Monday, June 27, 2011
The CFTC Investigates Suspicious Oil Trading Prior to IEA Announcement
The CFTC is reportedly investigating suspicious price movements in the oil futures markets prior to the announcement of the International Energy Agency in Paris that its 28 member countries would "release" 60 million barrels of oil over a 30-day period to counter "the the ongoing disruption of oil supplies from Libya." Half of this oil is coming from the U.S. Strategic Petroleum Reserve.
The price of oil futures did indeed fall prior to the announcement, which is suspicious. The CFTC, though, would seem to have a tough job getting to what happened and in charging anyone with wrongdoing.
With 28 countries involved in the decision, any leak or hints that something was up could have come from anywhere. Also, insider trading under the Commodity Exchange Act ("CEA") is not the same as under the securities law. In general, trading on non-public information has not been illegal in the futures markets. However, in the Dodd-Frank Act, the CFTC was able to persuade the Congress to add a provision to the CEA known as the "Eddie Murphy Rule." (This comes from the 1983 movie "Trading Places", in which Murphy stars. Part of the plot revolves around speculating on orange juice futures based on knowledge of Agriculture Department data prior to its release. While an amusing though not great movie, I can recommend "Trading Places" as an entertaining introduction to futures markets.)
The new provision of the CEA essentially bans the use of non-public information originating from the federal government in derivatives markets. (For a fuller discussion and the text of the provision, follow this link.) It does not say anything about information originating from a foreign government or international organization. Perhaps the CFTC could make the case that the information is the same as that held by the U.S. government or it could use the broader and vaguer anti-fraud provisions of the CEA. That could make for interesting litigation for those interested in CEA issues, if it ever gets to that point.
In any case, there seem to be formidable investigative and legal obstacles to the CFTC successfully bringing a case against people involved in trading based on advance knowledge of the IEA action. If they cannot catch a big fish, maybe the CFTC will find a relatively small U.S. entity which did something improper and may be willing to settle the charges.