US bill would put limits on natgas trading practices

14 April 2005 19:51  [Source: ICIS news]

WASHINGTON (CNI)--A bill in Congress would make major changes in the operation and regulation of market exchanges to make natural gas trading more transparent and “bring some stability” to gas pricing, its sponsors said Thursday.

Representatives Sam Graves (Republican-Missouri) and John Barrow (Democrat-Georgia) introduced their bill in the House of Representatives earlier today, saying the “Commodities Exchange Improvements Act of 2005” is “common sense, bi-partisan legislation that will help bring some reliability to natural gas prices.”

The two congressmen said the rising cost of natural gas in North America is putting severe strains on US manufacturing and agriculture and is undermining the livelihood of senior citizens.

To relieve those strains, Graves and Barrow want to change federal commodity trading rules and practices in five ways:

• The bill would again put natural gas trading under regulation of the Commodity Exchange Act (from which it was removed in 2000), restoring regulatory oversight of natgas futures contracts, swaps and hybrid instruments; 
• It would require that the Commodity Futures Trading Commission (CFTC) review and approve rules applicable to transactions involving natural gas;
• The legislation would require reporting whenever any person or entity takes a large trading position in natural gas, although a “large position” is not defined and is left to regulators’ discretion;
• It would require cash settlement for certain contracts of sale for future delivery of natural gas; and
• The bill would prohibit outgoing officials of the CFTC from working for any entity regulated by CFTC for one year after their departure from the commission.

In restoring natgas trading to regulation by the CFTC, the bill would limit the movement of natural gas daily price fluctuation to 8% of the prior days settlement price. 

Self-reporting to the CFTC by natgas traders would be required “as the Commission determines to be necessary and appropriate to prevent or deter actual or potential manipulation of the price of contracts of sale of natural gas for future delivery.”

For the cash settlement requirement, the bill directs the CFTC to require “any board of trade to implement rules that provide for any contract of sale for future delivery of natural gas to be settled in cash in lieu of making delivery of the natural gas but only in circumstances in which the Commission has determined that market conditions suggest the possibility of manipulation.”

Various aspects of the bill would take effect in three to six months after the president signs it into law, and it would warrant criminal penalties of up to 10 years imprisonment and fines up to $1m or three times the monetary gain and civil penalties of up to $1m or three times the monetary gain.

Other legislative items pending in Congress seek to increase the production or import of natural gas in an effort to improve US supplies and thus moderate gas pricing, but the Graves-Barrow bill is the first seeking greater controls on gas trading to mollify natgas price fluctuations.

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