Commodity Futures Trading Commission: Trends in Energy		 
Derivatives Markets Raise Questions about CFTC's Oversight	 
(19-OCT-07, GAO-08-25). 					 
                                                                 
Prices for four energy commodities--crude oil, heating oil,	 
unleaded gasoline, and natural gas--have risen substantially	 
since 2002. Some observers believe that higher energy prices are 
the result of changes in supply and demand. Others believe that  
increased futures trading activity has also contributed to higher
prices. This report, conducted under the Comptroller General of  
the United States' authority, examines (1) trends and patterns in
the physical and energy derivatives markets, (2) the scope of the
Commodity Futures Trading Commission's (CFTC) regulatory	 
authority over these markets, and (3) the effectiveness of CFTC's
monitoring and detection of market abuses and enforcement. For	 
this work, GAO analyzed futures and large trader data and	 
interviewed market participants, experts, and officials at six	 
federal agencies.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-25						        
    ACCNO:   A77447						        
  TITLE:     Commodity Futures Trading Commission: Trends in Energy   
Derivatives Markets Raise Questions about CFTC's Oversight	 
     DATE:   10/19/2007 
  SUBJECT:   Commodities exchanges				 
	     Commodity futures					 
	     Commodity marketing				 
	     Commodity sales					 
	     Energy demand					 
	     Energy industry					 
	     Energy marketing					 
	     Federal regulations				 
	     Financial analysis 				 
	     Financial futures					 
	     Financial institutions				 
	     Petroleum prices					 
	     Petroleum products 				 
	     Prices and pricing 				 
	     Regulatory agencies				 
	     Trade regulation					 
	     Reporting requirements				 
	     Performance measures				 
	     Supply and demand					 

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GAO-08-25

   

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Report to Congressional Addressees: 

United States Government Accountability Office: 

GAO: 

October 2007: 

Commodity Futures Trading Commission: 

Trends in Energy Derivatives Markets Raise Questions about CFTC's 
Oversight: 

Commodity Futures Trading Commission: 

GAO-08-25: 

GAO Highlights: 

Highlights of GAO-08-25, a report to congressional addressees 

Why GAO Did This Study: 

Prices for four energy commoditiesï¿½crude oil, heating oil, unleaded 
gasoline, and natural gasï¿½have risen substantially since 2002. Some 
observers believe that higher energy prices are the result of changes 
in supply and demand. Others believe that increased futures trading 
activity has also contributed to higher prices. This report, conducted 
under the Comptroller General of the United Statesï¿½ authority, examines 
(1) trends and patterns in the physical and energy derivatives markets, 
(2) the scope of the Commodity Futures Trading Commissionï¿½s (CFTC) 
regulatory authority over these markets, and (3) the effectiveness of 
CFTCï¿½s monitoring and detection of market abuses and enforcement. For 
this work, GAO analyzed futures and large trader data and interviewed 
market participants, experts, and officials at six federal agencies. 

What GAO Found: 

Rising energy prices have been attributed to a variety of factors, 
among them recent trends (2002-2006) in the physical and futures 
markets. These trends include (1) factors in the physical markets, such 
as tight supply, rising demand, and a lack of spare production 
capacity; (2) higher than average, but declining, volatility (a measure 
of the degree to which prices fluctuate over time) in energy futures 
prices for crude oil, heating oil, and unleaded gasoline; and (3) 
growth in several key areas, including the number of noncommercial 
participants in the futures markets (including hedge funds), the volume 
of energy futures contracts traded, and the volume of energy 
derivatives traded outside of traditional futures exchanges. Because 
these changes took place concurrently, the effect of any individual 
trend or factor is unclear. 

On the basis of its authority under the Commodity Exchange Act (CEA), 
CFTC focuses its oversight primarily on the operations of traditional 
futures exchanges, such as the New York Mercantile Exchange, Inc. 
(NYMEX), where energy futures are traded. Energy derivatives are also 
traded on other markets, namely, exempt commercial and over-the-counter 
(OTC) markets, that are exempt from CFTC oversight. Both types of 
markets have seen their volumes climb in recent years. Exempt 
commercial markets are electronic trading facilities where certain 
commodities, such as energy, are traded between large, sophisticated 
participants. OTC markets allow eligible parties to enter into 
contracts directly, without using an exchange. While the exempt 
commercial and OTC markets are subject to the CEAï¿½s antimanipulation 
and antifraud provisions and CFTC enforcement of those provisions, some 
market observers question whether CFTC needs broader authority to 
oversee these markets. CFTC is currently examining the effects of 
trading in the regulated and exempt energy markets on price discovery 
and the scope of its authority over these marketsï¿½an issue that will 
warrant further examination as part of the CFTC reauthorization 
process. Moreover, because of changes and innovations in the market, 
the methods used to categorize these data can distort the information 
reported to the public, which may not be completely accurate or 
relevant. 

CFTC conducts daily surveillance of trading on NYMEX that is designed 
to detect and deter fraudulent or abusive trading practices involving 
energy futures contracts. To detect abusive practices, such as 
potential manipulation, CFTC uses various information sources and 
relies heavily on trading activity data for large market participants. 
Using this information, CFTC staff may pursue alleged abuse or 
manipulation. However, because the agency does not maintain complete 
records of all such allegations, this lack of information makes it 
difficult to determine the usefulness and extent of these activities. 
In addition, CFTCï¿½s performance measures for enforcement do not fully 
reflect the programï¿½s goals and purposes, which could be addressed by 
developing additional outcome-based performance measures that more 
fully reflect progress in meeting the programï¿½s overall goals. 

What GAO Recommends: 

As part of CFTCï¿½s reauthorization process, Congress should consider 
further exploring the scope of the agencyï¿½s authority over energy 
derivatives trading, in particular for trading in exempt commercial 
markets. In addition, GAO recommends that CFTC improve the usefulness 
of the information provided to the public, better document its 
monitoring activities, and develop more outcome-oriented performance 
measures for its enforcement program. In written comments, CFTC 
generally agreed with GAOï¿½s recommendations. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-25]. For more information, contact Orice 
Williams at (202) 512-8678 or [email protected]. 

[End of section] 

Contents: 

Letter1: 

Results in Brief: 

Background: 

Several Factors Have Caused Changes in the Energy Markets, Potentially 
Affecting Prices: 

CFTC Oversees Exchanges and Has Limited Authority over Other 
Derivatives Markets: 

CFTC Engages in Surveillance Activities and Enforcement Activities, but 
the Effectiveness of these Activities Is Largely Uncertain: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: Types of Contracts and Transactions for Energy Commodities 
in the Physical and Financial Markets: 

Appendix III: New York Mercantile Exchange Surveillance and Enforcement 
Activities: 

Appendix IV: Commodity Futures Trading Commission's Energy-Related 
Enforcement Actions, August 2001-September 2006: 

Appendix V: Comments from the Commodity Futures Trading Commission: 

Appendix VI: GAO Contract and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Exempt Commercial Markets, Dates They Filed Notice with CFTC 
to Operate as an Exempt Commercial Market, and Commodities Traded on 
Each Market, 2001-2006: 

Table 2: Number of NYMEX Enforcement Cases Opened, Complaints Issued, 
Settlement, and Hearings, January 2000-May 2006: 

Table 3: Energy-Related Enforcement Actions Filed by CFTC, August 2001- 
September 2006: 

Figures: 

Figure 1: Monthly Average Spot Prices and Front Month Futures 
Settlement Prices, in Constant 2006 Dollars, 1987-2006: 

Figure 2: Convergence of the April 2006 Crude Oil Futures Contract 
Price and the Crude Oil Spot Price, March 22, 2004-March 21, 2006: 

Figure 3: Futures and Options Trading Volume for All Commodities and 
CFTC Staffing Levels (Actual and Estimated), Fiscal Years 1995-2008: 

Figure 4: Increase in World Demand for Crude Oil (Actual and 
Estimated), 1980-2006: 

Figure 5: Estimates of World Oil Spare Production Capacity, 1991-2008: 

Figure 6: Comparison of Annual Volatility with the Long-term Average 
Volatility for Four Energy Futures (Measured in Relative Terms Using 
Front Month Contracts), 1987-2006: 

Figure 7: Average Daily Number of Large Commercial and Noncommercial 
Traders per Month, July 2003-December 2006: 

Figure 8: Average Daily Trading Volume for Crude Oil, Heating Oil, 
Unleaded Gasoline, and Natural Gas Futures Contracts, 1982-2006: 

Figure 9: Percentage of Long and Short Open Interest in Futures and 
Options for Managed Money Traders, July 2003-December 2006: 

Abbreviations: 

BCC: business conduct committee: 

CEA: Commodity Exchange Act: 

CFMA: Commodity Futures Modernization Act of 2000: 

CFTC: Commodity Futures Trading Commission: 

COMEX: New York Commodity Exchange: 

COT: Commitment of Traders: 

CPO: commodity pool operator: 

CTA: commodity trading advisor: 

DOJ: Department of Justice: 

EIA: Energy Information Administration: 

FERC: Federal Energy Regulatory Commission: 

FTC: Federal Trade Commission: 

FTE: full-time- equivalent: 

HU: NYMEX gasoline contract: 

ICE: IntercontinentalExchange: 

ISS: integrated surveillance system: 

LTRS: large trader reporting system: 

NYMEX: New York Mercantile Exchange, Inc.: 

OMB: Office of Management and Budget: 

OPEC: Organization of the Petroleum Exporting Countries: 

OT: Cover- the-counter: 

PART: Program Assessment Rating Tool: 

RBNYMEX: reformulated gasoline blendstock contract: 

SEC: Securities and Exchange Commission: 

SRO: self-regulatory organization: 

United States Government Accountability Office: 

Washington, DC 20548: 

October 19, 2007: 

Congressional Addressees: 

The price of energy commodities--crude oil, unleaded gasoline, heating 
oil, and natural gas--increased significantly from 2002 to 2006, 
negatively affecting consumers and the U.S. economy. While increased 
energy prices generally are attributed to normal market forces of 
supply and demand, some observers have questioned whether trading 
activity in energy futures contracts and other types of energy 
derivatives placed upward pressure on prices during this 
period.[Footnote 1] A futures contract is an agreement to purchase or 
sell a commodity for delivery in the future.[Footnote 2] Like other 
types of derivatives, its price is based on the value of an underlying 
commodity, such as natural gas or oil. While futures prices are 
determined on the basis of prices in the market where physical goods 
and commodities are sold (physical market), buyers and sellers of 
natural gas, crude oil, gasoline, and other energy products are 
influenced by the futures prices of these commodities when determining 
their prices. Trading in futures contracts has grown significantly 
since 2001, in part because of trading by new market participants, such 
as hedge funds, and increased investment in commodity index 
funds.[Footnote 3] 

The surge in energy prices and the growth in the volume of futures 
contracts and other derivatives have renewed questions about the 
adequacy of the Commodity Futures Trading Commission's (CFTC) authority 
and ability to oversee derivatives that are traded off exchange, or 
over the counter (OTC). CFTC's primary mission includes preserving the 
integrity of the futures markets and protecting market users and the 
public from fraud, manipulation, and abusive trading 
practices.[Footnote 4] In 2000, CFTC's authority regarding futures 
contracts and other types of derivatives was clarified by the Commodity 
Futures Modernization Act of 2000 (CFMA). Among other things, the CFMA 
specifically authorizes off-exchange derivatives trading by 
establishing a framework that tailors the level of regulation of a 
market to the products being traded and the market's participants. 
Under the act, some exchanges (e.g., the New York Mercantile Exchange, 
Inc. (NYMEX)), that allow all types of traders, including retail 
customers, to access their facilities are regulated, while other venues 
that are off exchange can be accessed only by large, sophisticated 
traders and are either largely unregulated or exempt from regulation. 
Like futures markets, these unregulated, off-exchange markets also have 
grown significantly, raising questions about the amount of regulatory 
scrutiny that CFTC should provide. 

This report, conducted under the Comptroller General of the United 
States' authority, addresses concerns raised by Congress, consumer 
groups, states' attorneys general, and others about rising prices in 
energy markets and the relationship, if any, of futures trading to 
rising energy prices. We addressed this report to you because of your 
expressed interest or your committee's jurisdiction. This report 
focuses on four energy commodities--crude oil, unleaded gasoline, 
natural gas, and heating oil--and CFTC's oversight of these 
commodities. Specifically, this report examines (1) trends and patterns 
of trading activity in the physical and energy derivatives markets and 
the effects of those trends on prices; (2) the scope of CFTC's 
authority for protecting market users from fraudulent, manipulative, 
and abusive practices in the trading of energy futures contracts; and 
(3) the effectiveness of CFTC's monitoring and detection of market 
abuses in energy futures markets and in connection with energy-related 
enforcement actions. 

