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entitled 'Futures Markets: Approach for Examining Oversight of Energy 
Futures' which was released on May 4, 2006.

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United States Government Accountability Office:



Before the Committee on Energy and Commerce, House of Representatives:

Futures Markets:

Approach for Examining Oversight of Energy Futures:

Statement of Orice M. Williams: 
Financial Markets and Community Investment:


Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the design of our ongoing 
study of the Commodity Futures Trading Commission's (CFTC) oversight of 
futures trading in energy commodities. As you are aware, record high 
crude oil and natural gas prices have generated significant concerns by 
the public and members of Congress that the high and relatively 
volatile prices may be the result of factors other than market forces. 
Several members of the House and the Senate have expressed concerns 
over the upward trending prices and factors that may be causing the 
perceived increases in volatility of several energy commodities, 
including crude oil, gasoline, natural gas, and heating oil. As a 
result, we initiated this study under the authority of the Comptroller 
General. My remarks today focus on our ongoing study of (1) changes in 
energy futures markets and volatility since 2000 and (2) CFTC 
surveillance and enforcement activities in the oversight of energy 
futures trading.

This ongoing work will leverage results of our previous reviews of the 
financial and physical energy markets, and trading data from the CFTC 
and the New York Mercantile Exchange (NYMEX).[Footnote 1] It will also 
be based on discussions and reviews of available information from 
officials and staff from several federal agencies, refiners, vertically 
integrated oil companies, associations representing end users of 
natural gas, investment banks, and hedge funds, as well as market 
analysts and academics. We will also be reviewing relevant CFTC 
enforcement cases and CFTC Inspector General reports and incorporating 
their results in our work.

In summary:

Our ongoing study explores how energy futures markets and market 
participants with different investment objectives affect futures and 
commodity prices in a complex and rapidly evolving marketplace. Some of 
these participants include producers and refiners, who use futures 
contracts[Footnote 2] as a key tool to manage risk they face due to 
changes in prices. Since 2000, there has also been an increase in the 
number of new participants, such as hedge funds and investment banks. 
Our ongoing study will evaluate what market studies and other market 
data indicate as to whether energy futures prices have become more 
volatile. Specifically, we are looking at different ways of measuring 
volatility and reviewing recent studies on volatility by NYMEX, CFTC, 
Consumer Federation of America, and others. We are also using NYMEX 
trading data to document trends in volatility.

Our ongoing study also explores how CFTC's market surveillance program 
is used to monitor and detect market abuses in the trading of energy 
futures. We are also determining what fraudulent, manipulative, and 
abusive practices have been identified by CFTC and others in the 
trading of energy futures and how CFTC is positioned to protect market 
users from these practices. CFTC's surveillance program is one tool 
used to oversee the integrity of the futures market. CFTC uses its 
large trader reporting system and other sources such as relevant self- 
regulatory organizations (SRO) and other federal agencies to monitor 
for attempted manipulation in the futures markets. In cases of 
suspected fraud, manipulation or abuse, CFTC will undertake enforcement 
actions. As part of this study, we are looking at CFTC's authority and 
its resources to protect market users.


Futures contracts are traded on regulated exchanges and are settled 
daily based on their current value in the marketplace. The key players 
in futures markets are hedgers, speculators, and brokers. Hedgers use 
futures to shift the risk of a price change onto other market 
participants such as speculators. Speculators may assume the price risk 
that hedgers try to avoid in the hope of making a profit. Although 
speculators usually have no commercial interest in the commodities they 
trade, the desire to make a profit motivates them to collect market 
information regarding the supply and demand of commodities to 
anticipate the potential impact of this information on prices. Finally, 
there are brokers, who make the trade.

Oversight of the futures market is the responsibility of CFTC, which 
was created in 1974 as an independent agency responsible for 
encouraging competitiveness and efficiency in futures markets, ensuring 
their integrity, protecting market participants against manipulation, 
abusive trading practices, and fraud, and ensuring the financial 
integrity of the clearing process.[Footnote 3] Through its oversight, 
especially its surveillance and enforcement programs, CFTC is 
responsible for enabling the futures markets to provide a means for 
determining the price of commodities--price discovery--and for 
offsetting price risk faced by market participants. Oversight is also 
provided by NYMEX, an SRO, that is itself regulated by the CFTC.

In the U.S. futures regulatory structure, SROs--the futures exchanges 
and the National Futures Association--provide industry oversight. 
Futures SROs, such as NYMEX, are responsible for establishing and 
enforcing rules governing member conduct and trading; providing for the 
prevention of market manipulation, including monitoring trading 
activity; ensuring that futures industry professionals meet 
qualifications; and examining members for financial strength and other 
regulatory purposes. Their operations are funded by the futures 
industry through transaction fees and other charges. CFTC oversees the 
SROs to ensure that each has an effective self-regulatory program.

