On June 12, US Senator Richard Durbin introduced legislation to provide the Commodity Futures Trading Commission (CFTC), the federal agency that oversees commodity derivatives markets in the US, with regulatory authority to oversee trading activity in oil markets. This was followed by an announcement from the CFTC that it would change its policy relating to US traders’ ability to execute contracts in West Texas Intermediate (WTI) crude oil contracts. There would be nothing remarkable about these actions, except for one thing: the activity that is being targeted takes place on a foreign exchange – in London.

The proposed legislation is more commonly referred to as the “London Loophole” Act, and is somewhat akin to the “Enron Loophole” legislation recently passed by the US Congress. The legislation and the CFTC’s action are intended to close a significant regulatory lacuna in the CFTC’s commodities market surveillance system. Under current law, US traders can execute transactions in look-alike contracts in crude oil contracts on the New York Mercantile Exchange (Nymex) and on London’s InterContinental Exchange (ICE), and US regulators have an eye only on what goes on in New York. That means that traders can arbitrage between the two markets, and the CFTC in effect regulates only half of the trading.