To address these objectives, we obtained and analyzed end-of-the-day 
trading data for energy futures contracts from NYMEX and data from 
CFTC's large trader reporting system (LTRS) database, which we tested 
and found reliable for our purposes.[Footnote 5] We obtained and 
analyzed other CFTC records and reports relevant to the commission's 
surveillance and other activities. We also reviewed applicable laws, 
regulations, and policy statements. We obtained information from a 
broad range of participants in the energy futures markets and officials 
knowledgeable about the futures markets. These individuals included 
officials from large oil companies, refiners, trade associations 
representing end users of natural gas, investment banks, and hedge 
funds as well as energy consultants and academic experts. We 
interviewed officials in CFTC's Division of Market Oversight, Division 
of Enforcement, Office of the Chief Economist, Office of the General 
Counsel, and Office of the Inspector General. Moreover, because CFTC 
oversight is also provided through officials located in the 
commission's field offices, we obtained information from officials at 
the CFTC New York Regional Office, which conducts surveillance of 
futures trading on NYMEX. In addition, we gathered and analyzed 
information on oversight of the energy markets provided by other 
federal agencies, including the U.S. Department of Energy's Energy 
Information Administration (EIA), the Federal Energy Regulatory 
Commission (FERC), the Federal Trade Commission (FTC), the Department 
of Justice (DOJ), and the Securities and Exchange Commission (SEC). We 
conducted our work in Chicago, Houston, New York City, and Washington, 
D.C., between July 2005 and September 2007 in accordance with generally 
accepted government auditing standards. Appendix I contains a more 
detailed description of our scope and methodology. 

Results in Brief: 

Significant changes occurred in both physical and energy derivatives 
markets between 2002 and 2006 that were accompanied by rising energy 
prices; however, it is difficult to precisely determine the extent or 
effect of any single factor on energy prices. Specifically: 

* There was a tight supply and rising demand in the physical markets 
for crude oil, heating oil, unleaded gasoline, and natural gas, 
stemming from various factors--such as increased political instability 
in some of the major oil-producing countries, decreased spare oil 
production capacity, refining capacity that did not expand at the same 
pace as demand for gasoline, and rapidly rising global demand for 
energy products. 

* Volatility (a measure of the degree to which prices fluctuate over 
time) in energy futures prices generally remained above historic 
averages in 2002 and 2003, but declined through 2006 for crude oil, 
heating oil, and unleaded gasoline. 

* The number of noncommercial participants in the futures markets, the 
volume of energy futures contracts traded, and the volume of energy 
derivatives traded outside traditional futures exchange also have grown 
steadily. 

Reasonable arguments have been made that events in physical and futures 
markets contributed in some degree to the increases in inflation- 
adjusted energy prices in both markets during this period for crude 
oil, unleaded gasoline, and heating oil. However, opinions vary on how 
much the recent changes in the financial markets influenced energy 
prices. For example, some market participants and observers have argued 
that speculation alone could not have influenced prices artificially 
over such a long period, while others have concluded that increased 
trading activity put upward pressure on the prices of spot as well as 
futures contracts. 

Under the Commodity Exchange Act (CEA), CFTC's authority for protecting 
market users from fraudulent, manipulative, and abusive practices in 
energy derivatives trading is primarily focused on the operations of 
traditional futures exchanges, such as NYMEX, where energy futures are 
traded. To help provide transparency to the public, CFTC publishes 
aggregate trading information for large commercial (such as oil 
companies and refineries) and noncommercial (such as hedge funds) 
traders for various commodities through its Commitment of Traders (COT) 
reports. These reports include the number of traders, changes since the 
last report, and open positions--an obligation to take or make delivery 
of a commodity in the future without a matching obligation in the 
opposite direction. However, because of changes and innovation in the 
market, methods used to categorize these data can distort the accuracy 
and relevance of the information reported to the public. The market for 
energy derivatives also has changed in other ways. Specifically, trading
has grown on other markets, namely, exempt commercial markets-- 
electronic trading facilities that trade exempt commodities, more than 
half of which trade in energy products--and OTC markets.[Footnote 6] 
Currently, CFTC receives limited information on derivatives trading on 
exempt commercial markets--for example, records of allegations or 
complaints of suspected fraud or manipulation, and price, quantity, and 
other data on contracts that average five or more trades a day. The 
commission may receive limited information from OTC participants, such 
as trading records, to help CFTC enforce the CEA's antifraud or 
antimanipulation provisions. The scope of CFTC's oversight authority 
with respect to these markets has raised concerns among some Members of 
Congress and others that activities on these markets are largely 
unregulated, and that additional CFTC oversight is needed. While many 
regulators have resisted calls for more regulation in the past, recent 
events in the physical and energy derivatives markets have resulted in 
renewed focus on the sufficiency of CFTC's authority. As a result, CFTC 
held a hearing in September 2007 to begin examining trading on 
regulated exchanges and exempt commercial markets. The hearing included 
assessments of the relationship between these markets and assessments 
of whether markets other than NYMEX serve a price discovery function, 
which is the process of determining a commodity's price on the basis of 
supply and demand. These and future deliberations may provide insights 
into whether changes are needed in the scope of CFTC's authority. 
Depending on what CFTC finds in its assessments of the markets, 
Congress might want to consider what actions, if any, are warranted. 

To detect fraudulent or abusive trading practices involving exchange- 
traded energy futures, CFTC daily monitors the trading on exchanges 
such as NYMEX. CFTC examines daily electronic trading data on futures 
contracts and other information sources, such as commercial sources on 
energy commodities and tips from individuals on possible violations. 
CFTC's surveillance program primarily relies on daily reports from 
large traders to detect problems, such as the potential for 
manipulation. When CFTC staff detect potential problems or violations, 
they may gather additional information from NYMEX officials, traders, 
or other sources to determine if further action is warranted. CFTC 
staff said that they routinely investigated traders with large open 
positions. However, the staff added that they did not routinely 
maintain information about such inquiries; instead they documented 
their actions only when further action was warranted. This lack of 
information makes it difficult to determine the usefulness and extent 
of these activities. Without sufficient data on these and other 
inquiries, CFTC's records will understate the extent to which the 
commission surveils trading activity. In addition, CFTC management also 
might miss opportunities both to identify trends in activities or 
markets and to better target its limited resources. According to 
information provided by CFTC, the commission coordinates its 
enforcement actions with NYMEX as well as FERC, DOJ, and others. It 
also has taken enforcement actions in cases of attempted manipulation 
and other abusive practices in energy derivatives trading that resulted 
in fines of $305 million from 2001 through 2005. While these cases have 
been successfully pursued, it is difficult to determine whether they 
have helped deter market manipulation or the other abusive practices 
these pursuits addressed because the effectiveness of enforcement 
activities is not easily measured. The Office of Management and Budget 
(OMB) has concluded that the enforcement program lacks performance 
measures that illustrate whether it is meeting its overall objective. 

This report includes a matter for congressional consideration and three 
recommendations. In light of recent developments in derivatives markets 
and as part of CFTC's reauthorization process, Congress should consider 
further exploring whether the current regulatory structure for energy 
derivatives, in particular for those traded in exempt commercial 
markets, provides adequately for fair trading and accurate pricing of 
energy commodities. Our three recommendations to the Acting CFTC 
Chairman are aimed at improving the usefulness of information that CFTC 
provides to the public as a result of its surveillance activities and 
the efficiency of its enforcement program. First, we recommend that 
CFTC reexamine the classifications in the COT reports to determine if 
the commercial and noncommercial categories should be refined to 
improve the transparency, accuracy, and relevance of public information 
on trading activity in the energy futures markets. Second, we recommend 
that CFTC explore ways to routinely maintain written records of 
inquiries into possible improper trading activity and the results of 
these inquiries to more fully determine the usefulness and extent of 
its surveillance, antifraud, and antimanipulation authorities. Third, 
we recommend that CFTC examine ways to more fully demonstrate the 
effectiveness of its enforcement activities by developing additional 
outcome-related performance measures that more fully reflect progress 
on meeting the program's overall goals. 

We provided a draft of this report to CFTC, and the commission provided 
written comments that are reprinted in appendix V. In its comments, 
CFTC generally agreed with our findings. CFTC said that the commission 
will reexamine classifications in the COT reports. CFTC also said that 
the commission will explore additional recordkeeping procedures for 
staff, but that it must balance the time required for such additional 
tasks against the need to undertake market surveillance by an already- 
stretched surveillance staff. CFTC added that it has included the 
development of measures to evaluate the effectiveness of its 
enforcement program in its most recent strategic plan. CFTC also 
provided technical comments, which we have incorporated in this report 
as appropriate. 

Background: 

Energy commodities are bought and sold in several different physical 
and financial markets. Physical markets include the spot, or cash, 
markets where products such as crude oil or gasoline are bought and 
sold for immediate or near-term delivery. The United States has several 
spot markets. Examples are the pipeline hub near Cushing, Oklahoma for 
West Texas Intermediate crude oil and the Henry Hub near Erath, 
Louisiana, for natural gas. The prices set in the specific spot markets 
provide a reference point that buyers and sellers use to set the price 
for other types of the commodity traded in other locations. 

The prices established for energy commodities in the physical markets 
generally are determined by supply and demand. For example, when the 
demand for the product rises relative to supply because economies are 
growing, prices are likely to rise. Conversely, when demand falls 
relative to supply, prices are likely to fall. For energy products, 
demand and supply, and therefore price, can fluctuate on a seasonal 
basis. For example, consumer demand for gasoline in the United States 
is generally higher from May through early September--the summer 
driving season--and tends to flatten after Labor Day. Similarly, demand 
for natural gas and heating oil is highest during the heating season 
between October and March. 

The relative inelasticity of energy commodities means that small shifts 
in demand and supply can result in relatively large price fluctuations. 
In general, when the price of an energy commodity rises, the demand for 
that product is likely to fall in the long term, and vice versa. 
However, demand for energy commodities is price inelastic in the short 
term--that is, the quantity demanded changes little in response to a 
change in price. On the supply side, rising energy commodities prices 
motivate producers to increase the amount of commodities they supply to 
increase profits. However, because producers hold relatively low 
inventories of energy commodities in reserve, and finding and producing 
additional energy commodities takes a long time and is expensive, 
supply also is relatively inelastic. For example, supplies of natural 
gas from new production wells cannot be increased quickly to meet 
higher demand because of the time required to get the newly produced 
gas into the marketplace. 

Energy commodities also are traded in the financial markets, especially 
in the form of derivatives. Derivatives include futures, options, and 
swaps, whose values are based on the performance of the underlying 
asset. Options give the purchaser the right, but not the obligation, to 
buy or sell a specific quantity of a commodity or financial asset at a 
designated price. Swaps traditionally are privately negotiated 
contracts that involve an ongoing exchange of one or more assets, 
liabilities, or payments for a specified period. Futures and options 
contracts are traded on exchanges designated by CFTC as contract 
markets (futures exchanges), where a wide range of energy, 
agricultural, financial, and other commodities are bought and sold for 
future delivery. Commodity futures and options can be traded on both 
OTC and exempt commercial markets if the transactions involve 
qualifying commodities and the participants satisfy statutory 
requirements. 

Energy futures include standardized contracts for future delivery of a 
specific crude oil, heating oil, natural gas, or gasoline product at a 
particular spot market location. The exchange standardizes the 
contracts, and participants cannot modify them to their particular 
needs. For example, a standard gasoline futures contract traded on 
NYMEX is for 1,000 barrels (42,000 gallons), quoted in dollars and 
cents per gallon, and for delivery of up to 36 months into the future 
at New York Harbor.[Footnote 7] The owner of an energy futures contract 
is obligated to buy or sell the commodity at a specified price and 
future date. However, the owner may eliminate the contractual 
obligation before the contract expires by selling or purchasing other 
contracts with terms that offset the original contract. In practice, 
relatively few futures contracts on NYMEX result in physical delivery 
of the underlying commodity, but instead are liquidated with offsets. 
Options on futures contracts also are traded on exchanges such as NYMEX 
and foreign boards of trade that U.S. traders access directly. 

In addition to exchange-traded futures and options, the financial 
markets for energy commodities include derivatives traded among 
multiple traders on exempt commercial markets and derivatives created 
bilaterally in OTC transactions. As with futures, exempt commercial 
markets and other OTC derivatives allow producers and users of energy 
commodities to manage the risk of future changes in the price of a 
particular commodity. These contracts include options and swaps at an 
agreed-upon price. Appendix II shows some of the different types of 
contracts and transactions for energy commodities in the physical and 
financial markets. 