Changes in Energy Futures Markets and Volatility Since 2000:

Since 2000, there has been an increase in the number of market 
participants in the energy futures markets, such as hedge funds and 
investment banks, raising questions about the impact they have had on 
the market overall and volatility in particular. Futures contracts are 
also seen as a key tool that producers and refiners use to manage the 
risks they face due to changes in prices. Our work is designed to 
describe how energy futures markets and market participants with 
different investment objectives influence energy prices. To address 
this, we will provide an overview of the energy futures markets and the 
role played by various market participants. Further, we will discuss 
how the markets function to provide price discovery, liquidity, and 
risk management. We will also address markets other than NYMEX, such as 
the over-the-counter (OTC) market, and how these markets differ from 
NYMEX. Finally, we will explore NYMEX's role in providing price 
discovery for energy commodities and futures prices and their link to 
spot or cash prices.

As part of our work, we are also reviewing what market studies by CFTC, 
NYMEX and others have found to affect volatility. Specifically, we are 
determining how volatility is defined and identifying factors that 
impact volatility. We will also address whether available evidence 
suggests that new market participants are a factor causing volatility. 
In answering this question we will analyze both CFTC and NYMEX trading 
data and studies that have addressed the causes of volatility in the 
futures markets.

CFTC Provides Oversight Through Surveillance and Enforcement Activities 
of Energy Futures Trading:

CFTC provides oversight through surveillance and enforcement of energy 
futures trading and our ongoing work involves assessing how CFTC's 
market surveillance program is used to monitor and detect market abuses 
in the trading of energy futures. To address these issues we are 
evaluating both CFTC and NYMEX surveillance programs, with a focus on 
how CFTC uses its large trader reporting system data as part of its 
surveillance. This work will describe how CFTC commissioners are kept 
informed of surveillance and other market concerns. We will also 
describe how both CFTC and NYMEX surveillance programs provide 
oversight and how NYMEX monitors positions against specific limits to 
detect attempted abuses. This work will also document efforts of other 
agencies, including the Department of Justice, the Federal Trade 
Commission, and the Federal Energy Regulatory Commission in providing 
oversight to energy market activities.

We are also focusing on what fraudulent, manipulative, and abusive 
practices have been identified by CFTC and others in the trading of 
energy futures. We will provide information on the enforcement programs 
of CFTC and NYMEX, including the results of recent enforcement actions 
taken by CFTC and NYMEX and the settlements reached involving these 
enforcement actions. We are also addressing the extent to which CFTC 
uses internal and external sources in developing enforcement cases. 
This includes discussing NYMEX's enforcement activities and how NYMEX 
coordinates these activities with CFTC.

Finally, we are exploring how CFTC is positioned to protect market 
users and the public from actual and potential abuses in the trading of 
energy futures. Areas we are focusing on include changes in CFTC's 
regulatory approach since the Commodity Futures Modernization Act of 
2000 and staff resources available to accomplish its mission including 
the allocation of staff. Our current timeframe from completing this 
work is September 2006.

Mr. Chairman, this completes my prepared statement. I would be pleased 
to answer any questions that you or Members of the Committee may have.

Contact and Acknowledgements:

For further information about this testimony, please contact Orice 
Williams on (202) 512-8678 or Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this statement. Individuals making key 
contributions to this testimony include John Wanska (Assistant 
Director), Kevin Averyt, and John Forrester. 


[End of section]


[1] See U.S. GAO, Energy Markets: Factors Contributing to Higher 
Gasoline Prices, GAO-06-412T (Washington, D.C.: February 1, 2006); U.S. 
GAO, Motor Fuels: Understanding the Factors That Influence the Retail 
Price of Gasoline, GAO-05-525SP (Washington, D.C.: May 2005).

[2] Futures are one type of derivatives contract. The market value of a 
derivatives contract is derived from a reference rate, index, or the 
value of an underlying asset, including stocks, bonds, commodities, 
interest rates, foreign currency exchange rates, and indexes that 
reflect the collective value of underlying financial products. The 
regulation of derivatives generally varies depending on whether they 
are traded on exchanges (exchange-traded) or traded over-the-counter 
(OTC) and on the nature of the underlying asset, reference rate, or 
index. Futures obligate the holder to buy or sell a specific amount or 
value of an underlying asset, reference rate, or index at a specified 
price on a specified future date and are often traded on exchanges. 

[3] According to CFTC, clearing is the procedure through which the 
clearing organization becomes the buyer to each seller of a futures 
contract or other derivative, and the seller to each buyer for clearing 

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