CFTC Pitches Oversight of Carbon Markets

By IAN TALLEY
WASHINGTON -- The U.S. commodities regulator Wednesday made a strong pitch to Congress for his agency to control the nascent greenhouse gas credits markets.

It's the latest and boldest move in the jurisdictional battle for oversight of what many experts say could be worth several trillion dollars. The Commodity Futures Trading Commission is seeking to control both the futures and spot, or cash, markets, an area traditionally overseen by the Federal Energy Regulatory Commission.
Fearing excessive speculation, market manipulation and the impact of Wall Street financial trading on greenhouse gas credits, lawmakers are cautiously drafting legislation that will determine how greenhouse gas emissions will be regulated under a landmark bill that would cap emissions and create a trading market. After the recent collapse of the financial system and historic volatility in the energy markets, Congress is particularly wary of oversight of a commodity expected to affect nearly every sector of the economy.
"I think it's important ... that we have regulatory oversight of these important carbon allowance markets," CFTC Chairman Gary Gensler said on the sidelines of a Senate agriculture hearing on the issue. "We bring the best expertise and experience."
Many legislators in Congress have expressed particular concern about the CFTC regulating carbon markets, saying the agency has been far too lax in overseeing energy markets, allowing volatility that hammered many industries already suffering from a weakening economy.
Earlier this year, the CFTC said it wanted to regulate the carbon spot contract listed at the Chicago Climate Exchange because of the role it may play in helping to set market prices. The carbon spot contract is the second contract CFTC may regulate as part of its new authority under the 2008 farm bill that expanded its oversight beyond traditional futures markets.
Congress has also given both FERC and the Federal Trade Commission new powers in recent years to expand their watchdog powers of energy markets, putting pressure on the CFTC and sparking turf battles. The CFTC in turn beefed up its oversight of regulated and OTC markets, including proposing tough new position limits and reporting requirements.
But Mr. Gensler may be raising more fears than assuring lawmakers.
Testifying before the committee, Mr. Gensler said the new bill should allow some limited off-exchange, over-the-counter trading in proposed carbon markets, though most trading should be on exchange. Tailored financial products that covered 10-year to 20-year hedging contracts would be necessary for firms to build new power plants and other major energy infrastructure, the CFTC chairman said. While many major financial houses have espoused the same argument, some market officials have said that such OTC products weren't necessary.
In contrast, many legislators have called for a raft of measures that would disallow financial houses trading in the carbon trading, prohibit OTC trading, or implement price collars on greenhouse gas contracts.
In an effort to hedge lawmaker fears, Mr. Gensler said OTC trading would have to be limited, saying exempting too much trading from exchanges could create a new loophole traders could manipulate to their favor at the expense of price volatility and market stability.
Such an OTC market would be subject to strict capital requirements, transparency and aggregated position reporting, he said.
Write to Ian Talley at ian.talley@dowjones.com