Functions of Futures Markets: 

Market participants use futures markets to offset the risk caused by 
changes in prices, discover commodity prices, and speculate on price 
changes. Some buyers and sellers of energy commodities in the physical 
markets trade in futures contracts to offset, or "hedge," the risks of 
price changes in the physical markets. The futures markets help buyers 
and sellers determine, or "discover," the price of commodities in the 
physical markets, thus linking the two markets. Other participants-- 
generally, speculators--that do not have a commercial interest in the 
underlying commodities but are looking to make a profit take varying 
positions on the future value of commodities. In doing so, speculators 
provide liquidity and assume risks that other participants, such as 
hedgers, seek to avoid. Arbitrageurs are a third group of participants 
that aim to benefit by identifying discrepancies in price 
relationships, rather than by betting on future price movements. 
Arbitrage is a strategy that involves simultaneously entering into 
several transactions in multiple markets to benefit from price 
discrepancies across markets. For example, traders can trade 
simultaneously in exchanges and OTC. 

Price risk is an important concern for buyers and sellers of energy 
commodities because wide fluctuations in cash market prices introduce 
uncertainty for producers, distributors, and consumers of commodities 
and make investment planning, budgeting, and forecasting more 
difficult. A statistical measurement of the degree to which prices 
fluctuate over time is known as "volatility" and can be applied to 
prices in both the physical and financial markets. There are two basic 
types of volatility measurements. Historical volatility measures are 
calculated on the basis of price changes, using data from market 
transactions. Implied volatility reflects market participants' 
expectations of future volatility as derived from the prices of traded 
options (see app. III). This report presents data on the relative 
historical volatility of energy futures contracts, which we calculated 
from relative changes in daily prices. 

Futures and off-exchange derivatives markets provide participants with 
a means to hedge or shift unwanted price risk to others more willing to 
assume the risk or those having different risk situations. For example, 
if a petroleum refiner wanted to shed its risk of losing money as a 
result of falling gasoline prices, it could lock in a price by selling 
futures contracts to deliver the gasoline in 6 months at a guaranteed 
price. Likewise, a transportation company that knows it must refill its 
gasoline tanks in 6 months might want to offset the price risk 
associated with purchasing fuel by buying futures contracts to take 
delivery of gasoline then at a set price. Without futures contracts 
that help them manage risk, producers, refiners, and others likely 
would face uncertainty related to investment planning, budgeting, and 
forecasting--and potentially higher costs. 

Futures markets also provide a means of price discovery for commodities 
such as energy products. For price discovery, markets need current 
information about supply and demand, a large number of participants, 
and transparency. Market participants monitor and analyze the factors 
that currently affect, and that they expect to affect, the future 
supply and demand for energy commodities. With that information, they 
buy or sell energy commodity contracts on the basis of the price for 
which they believe the commodity will sell at the delivery date. The 
futures markets, in effect, distill the diverse views of market 
participants into a single price. In turn, buyers and sellers of 
physical commodities consider those predictions about future prices 
with other factors when setting prices on the spot and retail markets. 

A wide variety of participants hedge and speculate in energy 
derivatives markets. For the exchange-traded futures markets, CFTC 
categorizes traders in general terms as either commercial or 
noncommercial participants. CFTC identifies several subcategories of 
participants within the commercial category: producers, manufacturers, 
dealers/merchants, and swaps/derivatives dealers. Dealers and merchants 
include, among others, wholesalers, exporters and importers, shippers, 
and crude oil marketers. Typical noncommercial traders are entities 
such as those that manage money ("managed money traders").[Footnote 8] 
These noncommercial traders include, among others, commodity pool 
operators (CPO) and commodity trading advisors (CTA), many of which 
advise or operate hedge funds.[Footnote 9] Other noncommercial traders 
include floor brokers and unregistered traders. 

Relationship between Futures and Spot Prices: 

The prices for energy commodities in the futures and in the spot or 
physical markets are closely linked because they are influenced by the 
same market fundamentals in the long run. Prices in the physical spot 
and futures markets for the four energy commodities we reviewed are 
highly correlated and rose dramatically from 2002 to 2006. As shown in 
figure 1, from January 2002 to July 2006, monthly average spot prices 
for crude oil, gasoline, and heating oil increased by at least 220 
percent.[Footnote 10] Natural gas spot prices increased by more than 
140 percent. At the same time that spot prices increased, the futures 
prices for these commodities showed a similar pattern of a sharp and 
sustained increase from January 2002 into 2006. For example, the price 
of crude oil futures increased from an average of $22 per barrel in 
January 2002 to an average of $74 per barrel in July 2006. Natural gas 
futures prices spiked rapidly in the fall of 2005 after several strong 
hurricanes raised concerns about supply disruptions for the winter of 
2005-2006, then prices fell sharply due in part to a mild winter. 
Prices in the spot and futures markets show similar patterns because 
traders in those markets tend to rely on the same types of information 
when entering into transactions. 

Figure 1: Monthly Average Spot Prices and Front Month Futures 
Settlement Prices, in Constant 2006 Dollars, 1987-2006: 

[See PDF for image] 

Source: GAO analysis of Global Insight and NYMEX data. 

Note: The front month futures contract is the actively traded contract 
with the closest delivery date. NYMEX did not begin trading natural gas 
futures until 1990. 

[End of figure] 

The differences between futures and spot market prices for energy 
commodities narrow and the prices converge when futures contracts near 
expiration and physical delivery is required. As the expiration date 
nears, the physical delivery provision of the contract and the ability 
of traders to arbitrage combine to bring the futures and physical 
market prices together. Arbitrage plays a crucial role in moderating or 
removing price differences between spot and futures markets and 
contributes to the convergence of futures and spot prices at 
expiration. For example, if the price for a crude oil futures contract 
that would expire in 2 weeks were $62 per barrel and the spot market 
price were $60 per barrel, a trader could choose to buy oil now at the 
spot price and enter into a futures contract to deliver oil in 2 weeks 
at the futures price, thereby making a $2 profit.[Footnote 11] This and 
similar transactions by other traders would put upward pressure on the 
spot price and downward pressure on the futures price and move them 
toward convergence. Figure 2 provides an example of how the price of 
the April 2006 crude oil futures contract and the spot price for that 
commodity converged as the contract approached expiration. 

Figure 2: Convergence of the April 2006 Crude Oil Futures Contract 
Price and the Crude Oil Spot Price, March 22, 2004-March 21, 2006: 

[See PDF for image] 

Source: GAO analysis of EIA and NYMEX data. 

[End of figure] 

Changes in CFTC Oversight Authority and Resource Levels: 

Between the creation of CFTC in 1974 and the year 2000, the CEA 
generally restricted commodity derivatives trading to futures and 
options entered into on exchanges and made all transactions in futures 
contracts subject to CFTC's exclusive jurisdiction. However, in the 
late 1980s and early 1990s, commercial entities began entering into 
nonstandardized, off-exchange derivative contracts that had pricing 
characteristics similar to futures (i.e., pricing of the transactions 
derived from the prices of various commodities), and the instruments 
were used for risk shifting. According to CFTC officials, under 
exemptive authority provided in 1992 reauthorization legislation, CFTC 
announced that it would not take enforcement action against qualified 
commercial entities engaged in certain types of energy derivatives 
transactions, but the legality of instruments not covered by the 
exemption (i.e., their status as futures contracts subject to the CEA) 
remained unresolved.[Footnote 12] 

In 2000, the CFMA amended the CEA to provide for both regulated markets 
and markets largely exempt from regulation and to permit off-exchange 
trading of energy derivatives by qualified parties.[Footnote 13] The 
regulated markets include futures exchanges that have self-regulatory 
surveillance and monitoring responsibilities as self-regulatory 
organizations (SRO) and by CFTC.[Footnote 14] CFTC's primary mission 
includes preserving the integrity of these futures markets and 
protecting market users and the public from fraud, manipulation, and 
abusive practices related to the sale of commodity futures and options. 
This mission is achieved through a regulatory scheme that is based on 
federal oversight of industry self-regulation. The CEA also permits 
derivatives trading in markets that are largely exempt from CFTC's 
regulatory authority, including both OTC and exempt commercial markets, 
subject to statutory requirements governing the types of commodity and 
trader and the facility used for conducting the trades. The President's 
Working Group's 1999 report on OTC derivatives focused on changes to 
the CEA that in their view would "promote innovation, competition, 
efficiency, and transparency in OTC derivatives markets, to reduce 
systemic risk, and to allow the United States to maintain leadership in 
these rapidly developing markets."[Footnote 15] Derivatives on energy 
commodities, which are within the act's definition of "exempt 
commodity," may be traded in exempt commercial markets by eligible 
commercial entities, a category of traders broadly defined in the CEA 
to include firms with a commercial interest in the underlying commodity 
as well as other sophisticated investors, such as hedge funds. 
Violations of the CEA and CFTC regulations may be remedied by 
imposition of civil monetary penalties, trading bans, restitution, and 
other appropriate relief. 

In addition to CFTC oversight, futures exchanges accept self-regulatory 
obligations as a condition of designation. For example, NYMEX, as an 
SRO, is 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 
exchange members for financial soundness and other regulatory purposes. 
CFTC oversees SROs to ensure that each has an effective self-regulatory 
program.[Footnote 16] 

Within CFTC, three of the commission's six major operating units 
actively oversee futures exchanges and their derivatives clearing 
organizations.[Footnote 17] 

* The Division of Market Oversight approves and oversees the futures 
exchanges, conducts its own market surveillance, conducts trade 
practice reviews and investigations, and reviews exchange rules. 

* The Division of Clearing and Intermediary Oversight oversees, among 
other things, derivatives clearing organizations and the registration 
of intermediaries, which are persons such as futures commission 
merchants, CPOs, or CTAs that act on the behalf of others in futures 
trading.[Footnote 18] 

* The Division of Enforcement investigates and prosecutes alleged 
violations of the CEA and CFTC regulations. 

At the beginning of fiscal year 2006, 167 (34 percent) of CFTC's 490 
full-time-equivalent (FTE) positions were allocated to the first two 
CFTC divisions; at the beginning of fiscal year 2007, that allocation 
declined to 162 (35 percent) of CFTC's 458 FTE positions. These staff 
monitor the markets and market participants from CFTC's headquarters in 
Washington, D.C., as well as from field offices in New York; Chicago; 
Kansas City; and, until recently, Minneapolis.[Footnote 19] About one- 
third of CFTC's staff are located in the field offices. At the 
beginning of fiscal year 2006, 132 (27 percent) of CFTC's 490 FTE 
positions were allocated to the Division of Enforcement; at the 
beginning of fiscal year 2007, that number declined to 120 of CFTC's 
458 FTE positions. The 2007 data are estimated. While CFTC staffing 
levels have declined, according to CFTC, futures and options trading 
volume for all commodities has roughly doubled from fiscal years 2002 
to 2006 and is expected to continue to rise, as indicated in figure 3. 

Figure 3: Futures and Options Trading Volume for All Commodities and 
CFTC Staffing Levels (Actual and Estimated), Fiscal Years 1995-2008: 

[See PDF for image] 

Source: GAO analysis of CFTC, the National Finance Center, and the 
Future Industry Association data. 

[End of figure] 

Several Factors Have Caused Changes in the Energy Markets, Potentially 
Affecting Prices: 

Both physical and futures markets experienced a substantial amount of 
change from 2002 through 2006. Reasonable arguments have been made that 
events in both markets have contributed to rising energy prices, at 
least in the short term, but opinions vary regarding the extent that 
recent changes in the financial markets have influenced the prices of 
energy products in the physical markets over the long term. Because of 
these concurrent changes, identifying the causes of the increases in 
energy prices in both the physical and futures markets for crude oil, 
unleaded gasoline, heating oil, and natural gas is difficult. First, 
during this period, the physical markets experienced tight supply and 
rising demand from increasing global demand, ongoing political 
instability in oil-producing regions, and other supply disruptions. 
Second, annual volatility of energy prices remained above historic 
averages during the beginning of the period (although during 2006, 
volatility generally declined to levels at or near the historical 
average). Third, the volume of trading in energy futures increased as 
growing numbers of managed money traders viewed energy futures as 
attractive investment alternatives. 

