Futures Markets:

Approach for Examining Oversight of Energy Futures

GAO-06-742T: Published: May 4, 2006. Publicly Released: May 4, 2006.

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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. This testimony focuses on our ongoing study of (1) changes in energy futures markets and volatility since 2000 and (2) Commodity Futures Trading Commission (CFTC) surveillance and enforcement activities in the oversight of energy futures trading.

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 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 the New York Mercantile Exchange (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.

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