views was aired regarding the relative importance of the many drivers influencing oil prices, the impact of price volatility and potential measures aimed at combating excessive volatility, attendees agreed on a number of key issues that need to inform future policy actions aimed at helping markets work better:

• Firstly, volatility is an inescapable feature of markets, which cannot ever be totally eradicated, nor is it desirable to try to do so. But excessive volatility can be controlled by means of better operating markets and improved visibility of current conditions and expectations for the market in the future;
• Secondly, the issue of data transparency is paramount for a better understanding of oil market dynamics. Improved data on demand, supply and stocks are key to a better grasp on market fundamentals, notably in the emerging markets that are now playing an increasing role, such as Asia. However, equally important is greater granularity on financial market information. Recent welcome moves to enhance reporting requirements by the CFTC and others need to be continued, and potentially extended to OTC derivatives markets.
• Thirdly, participants also agreed that enhanced cooperation between key research institutions and analysts must broaden and deepen into the complex inter-relationships between physical and financial markets.
• Fourthly, many participants highlighted that efforts to further regulate commodity markets must take into account important factors such as liquidity and the ability to manage risk, which could be impaired if incoming regulation is applied in too stringent a manner.
• Finally, clearer and more consistent longer term policy efforts are required in areas such as
encouraging investment, a continued shift towards market pricing and oil use efficiency measures.

The UK’s FSA, which oversees British commodities markets, was invited to the meeting.

The FSA traditionally takes a different approach to regulation to its US counterparts, and that has been the case in commodities as much as financial markets. While the CFTC is proposing stricter position limits for energy commodities markets, and just this week fined UBS for exceeding existing limits, the FSA has been fairly quiet about the prospects for tighter regulation. But the possibility of trades moving away from the US is quite a big concern for the CFTC commissioners.

Related links:

Digging deeper into the CFTC’s position limits (FT Alphaville)

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