Tight Supply and Rising Demand for Physical Energy Commodities 
Contributed to the Increase in Futures and Spot Prices: 

The energy physical markets have undergone substantial change and 
turmoil from 2002 through 2006, which affected prices in the spot and 
futures markets. First, like many market observers and participants, we 
found a number of fundamental supply and demand conditions that could 
influence prices. Moreover, these parties have observed that the lack 
of spare capacity in certain areas, such as production, transportation, 
and storage, can affect prices. Second, over the short term, weather 
events also were a significant cause of rising energy prices because of 
their effects on energy supply, according to several of the market 
observers we interviewed. Third, many market observers also identified 
geopolitical uncertainty arising from the instability and insecurity of 
the world's major oil-producing regions as a major factor affecting 
energy prices.[Footnote 20] Concerns about political events may 
manifest in the form of higher futures prices if traders predict that 
an event--such as a strike within the industry or pipeline sabotage by 
terrorists--will have an effect on future supply. Finally, on the 
demand side, a significant factor noted by observers was the increase 
in global consumption of petroleum products, primarily among 
industrializing Asian nations such as China and India. 

Analysis of world oil prices by EIA and us indicates that increases in 
crude oil prices occur if political instability, terrorist acts, or 
natural disasters create uncertainties about, or actual disruptions in, 
supply from countries that produce or refine oil. For example, 
according to EIA, in the early 2000s, cutbacks in the Organization of 
the Petroleum Exporting Countries (OPEC) production and rising demand 
caused oil prices to increase to more than $30 per barrel, only to fall 
precipitously when the global economy weakened following the September 
11, 2001, crisis.[Footnote 21] Moreover, as we reported in 2005, rapid 
growth in oil demand in Asia contributed to a rise in crude oil prices 
to more than $50 per barrel during 2004.[Footnote 22] 

According to EIA, world oil demand that was about 59 million barrels 
per day in 1983 grew to more than 85 million barrels per day in 2006. 
The United States consumes nearly one-quarter of this amount--or more 
than 20 million barrels per day in 2006--and its demand has grown about 
1.5 percent per year since 1983. The rapid economic growth in Asia also 
has stimulated a strong demand for energy commodities. For example, 
China has overtaken Japan as the second-largest consumer of crude oil, 
after the United States. According to EIA data, from 1983 to 2004, 
Chinese demand grew from about 1.7 million barrels consumed per day to 
about 6.4 million barrels consumed per day. This increase in the global 
demand for crude oil is shown in figure 4. 

Figure 4: Increase in World Demand for Crude Oil (Actual and 
Estimated), 1980-2006: 

[See PDF for image] 

Source: GAO analysis of EIA data. 

Note: The world oil demand data for 2006 represent a preliminary 
estimate. 

[End of figure] 

The growth in demand does not, by itself, lead to higher prices for 
crude oil or any other energy commodity. For example, if the growth in 
demand were exceeded by a growth in supply, prices would fall, with 
other things remaining constant. However, according to EIA, the growth 
in demand outpaced the growth in supply, even with spare production 
capacity included in supply. Spare production capacity is surplus oil 
that can be produced and brought to the market relatively quickly to 
rebalance the market if there were a supply disruption anywhere in the 
world oil market. EIA estimates that global spare production capacity 
in 2006 was about 1.3 million barrels per day (see fig. 5). Most of 
that capacity was concentrated in the 12 OPEC countries that supply 
about 40 percent of the world's oil, primarily Saudi Arabia. This 
compared with spare capacity of about 10 million barrels per day in the 
mid-1980s, or of about 5.6 million barrels a day as recently as 2002. 
Analysis by EIA indicates that the growth of oil production in non-OPEC 
nations, which produce most of the world's oil and include countries 
such as Canada, China, Mexico, Norway, Russia, the United Kingdom, and 
the United States, has slowed relative to the growth in demand, and 
these nations have virtually no spare production capacity. As a 
commodity that is produced and traded worldwide, crude oil prices could 
be affected by the value of the U.S. dollar on open currency markets. 
For example, because crude oil is typically denominated in U.S. 
dollars, the payments that oil-producing countries receive for their 
oil also are denominated in U.S. dollars. As a result, a weak U.S. 
dollar decreases the value of the oil sold at a given price, and oil- 
producing countries may wish to increase prices for their crude oil to 
maintain purchasing power in the face of a weakening U.S. dollar, to 
the extent they can. 

Figure 5: Estimates of World Oil Spare Production Capacity, 1991-2008: 

[See PDF for image] 

Source: GAO analysis of EIA data. 

Note: The spare production capacity data for 1991-1997 represent an 
average estimate over that period. 

[End of figure] 

Major weather and political events also can lead to supply disruptions 
and higher prices. In its analysis, EIA has cited the following 
examples: 

* Hurricanes Katrina and Rita removed about 450,000 barrels per day 
from the world oil market from June 2005 to June 2006. 

* Instability in major OPEC oil-producing countries, such as Iran, 
Iraq, Nigeria, and Venezuela, has lowered production and increased the 
risk of future production shortfalls. 

* Oil production in Russia, a major driver of non-OPEC supply growth 
during the early 2000s, was adversely affected by a worsened investment 
climate as the government raised export and extraction taxes. 

The supply of crude oil affects the supply of gasoline and heating oil, 
and, just as production capacity affects the supply of crude oil, 
refining capacity affects the supply of products distilled from crude 
oil. As we have reported, refining capacity in the United States has 
not expanded at the same pace as the demand for gasoline.[Footnote 23] 
Despite a growth in the capacity of existing gasoline refineries, the 
growth in demand has meant that refineries have been running at an 
average of more than 93 percent of production capacity since the mid- 
1990s, compared with about 78 percent in the 1980s. Higher utilization 
rates can increase operating costs and lead to prices being higher than 
otherwise would be expected, as occurred in the second half of the 
1990s. 

Another factor affecting the supply, and therefore the price, of 
petroleum products is the amount held in inventory. Inventory is 
particularly crucial to the supply and demand balance because it can 
provide a cushion against price spikes if, for example, a refinery 
outage temporarily disrupts production. We have reported that, as in 
other industries, the petroleum products industry has adopted "just-in- 
time" delivery processes to reduce costs, leading to a downward trend 
in the level of gasoline inventories in the United States. For example, 
in the early 1980s, private companies held stocks of gasoline in excess 
of 35 days of average U.S. consumption; while in 2004, those stocks 
were equivalent to less than 25 days consumption.[Footnote 24] Lower 
costs of holding inventories may reduce gasoline prices, but lower 
levels of inventories also may cause prices to be more volatile because 
when a supply disruption occurs or there is an increase in demand, 
there are fewer stocks of readily available gasoline from which to 
draw, thereby putting upward pressure on prices. Others have noted that 
higher prices for future delivery of oil have induced oil companies to 
buy more oil and place it in storage. They concluded that this practice 
has created a situation where oil prices are high despite high levels 
of oil in inventory. 

In addition to the supply and demand factors that generally apply to 
all energy commodities, there are specific conditions that apply to 
particular commodities. For example, to meet national air quality 
standards under the Clean Air Act, as amended, many states have 
mandated the use of special gasoline blends--so-called "boutique 
fuels." As we have recently reported, there is a general consensus that 
higher costs associated with supplying special gasoline blends 
contributed to higher gasoline prices, either because of more frequent 
or more severe supply disruptions or because higher costs are likely 
passed on, at least in part, to consumers.[Footnote 25] As another 
example, according to EIA, the recent phaseout of a chemical used to 
improve gasoline performance--methyl tertiary butyl ether--increased 
the price of U.S. gasoline, in part because the chemical was replaced 
by ethanol, a more costly additive. As in the futures markets, the 
physical markets have undergone substantial changes that can affect 
prices. These specific factors affecting particular commodities, when 
combined with the general supply and demand conditions, contribute to 
increased energy prices and price volatility. However, market 
participants and other observers disagree on whether high energy prices 
were solely due to supply and demand fundamentals or whether increased 
futures trading activity also was fueling higher prices. 

The Effects of Relatively High but Falling Volatility and a Growing 
Volume of Derivatives Trading on Energy Prices Are Unclear: 

The changes occurring in the physical markets have not happened in 
isolation; they have been accompanied by advances in technology, 
relatively high but falling volatility in energy futures prices, and a 
growing volume of trading in the derivatives markets. The effects of 
these changes on energy prices are not clear. 

Although energy futures prices increased from 2002 to 2006 (see fig. 
1), the relative volatility of those prices for three of the four 
commodities generally declined. As shown in figure 6, the annual 
historical volatilities--measured using the relative change in daily 
prices of energy futures--from 2000 through 2006 generally were above 
or near their long-term averages, although crude oil and heating oil 
declined below the average and gasoline declined slightly. As we have 
reported, futures prices typically reflect the effects of such world 
events on the price of crude oil.[Footnote 26] Political instability 
and terrorist acts in countries that supply oil create uncertainties 
about future supplies, which is reflected in futures prices in 
anticipation of an oil shortage and expected higher prices in the 
future. Conversely, news about a new oil discovery that would increase 
world oil supply could result in lower futures prices. In other words, 
futures traders' expectations of what may happen to world oil supply 
and demand influence their price decisions. 

Figure 6: Comparison of Annual Volatility with the Long-term Average 
Volatility for Four Energy Futures (Measured in Relative Terms Using 
Front Month Contracts), 1987-2006: 

[See PDF for image] 

Source: GAO analysis of NYMEX data. 

Note: NYMEX did not begin trading natural gas futures until 1990. 

[End of figure] 

The annual volatility of natural gas fluctuated more widely than that 
of the other three commodities and increased in 2006, even though 
prices largely declined from the levels reached in 2005. EIA has stated 
that the volatility of natural gas prices is due to factors in the 
physical marketplace, such as changing weather, producers' inability to 
move natural gas quickly to areas in response to quickly rising demand, 
and limited local storage. A research director for a consumer advocacy 
organization who studied natural gas prices concluded that increased 
trading by speculators had increased volatility and prices.[Footnote 
27] CFTC also has studied this issue and found that natural gas prices 
from August 2003 through August 2004 did not appear to be determined by 
any single category of market participant, although joint demand and 
supply of contracts by all participants clearly affected the change in 
price. In other words, managed money traders' activity (including hedge 
funds), by itself, did not have a significant effect on price 
changes.[Footnote 28] 

While some often equate higher prices with higher volatility, an 
increase in futures contract prices does not necessarily mean that 
volatility will increase in a similar manner, and an increase in 
volatility does not necessarily mean that prices will rise. Price 
volatility measures the variability rather than the direction of price 
changes and is based on the standard deviation of those 
changes.[Footnote 29] Therefore, if futures contract prices change at a 
steady rate, the prices may have lower volatility than if large swings 
in prices occurred. 

At the same time that prices were rising and volatility was generally 
above or near long-term averages, futures markets also experienced an 
increase in the number of large noncommercial participants, such as 
managed money traders.[Footnote 30] The trends in price and volatility 
made the energy derivatives markets attractive for an increasing number 
of traders looking to either hedge against those changes or profit from 
them. According to CFTC large trader data, from July 2003 to December 
2006, crude oil futures and options contracts experienced the most 
dramatic increase as the average number of noncommercial traders grew 
from about 125 to about 286. As shown in figure 7, over a similar 
period, the average number of noncommercial traders also showed an 
upward but less dramatic trend for unleaded gasoline, heating oil, and 
natural gas. 

Figure 7: Average Daily Number of Large Commercial and Noncommercial 
Traders per Month, July 2003-December 2006: 

[See PDF for image] 

Source: GAO analysis of CFTC data. 

[End of figure] 

Some market participants and observers have concluded that large 
purchases of oil futures contracts by speculators in effect have 
created an additional demand for oil that has led to higher prices; 
others disagree. The Senate's Permanent Subcommittee on Investigations, 
Committee on Homeland Security and Governmental Affairs, issued a staff 
report in June 2006 that concluded that the traditional forces of 
supply and demand could not fully account for increases in the prices 
of energy commodities.[Footnote 31] Also, according to an energy firm, 
an investment bank, an academic, and hedge fund officials, increasing 
numbers of speculative traders in the market and rising trading volume 
placed upward pressure on futures prices. However, others, including 
investment bank and CFTC officials, have argued that speculators did 
not increase prices, but they provided liquidity and dampened 
volatility. Moreover, other investment banks, energy firms, and FERC 
officials told us that speculative trading in the futures markets can 
contribute to short-term price movements in the physical markets. 
However, they did not believe it was possible to sustain a speculative 
"bubble" over time because the two markets are linked and both respond 
to information regarding changes in supply and demand caused by such 
factors as the weather or geopolitical events. Therefore, in their 
view, speculation could not lead to artificially high or low prices 
over a long period. 

Within the noncommercial trader category, the largest increases came 
from managed money traders--which generally trade for their own 
accounts rather than for others. Specifically, for crude oil, the 
average number of managed money traders that trade daily increased 
significantly from about 62 in July 2003 to about 128 in December 2006. 
At the same time, the number of smaller traders also grew significantly 
from an average of about 26 per day in July 2003 to an average of about 
111 per day in December 2006. The number of managed money traders and 
smaller traders for unleaded gasoline, heating oil, and natural gas 
also increased similarly during that period. The number of commercial 
futures traders generally did not increase in a fashion similar to that 
of noncommercial traders. 

As the number of traders has increased, so has the trading volume on 
NYMEX for all energy futures contracts, particularly crude oil and 
natural gas, as shown in figure 8. From 2001 through 2006, the average 
daily contract volume for crude oil increased by 90 percent and for 
natural gas increased by 93 percent. However, unleaded gasoline and 
heating oil experienced less dramatic growth in their trading volumes 
during this period. 

Figure 8: Average Daily Trading Volume for Crude Oil, Heating Oil, 
Unleaded Gasoline, and Natural Gas Futures Contracts, 1982-2006: 

[See PDF for image] 

Source: GAO analysis of NYMEX data. 

Note: The trading volume data for unleaded gasoline include the RB 
contract introduced on NYMEX in October 2005. The start dates for these 
commodities varied for these NYMEX contracts. 

[End of figure] 

Along with the strong growth of energy futures trading, the amount of 
energy derivatives traded outside of exchanges also appears to have 
increased significantly. However, comprehensive data on the trading 
volume of energy-related OTC derivatives are not available because OTC 
energy markets are not regulated. The Bank for International 
Settlements publishes data on worldwide OTC derivative trading volume 
for broader groupings of commodities that can be used as a rough proxy 
for trends in the trading volume of OTC energy derivatives.[Footnote 
32] According to these data, the notional amounts outstanding of OTC 
commodity derivatives--excluding precious metals, such as gold--grew by 
854 percent from December 2001 through December 2005.[Footnote 33] From 
December 2004 through December 2005, the notional amount outstanding 
increased by 214 percent to more than $3.2 trillion. Despite the lack 
of comprehensive energy-specific data on OTC derivatives, the recent 
experience of individual trading facilities revealed the growth of 
energy derivatives trading outside of futures exchanges. For example, 
according to an annual financial statement of the 
IntercontinentalExchange (ICE), the volume of contracts traded on ICE-
-including financially settled derivatives and physical contracts-- 
increased by 438 percent, from more than 24 million contracts in 2003 
to more than 130 million in 2006. 

While some market observers believed that managed money traders were 
exerting upward pressure on prices by predominantly buying futures 
contracts, CFTC data reveal that, from the middle of 2003 through the 
end of 2006, the trading activity of managed money participants became 
increasingly balanced between buying and selling. According to basic 
futures market theory, a trader speculating and holding an outstanding 
position to buy the commodity--a long open interest position--expects 
that the price of the commodity will rise, while a trader holding an 
outstanding position to sell the commodity--a short open interest 
position--expects that the price will decline. As shown in figure 9, 
according to CFTC data, from July 2003 through December 2003 managed 
money traders' ratio of long open interest in crude oil to short open 
interest was about 2.5:1, suggesting a strong expectation that prices 
would rise, on average, throughout that period, which they did. By 
2006, this ratio fell to 1.2:1, suggesting that managed money traders 
as a whole were more evenly divided in their expectations about future 
prices. Managed money trading in unleaded gasoline, heating oil, and 
natural gas showed similar trends. Although for natural gas, open 
interest was more often short than long, suggesting a general 
expectation that prices would decline, which largely did not occur 
until 2006. Also, the relatively high percentage of open interest for 
natural gas held by these traders in 2006--surging to just over 40 
percent--was perhaps due to the increased volatility of natural gas 
futures prices from 2005 to 2006, which provided traders with more 
opportunities for profit (or loss). 

Figure 9: Percentage of Long and Short Open Interest in Futures and 
Options for Managed Money Traders, July 2003-December 2006: 

[See PDF for image] 

Source: GAO analysis of CFTC data. 

Note: Data for 2003 were for July through December. The percentages 
indicate what portion of long and short open interest was held by 
managed money traders. For example, in 2004, managed money traders held 
14.5 percent of the total long open interest for crude oil and 7.1 
percent of the total short open interest. Because data are not included 
for all categories of traders, the percentages for these categories 
within a particular period do not total 100. These data should be 
viewed as a general overview of managed money traders' positions. They 
do not provide insights into how traders' individual positions changed 
over time. Our data for 2006 include contract trading data for RB and 
for the gasoline--HU--that began to be replaced by RB. 

[End of figure] 

CFTC Oversees Exchanges and Has Limited Authority over Other 
Derivatives Markets: 

Energy products are traded on multiple markets, which are subject to 
varying levels of CFTC oversight and regulation. Under the CEA, CFTC 
regulatory oversight is focused on conducting the surveillance of 
futures exchanges, protecting the public, and ensuring market 
integrity. CFTC collects and analyzes trading position information on 
futures exchanges, which is central to this oversight. The information 
is subsequently published at highly aggregated levels in the 
commission's COT reports, and it helps to provide transparency to the 
market. However, these public reports have been criticized because the 
informational categories for traders do not accurately reflect energy 
market activity. While CFTC's oversight is focused on futures 
exchanges, the number of exempt commercial markets for trading energy 
commodities, which are not subject to general CFTC oversight, have 
grown. However, traders in these markets are subject to the CEA's 
antimanipulation and, where applicable, antifraud provisions.[Footnote 
34] Also, exempt commercial markets must provide CFTC with data for 
certain contracts and notify CFTC if cash markets use exempt market 
prices to price their transactions (although that has not 
occurred).[Footnote 35] Energy products also are traded off exchange 
(referred to as OTC) and are not subject to direct CFTC oversight and 
regulation. However, as we have previously noted, certain types of off- 
exchange transactions are subject to antifraud and the antimanipulation 
provisions of the CEA, which CFTC has the authority to enforce. In 
addition, contract participants may be subject to other regulatory 
authority on the basis of their role in the physical market. To enhance 
its ability to detect and deter price manipulations, CFTC has published 
for comment a proposal to amend part 18 of its regulations to obtain 
from traders that have large (reportable) positions in an exchange- 
traded commodity information about their off-exchange positions in the 
same commodity.[Footnote 36] CFTC also held a hearing in September 2007 
to examine trading on regulated exchanges and exempt commercial 
markets, which included an assessment of price discovery and the 
implications for CFTC oversight. 

CFTC Has General Oversight Authority over Futures Exchanges, but Its 
Publicly Reported Information on These Exchanges Has Not Kept Pace with 
Changing Market Conditions: 

Under the CEA, CFTC has general oversight authority over futures 
exchanges such as NYMEX. These exchanges receive CFTC approval to list 
futures and options contracts for trading and are subject to direct 
CFTC regulation and oversight. To be a regulated futures exchange, an 
exchange must demonstrate to CFTC that the exchange complies with (1) 
the criteria for designation under section 5(b) of the CEA for, among 
other things, the prevention of market manipulation, fair and equitable 
trading, the conduct of trading facilities, and the financial integrity 
of transactions conducted on the board; (2) the set of core principles 
under section 5(d) of the act establishing their regulatory 
responsibilities; and (3) the provisions on application procedures of 
part 38 of the CFTC rules.[Footnote 37] According to CFTC officials, 
following procedures in the CEA, these exchanges may list new 
contracts, after certifying that they are in compliance with certain 
core principles, including ascertaining that the contracts are not 
readily susceptible to manipulation and monitoring trading to prevent 
price manipulation.[Footnote 38] 

CFTC's oversight is focused on fulfilling three strategic goals 
relating to futures exchanges. First, to ensure the economic vitality 
of the commodity futures and options markets, CFTC conducts its own 
direct market surveillance and also reviews on an oversight basis the 
surveillance efforts of these exchanges. According to CFTC officials, 
the commission monitors trading activity in futures markets and uses 
these trading data to analyze large positions that might be used to 
manipulate futures markets. In its oversight role, CFTC reviews new 
futures contracts to assess susceptibility to manipulation. To list a 
new futures contract, an exchange must file a written self- 
certification with CFTC and, if requested, must provide additional 
evidence, information, or data to CFTC on whether the contact satisfies 
CEA requirements and the commission's regulations or policies. Second, 
to protect market users and the public, CFTC has promoted sales 
practices and other customer protection rules applicable to futures 
commission merchants and other registered intermediaries.[Footnote 39] 
In this connection, CFTC closely monitors the enforcement of 
registration and other requirements by the National Futures 
Association, which is an SRO responsible for regulating all firms and 
individuals conducting futures business with public customers. Third, 
to ensure the market's financial integrity, CFTC reviews the audit and 
financial surveillance activities of SROs. It also periodically reviews 
registered derivatives clearing organizations to ensure that they are 
effectively monitoring risks and protecting customer funds. 

CFTC provides the public information on open interest in exchange- 
traded futures and options by commercial and noncommercial traders for 
various commodities in its weekly COT reports, which are relied upon by 
the public. Changing market conditions caused CFTC in 2006 to reassess 
COT reporting and its value to the public.[Footnote 40] A trading 
entity generally gets classified as commercial by filing a statement 
with CFTC that it is commercially "engaged in business activities 
hedged by the use of the futures or option markets." To ensure that 
traders are classified with accuracy and consistency, commission staff 
review this self-classification and may reclassify a trader if staff 
have additional information about the trader's use of the markets. A 
trader may be classified as commercial in some commodities and as 
noncommercial in other commodities. A single trading entity cannot be 
classified as both commercial and noncommercial in the same commodity. 
Nonetheless, a multifunctional organization that has more than one 
trading entity may have each trading entity classified separately in a 
commodity. For example, a financial organization trading in financial 
futures may have a banking entity whose positions are classified as 
commercial and have a separate money-management entity whose positions 
are classified as noncommercial. 

Recently, CFTC observed that the exchange-traded derivatives markets, 
as well as derivatives trading patterns and practices, have evolved, 
leading CFTC to question whether the commercial and noncommercial 
categories of today's COT reports appropriately classify trading 
practices. In June 2006, CFTC issued a notice in the Federal Register 
that it was undertaking a comprehensive review of the COT reporting 
program out of concern that the reports in their present form might not 
accurately reflect the commercial or noncommercial nature of positions 
held by nontraditional hedgers, such as swaps dealers.[Footnote 41] On 
the basis of the comments received in response to the notice, in 
December 2006, CFTC announced the initiation of a 2-year pilot program 
for publishing a supplemental COT report that would contain, in 
addition to categories for noncommercial and commercial positions, a 
category showing aggregate futures and options positions of index 
traders in 12 selected agricultural commodities. In explaining the 
program, CFTC observed that the "index traders" category would include 
traders that also were included in the noncommercial and commercial 
categories: 

"In addition, the Commission will begin publishing a supplemental COT 
report that includes, in a separate category, the positions of 
commodity index traders in certain physical commodity futures markets. 
These so-called 'Index Traders' will be drawn from both the current 
Noncommercial and the Commercial categories. Coming from the 
Noncommercial category will be managed funds, pension funds and other 
institutional investors that generally seek exposure to commodity 
prices as an asset class in an unleveraged and passively managed manner 
using a standardized commodity index. Coming from the Commercial 
category will be entities whose positions predominantly reflect hedging 
of OTC transactions involving commodity indices--for example, swap 
dealers holding long futures positions to hedge short OTC commodity 
index exposure opposite institutional traders such as pension funds. 
These latter position holders are those traders described in the 
request for comments as 'non-traditional commercials.'" 

CFTC stated that the pilot program for reporting of commodity index 
trading did not include energy and metals markets because the large 
trader data currently available to the commission would not permit an 
accurate breakout of index trading in these markets. According to CFTC, 
swap dealers, who use futures markets to hedge commodity index 
transactions in the OTC market, conduct most trading of commodity index-
related futures. However, these swap dealers also may engage in OTC 
derivative transactions on energy or metals prices directly and conduct 
cash transactions in the underlying energy or metals markets. As a 
result of these activities, the overall futures positions held by swap 
dealers in energy and metal futures markets may not necessarily 
correspond closely with the hedging of OTC commodity index 
transactions. The commission stated that including these traders in the 
new index trader category would not enhance market transparency. 
Furthermore, it did not want to delay publication of the new COT report 
while it continues to study whether it is feasible to publish 
meaningful reports for other markets. The objective of the pilot 
program is to improve the transparency of an evolving market by 
separately reporting the positions of index traders. Similarly, the 
increasing volume of off-exchange trading in energy derivatives and the 
recent volatility of energy commodity prices justify considering 
whether a COT category of futures positions held by participants in off-
exchange energy markets also could enhance transparency. CFTC said it 
will assess the relevance and usefulness of the new reporting and study 
whether it is possible and appropriate to expand the supplemental 
report to include data for other physical commodity futures markets. 

Significant changes in the energy markets also may lead CFTC to further 
examine the usefulness, accuracy, and relevance of reported information 
to users. According to CFTC officials, energy trading has seen the 
entry of new market participants. For example, investment banks, hedge 
funds, and swaps dealers have become significant market participants. 
Moreover, according to industry analysts and representatives from 
investment banks and large oil companies, some commercial participants 
only hedge, some only speculate, and others both hedge and speculate in 
the energy markets. While some commercial participants may hedge and 
speculate in the same energy market, CFTC classifies these entities as 
commercial participants. CFTC has not been able to identify new 
categories for traders of energy commodities. Such reporting can 
distort the accuracy and relevance of reported information to users and 
the public, thereby limiting the usefulness of the information reported 
to the public as well as information used by traders. 

CFTC Authority over Exempt Commercial Markets Consists of Enforcing the 
Antifraud and Antimanipulation Provisions of the CEA and Administering 
Certain Reporting Requirements: 

In contrast to the direct oversight provided to futures exchange, 
exempt commercial markets are not subject to CFTC's general oversight 
authority. According to CFTC officials, as these markets have grown in 
prominence, some market observers have questioned their role in the 
energy markets. Trading energy derivatives on exempt commercial markets 
is permissible only for eligible commercial entities. While not subject 
to general CFTC oversight, these markets are subject to CFTC rule 36.3, 
which provides for the dissemination of exempt commercial market 
trading data should exempt commercial market prices be used to price 
cash markets and contains notification, recordkeeping, and reporting 
requirements.[Footnote 42] Also, exempt commercial market participants 
are subject to CFTC's enforcement authority for the antimanipulation 
and antifraud provisions of the CEA.[Footnote 43] These markets are not 
required to register with CFTC, but must notify CFTC that they are 
operating as an exempt commercial market and comply with certain CFTC 
informational, recordkeeping, and other requirements.[Footnote 44] 

Specifically, CFTC promulgated rule 36.3 under two subsections of the 
CEA. One subsection authorizes CFTC to prescribe rules if necessary to 
ensure the timely dissemination of price, trading volume, and other 
trading data for a derivative traded on an exempt commercial market if 
the commission determines that the electronic trading facility used by 
the market performs a significant price discovery function for 
transactions in the cash market for the commodity underlying the 
derivative.[Footnote 45] The other subsection establishes notification, 
recordkeeping, and reporting requirements for exempt commercial 
markets.[Footnote 46] The rule requires, among other things, that the 
electronic trading facility in an exempt commercial market must notify 
CFTC of its reliance on the exemption and provide CFTC with price, 
quantity, and other data on contracts that average five or more trades 
a day over the most recent quarter for which they are relying on the 
CEA exemption. The facility also must maintain a record of allegations 
or complaints they receive concerning instances of suspected fraud or 
manipulation and provide CFTC with a copy of the record. CFTC officials 
said that the reports include transaction-level data, such as quantity 
and price, for all trades in products meeting the criteria, but not the 
identities of counterparties to the trades. These officials said that 
three exempt commercial markets--ICE, the Natural Gas Exchange, and 
ICAP--currently provide the rule 36.3 trade information reports; in the 
past, the Optionable and ChemConnect exempt commercial markets also 
provided these reports. For example, ICE officials told us that for 
their OTC activities they keep records for all of the products traded 
on their platform, and report to CFTC on liquid markets (those 
averaging five trades a day) and any complaints received from market 
participants. ICE officials said that CFTC often asks ICE for detailed 
information about participants that are putting up bids and offers and 
about all of the trades executed in a day. 

CFTC officials said that the other electronic exchanges have provided 
notice that they are operating in reliance on the CEA exemption, but 
they have not provided rule 36.3 trade information reports. CFTC 
officials explained that an electronic exchange only has to provide 
information reports if it meets the threshold for reporting, which 
includes averaging five trades per day in the relevant contract. These 
officials also said that they do not actively check to determine 
whether the thresholds are being met. 

To date, no exempt commercial market or CFTC has determined if cash 
markets for energy commodities routinely use exempt market prices to 
price their transactions. According to CFTC officials, an exempt 
commercial market or CFTC may determine, using certain criteria, if the 
market serves such a price discovery function. Exempt markets that 
serve such a function become subject to certain public reporting 
requirements. According to CFTC officials, the commission has not made 
such a determination for two reasons. First, they said that the only 
consequence of serving a price discovery function under current law is 
that the exempt commercial market must publish its prices. They noted 
that this is a circular argument because it is the public availability 
of pricing information that enables the exempt commercial market to 
serve a price discovery function. Second, they said that this is a low 
priority. In their view, the current fiscal situation does not allow 
CFTC to send its economists into the field on matters such as this that 
would not go before the commission. Also in their view, even if the 
markets served a price discovery function, no significant consequence 
would entail because of the circularity argument. However, in light of 
the growth of trading on ICE and the lessons learned from the Amaranth 
crisis, CFTC held a hearing in September 2007 to examine trading on 
regulated exchanges and exempt commercial markets.[Footnote 47] The 
hearings included an assessment of price discovery in these markets and 
the implications for CFTC oversight of these markets. 

Since 2001, 17 facilities have notified CFTC that they had begun 
operating as exempt commercial markets (see table 1). According to CFTC 
officials, 11 of these markets currently offer, or had offered, 
transactions in energy products, with 8 now operational. Some of these 
markets have become important players in the trading of energy 
products. ICE, in addition to the exempt swap contracts it trades in 
its capacity as an exempt commercial market, is the trading platform 
for physical commodities, including spot and forward contracts, which 
routinely involve delivery. According to CFTC officials, some in the 
industry assert that ICE is the trading platform for an estimated 70 
percent of the spot trading for natural gas.[Footnote 48] Another 
exempt commercial market, ChemConnect, advertises that data and news 
providers, such as Bloomberg and Dow Jones Energy Services, rely on it 
to provide accurate, timely information on energy products. 
Furthermore, the Web site for the HoustonStreet Exchange indicates that 
it serves as an electronic trading facility for crude oil and refined 
products also traded on NYMEX. While there has been significant growth 
in the number of electronic exchanges, CFTC officials said that they 
receive trade information reports from only 2--ICE and the Natural Gas 
Exchange. According to CFTC officials, they have no evidence that the 
others meet the minimum threshold trading volume for reporting. 

Table 1: Exempt Commercial Markets, Dates They Filed Notice with CFTC 
to Operate as an Exempt Commercial Market, and Commodities Traded on 
Each Market, 2001-2006: 

Notification date: 2006; 
Exempt commercial market: ChemConnect; 
Commodity category: Energy products. 

Notification date: 2003; 
Exempt commercial market: Chicago Climate Exchange; 
Commodity category: Emission allowances. 

Notification date: 2002; 
Exempt commercial market: Commodities Derivative Exchange; 
Commodity category: Metals. 

Notification date: 2002; 
Exempt commercial market: HoustonStreet Exchange; 
Commodity category: Energy products. 

Notification date: 2006; 
Exempt commercial market: ICAP Commodity and Commodity Derivatives 
Trading System; 
Commodity category: Energy products. 

Notification date: 2006; 
Exempt commercial market: ICAP Electronic Trading Community; 
Commodity category: Natural gas and its derivatives. 

Notification date: 2005; 
Exempt commercial market: ICAP Hyde Limited Trading System; 
Commodity category: Forward freight agreements. 

Notification date: 2001; 
Exempt commercial market: IntercontinentalExchange; 
Commodity category: Precious metals, base metals, and energy products. 

Notification date: 2001; 
Exempt commercial market: International Maritime Exchange; 
Commodity category: Freight rates. 

Notification date: 2002; 
Exempt commercial market: Natural Gas Exchange; 
Commodity category: Energy products. 

Notification date: 2006; 
Exempt commercial market: NetThruPut; 
Commodity category: Condensates and liquefied petroleum gas. 

Notification date: 2001; 
Exempt commercial market: Optionable; 
Commodity category: Energy products. 

Notification date: 2003; 
Exempt commercial market: Spectron Live.com Limited; 
Commodity category: Liquefied petroleum gas. 

Notification date: 2003; 
Exempt commercial market: TFS Energy; 
Commodity category: Weather derivatives. 

Notification date: 2005; 
Exempt commercial market: Trade Capture; 
Commodity category: Energy products. 

Notification date: 2002; 
Exempt commercial market: Tradespark; 
Commodity category: Energy products, weather indexes, and emission 
allowances. 

Notification date: 2003; 
Exempt commercial market: Tradition Financial Services Pulp and Paper 
Division; 
Commodity category: Pulp and paper products. 

Source: GAO analysis of CFTC data. 

[End of table] 

Although CFTC Can Enforce Antimanipulation and Applicable Antifraud 
Provisions of the CEA in OTC Energy Derivatives Markets and Exempt 
Commercial Markets, Views Vary about the Sufficiency of Its Regulatory 
Authority with Respect to Off-Exchange Energy Derivatives: 

Energy derivatives also may be traded OTC, under the conditions and 
restrictions in the CEA for exempt commodities. The act exempts from 
most of its provisions transactions in exempt commodities into which 
large market participants enter and that are not traded on a trading 
facility. In addition, the act exempts from most of its provisions 
transactions in exempt commodities traded on an electronic trading 
facility, as long as large commercial traders (defined in the act as 
"eligible commercial entities") enter into them on a principal-to- 
principal basis.[Footnote 49] Bilateral OTC derivatives contacts are 
viewed as private transactions between sophisticated counterparties, 
and there is no requirement for parties involved in OTC transactions to 
disclose details of their transactions. Because OTC derivatives are 
contractual agreements, each party is subject to and assumes the risk 
of nonperformance by its counterparty. This is different from exchange- 
traded derivatives, where a central clearinghouse stands behind every 
trade. Thus, according to officials of the International Swaps and 
Derivatives Association, in the OTC context it is vitally important 
that one has confidence in the creditworthiness and trustworthiness of 
one's counterparty. While these markets generally are not subject to 
direct CFTC oversight, CFTC has the authority to enforce antifraud and 
antimanipulation provisions of the CEA in connection with transactions 
in exempt commodities that take place through an electronic trading 
facility, and that are entered bilaterally without being subject to 
negotiation.[Footnote 50] Several of the enforcement actions filed by 
CFTC since 2001 addressed the use of false reporting in an attempt to 
manipulate energy prices on NYMEX. 

In addition to being subject to certain provisions of the CEA, the 
participants in these contracts may be subject to other regulatory 
authorities on the basis of their activities in the physical market. 
For example, certain actions--such as the buying and selling of a 
physical energy commodity by traders, such as hedge funds--may fall 
under the regulatory authority of FERC, which regulates the interstate 
transmission of physical commodities, such as natural gas, oil, and 
electricity, to protect energy consumers. Also, certain OTC derivative 
activities conducted by commercial banks are subject to oversight by 
the appropriate bank regulator. For example, commercial banks that 
engage in OTC derivatives are overseen by their relevant regulator, 
such as the Office of Comptroller of the Currency or the Board of 
Governors of the Federal Reserve System with respect to how their 
derivatives trading satisfies requirements of the banking laws. 
Likewise, SEC also has oversight authority over investment banks' 
activities that fall under its regulatory purview. These regulators do 
not regulate the specific transactions or maintain oversight of OTC 
derivatives as a class of instruments or markets; they regulate the 
entities that enter into the contracts or that act as dealers, 
counterparties, or both. 

While some observers have called for more oversight of OTC derivatives, 
most notably for CFTC to be given greater oversight authority of this 
market, others oppose any such action as unnecessary. Supporters of 
more CFTC oversight authority believe that regulating OTC derivatives 
markets is needed to protect the regulated markets and protect 
consumers from potential abuse and possible manipulation. One of their 
concerns is that because there is little information available about 
the size of this market or the terms of the contracts, CFTC may not be 
assured that trading on the OTC market is not adversely affecting the 
regulated markets and, ultimately, consumers. Specifically, some have 
mentioned that, unlike trading on a regulated exchange, OTC derivatives 
are not subject to any routine reporting requirements. Some have 
suggested that a combination of quantitative and qualitative 
information (such as whether derivatives are used mainly for trading or 
hedging purposes, and notional amounts by derivatives category) be 
collected.[Footnote 51] 

However others, including the President's Working Group, have concluded 
that OTC derivatives generally are not subject to manipulation because 
contracts are settled in cash on the basis of a rate or price 
determined in a separate, highly liquid market and these OTC 
transactions do not serve a significant price discovery 
function.[Footnote 52] The Working Group also noted that if electronic 
markets were to develop and serve a price discovery function, then 
consideration should be given to enacting a limited regulatory regime 
aimed at enhancing market transparency and efficiency through CFTC, as 
the regulator of exchange-traded derivatives. 

However, because of the lack of reported data about this market, 
addressing concerns about its function and effect on regulated markets 
and entities would be a challenge. CFTC officials have said that they 
have reason to believe these off-exchange activities affect prices 
determined on a regulated exchange. In a June 2007 Federal Register 
release clarifying its large trader reporting authority, CFTC noted 
that having data about the off-exchange positions of traders with large 
positions on regulated futures exchanges could enhance the commission's 
ability to deter and prevent price manipulation or any other 
disruptions to the integrity of the regulated futures markets.[Footnote 
53] According to CFTC officials, the commission also has proposed 
amendments to clarify its authority under the CEA to collect 
information and bring fraud actions in principal-to-principal 
transactions in these markets, thus enhancing CFTC's ability to enforce 
antifraud provisions of the CEA.[Footnote 54] 

Also, in August 2007, CFTC announced plans to conduct a hearing to 
begin examining more closely the trading on regulated exchanges and 
exempt commercial markets. The September 2007 hearing focused on a 
number of issues, including: 

* the current tiered regulatory approach established by the CFMA and 
whether this model is beneficial; 

* the similarities and differences between exempt commercial markets 
and regulated exchanges, and the associated regulatory risks of each 
market; and: 

* the types of regulatory or legislative changes that might be 
appropriate to address any identified risks. 

CFTC Engages in Surveillance Activities and Enforcement Activities, but 
the Effectiveness of these Activities Is Largely Uncertain: 

CFTC provides oversight for commodity futures markets through routine 
surveillance, analysis of market data, and inquiries of market 
participants and others. The commission uses information gathered from 
surveillance activities to identify unusual trading activity and 
possible market abuse. In particular, CFTC's LTRS provides essential 
information for surveillance, and LTRS provides information on the 
majority of all trading activity on futures exchanges. CFTC staff also 
rely on data from other sources and on their experience to identify 
potential problems, reporting unresolved potential market problems to 
the commission. NYMEX also conducts its own surveillance activities. 
According to CFTC and industry officials, CFTC and NYMEX contact 
traders to collect additional information about questionable trading 
practices. CFTC staff also said that they routinely investigate traders 
with large open positions, but the staff added that they do not 
routinely maintain information about such inquiries, thereby making it 
difficult to determine the usefulness and extent of these activities. 
In addition, CFTC coordinates its surveillance activities with other 
federal, state, and foreign authorities. While CFTC's surveillance 
authority is limited to futures exchanges, the commission's enforcement 
authority for manipulation and fraud extends to both exchange-based 
trading and off-exchange trading in exempt commodities, such as energy 
products. According to data provided by CFTC, in recent years, it has 
used its enforcement authority to file enforcement actions for almost 
300 cases, more than 30 of which involved energy-related commodities. 
However, as with programs operating in regulatory environments where 
performance is not easily measurable, evaluating the effectiveness of 
CFTC's enforcement activities is challenging because of the lack of 
effective outcome-based performance measures. CFTC's enforcement 
program received mixed ratings in a recent OMB review because CFTC 
could not fully demonstrate the effectiveness of its enforcement 
activities. 

CFTC Oversight Includes Surveillance of Energy Futures Trading, but the 
Full Extent of Follow-up Activities Is Uncertain: 

CFTC conducts regular market surveillance and oversight of energy 
trading on NYMEX and other futures exchanges. These activities include 
focusing on detecting and preventing disruptive practices before they 
occur and keeping the CFTC commissioners informed of possible 
manipulation or abuse. In addition to conducting direct surveillance of 
trading in energy futures markets on NYMEX, CFTC focuses on NYMEX's 
compliance with appropriate CEA core principles, including monitoring 
of trading to prevent price manipulation and enforcing position limits 
and position accountability rules. In conducting its own surveillance 
activities, NYMEX may bring enforcement actions when violations are 
found. CFTC staff also investigate traders with large open positions 
and document cases of improper trading. 

CFTC Oversees Trading on Futures Exchanges: 

According to CFTC officials, CFTC staff at three regional offices 
provide much of the market oversight and monitor daily trading 
activity. For instance, CFTC's New York Regional Office employs seven 
economists, who look for unusual trading and potential market 
manipulations in all futures contracts traded on New York futures 
exchanges. The New York regional staff obtain information from both 
market participants and NYMEX to monitor energy trading activity. New 
York CFTC staff stated that each morning, about 160 firms 
electronically submit large trader position data from the previous day 
to CFTC. CFTC headquarters receives these data and makes them available 
on a network to its field offices. Staff review these data for 
potential errors or omissions and then populate the LTRS, a database 
that staff use in conducting their surveillance activities. 

CFTC staff also said that they rely on the commission's integrated 
surveillance system (ISS), which contains surveillance data that CFTC 
has collected from the futures exchanges, clearing members, foreign 
brokers, and large traders. According to CFTC's 2005 performance and 
accountability report, ISS is a critical application to support futures 
and options data market surveillance.[Footnote 55] This system provides 
continuously updated trading data on holders of large futures and 
option positions that CFTC staff uses daily to monitor futures and 
option trading, detect potential problems, and identify trends in the 
marketplace. According to CFTC officials, ISS also is used to 
facilitate analysis of data received from exempt markets as a result of 
special calls for information. For example, pursuant to separate 
special calls issued in April, September, and December, 2006, ICE now 
continuously provides the commission with large trader position data. 
The commission also issued enforcement-related special calls seeking 
data for two individual ICE market participants in September 2006 and 
February 2007. 

The LTRS, which is part of ISS, is a comprehensive system for 
collecting information on market participants, a key information source 
for CFTC's market surveillance program and essential for monitoring 
markets and identifying and resolving potential problems involving 
market congestion, manipulation, and speculative position 
limits.[Footnote 56] Congestion may occur when traders holding short 
positions are attempting to cover their positions but are unable to 
find an adequate supply of contracts provided by traders with long 
positions or by new sellers willing to enter the market, except at 
sharply higher prices. In conducting their daily surveillance 
activities, CFTC officials said they analyze the trading data for 
indications that individual traders may be attempting to manipulate the 
market. This activity involves (1) looking for traders having unusually 
large market positions relative to open interest--the total number of 
futures contracts that have been entered into and not yet liquidated by 
an offsetting transaction or fulfilled by delivery--and deliverable 
supply and (2) examining the potential for disruption at expiration and 
sharp moves in the market. If certain positions pose concerns to CFTC 
staff, they can request additional information from a reporting firm or 
trader about trading and delivery activity. 

CFTC staff also analyze trading using data from other sources. CFTC 
officials said that the staff look at price movements and price 
relationships--especially in the natural gas, crude oil, heating oil, 
and unleaded gasoline markets--using commercial information sources, 
such as Bloomberg, Gas Daily, Reuters, and other market sources. They 
also obtain information about traders by monitoring their Web sites and 
use NYMEX's and EIA's Web sites and Lexis-Nexis, as well as firms' Web 
sites. CFTC staff said that they are in regular contact with exchange 
officials, who have data on clearing members and trading activity. They 
also obtain surveillance information from other units within the 
commission and from tips by the public. 

While CFTC data and other market collections are focused on identifying 
potential market disruptions and manipulations, staff also rely on 
their experience to identify potential problems. According to CFTC 
staff, the New York Regional Office staff assigned to surveillance of 
energy trading have many years of experience, either doing surveillance 
work for CFTC or in the futures industry, in general. Experienced staff 
are needed because, according to CFTC staff, analyzing market data is 
an art as well as a science. CFTC staff referred to the traditional 
test for manipulation set forth in the commission's Indiana Farm 
decision as a commonly recognized statement of the elements that are 
necessary to prove manipulation.[Footnote 57] 

According to CFTC staff, when a potential market problem has been 
identified, surveillance staff generally contact the exchange or 
traders to gather additional information. They said that surveillance 
staff may ask exchange employees, brokers, or traders questions to 
confirm positions and determine the intent of traders. They added that 
staff may express concern about the size of positions or possible 
actions by traders and caution traders to act responsibly.[Footnote 58] 
According to the staff, CFTC's Division of Market Oversight may issue a 
warning letter or make a referral to the Division of Enforcement to 
conduct a nonpublic investigation into the trading activity. Markets 
where surveillance problems have not been resolved may be included in 
reports presented to the commission at weekly surveillance meetings. 
These reports provide information on traders with the four largest long 
and short positions; other market information, including delivery 
information; and background on the contact. According to CFTC staff, 
CFTC commissioners review the reports; discuss the situations with 
surveillance staff; and, if appropriate, consider other possible 
remedial actions, such as suggesting that the exchange take emergency 
action. If necessary, the commission itself may take emergency action. 

If these actions do not resolve the issue or if an exchange fails to 
resolve a problem by taking actions that the commission deems 
appropriate, CFTC can order an exchange to take emergency actions. 
These actions include limiting trading, imposing or reducing limits on 
positions, requiring the liquidation of positions, extending a delivery 
period, or suspending trading. The commission has taken such emergency 
actions four times in its history, but never for energy markets. 

In addition to CFTC's surveillance of NYMEX and trading on the 
exchange, NYMEX conducts its own surveillance activities and, if 
violations are found, brings its own enforcement actions. NYMEX is 
responsible for enforcing its own standards and CFTC's standards 
embodied in its rules governing the exchange, and its surveillance 
program is designed to monitor for possible manipulation by market 
participants. If NYMEX staff find potential violations, they will 
gather information and, if needed, take enforcement actions. For 
example, according to officials at a large refiner, NYMEX staff call 
them nearly every month about a large trade to make sure that their 
physical (or wet) barrels have moved and that their trade is not a 
price-setting mechanism or market ploy. Refiner officials added that 
even though NYMEX staff know they are a big refiner, they will examine 
their trades to see the actual signed contract to make sure it is 
valid. In their view, NYMEX staff are vigilant, as they should be. 
Officials from a hedge fund also said that both NYMEX and CFTC staff 
monitor their positions carefully and, as a speculator, would be 
notified immediately by NYMEX and CFTC if they were over the trading 
limits on any day. When asked about what weaknesses in the structure, 
monitoring, or enforcement mechanisms of derivative markets might allow 
for market manipulation, one market observer responded that he was not 
aware of any such weaknesses. Appendix III contains detailed discussion 
of NYMEX surveillance activities and enforcement actions. 

Actions Taken by CFTC Staff to Inquire about Potential Problems May Not 
Always Be Documented: 

CFTC staff routinely make inquiries about traders with large open 
positions approaching expiration, but formal records of their findings 
are only kept in cases where there is evidence of improper trading. If 
LTRS data reveal that a trader has a large open market position that 
could disrupt markets if it were not closed before expiration, CFTC 
staff would contact the trader to determine why the trader had the 
position and what plans the trader had to close the position before 
expiration or to ensure that the trader was able to take delivery. If 
the traders provided a reasonable explanation for the position and a 
reasonable delivery or liquidation strategy, staff said that no further 
action would be required. CFTC staff said they would document such 
contacts on the basis of their importance in either informal notes, e- 
mails to supervisors, or informal memorandums. No formal record would 
be made of the inquiry, according to one CFTC official, unless there 
was a signal indicating improper trading activity. Without such data, 
CFTC's measures of the effectiveness of its actions to combat fraud and 
manipulation in the markets will not reflect this surveillance 
activity, and CFTC management might miss opportunities to both identify 
trends in activities or markets and better target its limited 
resources. 

CFTC staff added that all surveillance projects and activities that 
require a minimum number of hours of work are tracked by quarterly 
statistical reports, including those futures expirations with large 
trader or deliverable supply problems. They said that expirations are 
routinely monitored by economists and reviewed with their supervisors 
through weekly surveillance reports. Economists are responsible for the 
analytical review of cash and futures market developments, including 
the assessment of supply and demand factors, basis and spread 
relationships, the adequacy of deliverable supply, large trader 
positions and position changes, large trader histories, and the 
potential for group trader activity. CFTC staff said that their 
economists keep their supervisors and the commission informed of 
potential problems as they arise. 

CFTC Coordinates Its Surveillance and Oversight Activities with Others: 

In addition to keeping CFTC commissioners apprised of surveillance 
activities and specific cases that may require action, CFTC coordinates 
its surveillance and oversight activities with other federal agencies, 
states' attorneys general, and foreign regulators. CFTC officials told 
us that through the Division of Enforcement's Office of Cooperative 
Enforcement, which was created in 2002, they conduct outreach efforts 
to other financial regulators at the federal and state levels. 
Specifically, CFTC and FERC coordinate oversight and enforcement 
activities and have a memorandum of understanding that provides for the 
exchange of data. FERC regulates the interstate transmission of natural 
gas, oil, and electricity, and it audits natural gas sellers' 
compliance with the protocols outlined by FERC for reporting sales to 
index publishers like Platts, a company that compiles information on 
oil, natural gas, and electricity and other energy commodities and 
provides industry reports on commodity prices. If futures transactions 
are thought to affect transactions within FERC's jurisdiction, then 
FERC and CFTC may coordinate their oversight and enforcement work by 
sharing data as provided in the memorandum. In pursuing potential 
market abuse cases, such as individuals trying to manipulate energy 
spot prices to benefit their futures market positions, FERC officials 
said that FERC will tend to take the lead when abuses occur in the 
physical markets. FERC officials also said that CFTC will tend to take 
the lead when abuses occur in the futures markets. In July 2007, FERC 
filed two market manipulation cases that, according to a commission 
announcement, was the first time the agency used its enforcement 
authority under the Energy Policy Act of 2005 and its former market 
manipulation rule. According to CFTC officials, CFTC has filed 38 cases 
over the past 6 years that have focused on conduct in both the cash and 
futures markets (see app. IV). CFTC and FERC also may work with DOJ on 
certain cases. 

In addition, CFTC officials said that, on occasion and when warranted 
by the circumstances, CFTC has shared large trader information with 
certain agencies, such as the Department of the Treasury, the Board of 
Governors of the Federal Reserve System, and the Federal Reserve Bank 
of New York, to address issues of common concern to the agencies. For 
example, in the aftermath of the financial difficulties in 1998 of Long 
Term Capital Management, a large hedge fund, CFTC shared information on 
the hedge fund's exchange trading activity with members of the 
President's Working Group. Because coordinating requires judgments 
about what information would need to be and could be shared and about 
how best to share it, we concluded in a 1999 report that the regulators 
are in the best position to determine the most effective ways to 
enhance their coordination.[Footnote 59] CFTC also shares information 
with other members of the President's Corporate Fraud Task Force at 
their quarterly meetings on antifraud cases. 

CFTC Energy-Related Enforcement Actions Generally Involved False 
Reporting and Attempted Manipulation, and Enforcement Actions Often Are 
Coordinated with Other Authorities: 

CFTC's Division of Enforcement is charged with enforcing the 
antimanipulation sections of the CEA, including sections 6(c), 6(d), 
and 9(a)(2). In particular, section 9(a)(2) sets forth the commission's 
antimanipulation and false reporting authority in cash and futures 
markets.[Footnote 60] In determining whether violative conduct has 
occurred, CFTC officials told us that the Division of Enforcement has 
broad investigatory authority to obtain records and testimony, 
including subpoena authority, under a commission order. They added that 
upon conclusion of an investigation, which is routinely nonpublic, the 
division may recommend enforcement action if warranted. 

The enforcement actions CFTC has taken in its energy-related cases 
generally have involved false public reporting as a method of 
attempting to manipulate prices on both the NYMEX futures market and 
the off-exchange markets. CFTC officials said that from October 2000 to 
September 2005, the commission initiated 287 enforcement cases and more 
than 30 of these cases involved energy trading, including actions 
against Enron and others. For example, according to CFTC data, from 
2001 through 2005, CFTC levied fines totaling $305 million in actions 
alleging attempted manipulation of the price of natural gas (see app. 
IV for more detailed information). Most of these cases charged 
attempted manipulation by means of falsely reporting natural gas 
trading information to energy index firms, such as Platts, that 
calculate surveys or indexes of natural gas prices for various physical 
delivery points (hubs) throughout the United States. Generally, these 
cases involved allegations of various defendants knowingly 
disseminating false information in an effort to skew the indexes for 
their financial benefit or for other reasons. Participants in the 
natural gas markets use the indexes for price discovery and assessing 
price risk. Many of the actions were initiated on the basis of 
information that came from sources other than CFTC surveillance 
activities, or those of NYMEX, because they involved activities outside 
of NYMEX. As one major oil company official told us, in his view, CFTC 
and FERC vigorously pursued attempts by traders to manipulate the 
market. 

Most recently, on August 1, 2007, the commission entered an order 
imposing a $1 million penalty against Marathon Petroleum Company, LLC, 
for attempting to manipulate spot cash crude prices by attempting to 
influence the Platts market assessment. On July 25, 2007, the 
commission commenced an action against Amaranth and others for 
attempted manipulation of NYMEX natural gas futures prices. Also on 
July 26, 2007, the commission commenced an enforcement action on Energy 
Transfer Partners, L.P., and others for attempted manipulation of 
physical natural gas prices. 

Regarding energy futures, CFTC coordinates its enforcement activities 
with NYMEX officials and various other federal, state, and foreign 
authorities. CFTC staff stated that they meet periodically with NYMEX 
Compliance Department officials to discuss enforcement activities, as 
appropriate, and have formal quarterly meetings to discuss mutual 
involvement in specific cases, including energy products. In addition 
to coordinating energy enforcement matters with NYMEX, as a regulator 
of derivatives trading, CFTC often will work with the regulator of the 
underlying commodity or affected market, whether the Department of 
Agriculture, FERC, or Treasury. CFTC does not have criminal authority 
but often works with DOJ on those cases involving violations of the CEA 
that DOJ believes warrant criminal prosecution.[Footnote 61] DOJ 
officials stated that their focus has been on natural gas cases, which 
began with cases involving Enron. According to DOJ officials, their 
role complemented the regulatory roles of FERC and CFTC, and they have 
an effective working relationship with CFTC in terms of sharing case 
information. For example, pursuant to a memorandum of understanding 
with CFTC, in May 2006, FERC obtained information about trading in 
natural gas futures contracts that FERC used in support of an 
enforcement action against Amaranth that was initiated in July 
2007.[Footnote 62] On July 25, 2007, CFTC filed an action in the United 
States District Court for the Southern District of New York against 
Amaranth Advisors, L.L.C., Amaranth Advisors (Calgary) ULC, and Brian 
Hunter alleging, among other things, that the defendants intentionally 
and unlawfully attempted to manipulate the price of natural gas futures 
contracts on NYMEX on February 24, 2006, and April 26, 2006. In another 
case, on June 28, 2006, CFTC brought an enforcement action against BP 
Products North America, Inc., alleging, among other things, that BP 
cornered the physical propane market and manipulated the price of 
propane in February 2004.[Footnote 63] Also on June 28, 2006, DOJ 
announced that a former BP trader had pled guilty to conspiracy to 
manipulate and corner the physical propane market. FTC also has 
exercised its authority in the energy arena. Since 1980, FTC's focus in 
energy has been in reviewing mergers and acquisitions for 
anticompetitive behavior and investigating instances of possible 
collusion, price fixing, and other anticompetitive conduct. However, 
FTC staff told us that they generally did not coordinate their work 
with CFTC, but added that they would turn over any evidence of futures 
manipulation to CFTC. CFTC staff said that, as appropriate, CFTC also 
coordinates its antifraud enforcement activities with states' attorneys 
general, who often will assist in a case by acting as a co-plaintiff 
with CFTC. In turn, CFTC may detail an attorney to a state. CFTC staff 
said that they also may work with international authorities, such as 
the United Kingdom's Financial Services Authority, on cases involving 
activities in more than one nation. 

CFTC's Enforcement Program Received a Mixed OMB Rating but Lacks 
Effective Outcome-Based Performance Measures: 

Although CFTC has undertaken enforcement actions and levied fines, 
OMB's most recent 2004 Program Assessment Rating Tool (PART) assessment 
of the CFTC enforcement program was mixed. OMB designed PART to provide 
a consistent approach to assessing federal programs in the executive 
budget formulation process. PART is a standard series of questions 
meant to serve as a diagnostic performance tool, drawing on available 
program performance and evaluation information to form conclusions 
about program benefits and recommend adjustments that may improve 
results. In the assessment, OMB rated the enforcement program as 
"Results Not Demonstrated" and said that the enforcement program lacked 
performance measures that illustrate whether the program meets its 
overall objective. However, CFTC's existing performance measures show 
that it brings substantive cases in a timely manner and "is well 
designed to meet its objectives [of protecting commodity futures and 
options market users and the public from fraud, manipulation, and 
abusive practices related to the sale of certain commodities through 
the enforcement of laws against such practices] and to maximize the use 
of its resources." According to the PART assessment, the enforcement 
program has a clear purpose, addresses the public interest by ensuring 
adherence to the CEA and CFTC's regulations, is not duplicative of 
other government programs, is free of major design flaws, and is 
effectively targeted so that the resources address the program's 
purposes. OMB scored CFTC at 100 percent for the dimensions of both 
program purpose and design and program management, 71 percent for 
planning, and 67 percent for results and accountability. Compared with 
the other 96 programs that OMB identified as similar to CFTC's program, 
the comparable programs have much lower average scores for the 
dimensions of purpose and design (82 percent), program management (84 
percent), and results and accountability (50 percent) and have a 
similar score for planning (73 percent). 

CFTC's score of 71 percent for the planning dimension reflected OMB's 
assessment that CFTC included performance measures in its annual 
reports; used the actual results it achieved during the preceding 
fiscal year as a baseline for all of its performance measures and 
strove to set ambitious targets for its performance; was scrutinized on 
a regular basis by CFTC's Office of the Inspector General; had budget 
requests that were explicitly tied to accomplishment of the annual and 
long-term performance goals, and resource needs that were presented 
completely and transparently in the program's budget; and had taken 
meaningful steps to correct its strategic planning deficiencies. 
However, OMB also concluded that regarding the strategic planning 
dimension, the program had a limited number of long-term performance 
outcome measures that did not fully reflect the program's goals, and 
that the long-term measures and targets did not fully reflect the 
program's purposes. These measures included: 

* the percentage growth in market volume, 

* the increase in the numbers of exchanges and clearinghouses, 

* the percentages of SROs and clearing organizations that complied with 
the requirement to enforce their rules, and: 

* the percentage decreases in both the number of customers who lost 
funds because of alleged wrongdoing and the amount of funds that these 
customers lost. 

CFTC enforcement staff stated that they face challenges in establishing 
measures to determine whether the enforcement program achieves its goal 
of deterring people from engaging in market manipulation or other 
abusive behavior. 

According to OMB, CFTC's score of 67 percent on the program results and 
accountability dimension reflected its assessment that CFTC's 
enforcement program had demonstrated both (1) improved time 
efficiencies and cost-effectiveness in achieving its program goals and 
(2) our several evaluations of CFTC indicating that it was effective 
and achieving results.[Footnote 64] OMB also reported that for fiscal 
year 2004, the enforcement program met all of its outcome measures and 
came close to meeting all of its output measures, with one exception. 
OMB further stated that the outcome-related measures established for 
enforcement do not fully reflect progress on meeting the program's 
overall goals. 

While CFTC satisfied most but not all of OMB's PART criteria, it has 
fallen short in its ability to develop long-term performance outcome 
measures that are reflective of its program's goals and purposes. As 
OMB identified, CFTC has substituted proxy measures for outcome 
measures: that is, using measures such as percentage growth in market 
volume and increase in the number of exchanges and clearinghouses as 
proxies for protecting market integrity, and percentage decreases in 
both the number of customers who lost funds because of alleged 
wrongdoing as proxies for both protecting market integrity and 
consumers. We have found that managers in a regulatory environment 
where programs and activities are not easily measurable, as is the case 
with CFTC enforcement, have reported that it is particularly 
challenging to measure outcome-oriented performance and collect useful 
data.[Footnote 65] However, there are a number of other ways to 
evaluate program effectiveness, such as using expert panel reviews, 
customer service surveys, and process and outcome evaluations. We have 
found with other programs that the form of the evaluations reflect 
differences in program structure and anticipated outcomes, and that the 
evaluations are designed around the programs and what they aim to 
achieve.[Footnote 66] Without utilizing these or other methods to 
evaluate program effectiveness, CFTC is unable to demonstrate whether 
its enforcement program is meeting its overall objectives. 

Conclusions: 

The rise in energy prices can be and has been attributed to a variety 
of factors. From January 2002 through June 2006, the physical and 
derivatives markets both underwent substantial change and evolution. 
The physical energy markets experienced tight supply and increasing 
global demand, ongoing political instability in oil-producing regions, 
and other supply disruptions, which affected the prices of energy 
products. At the same time, increasing numbers of and different types 
of market participants were trading futures in search of higher 
returns, thereby increasing contract volume. Substantial growth in the 
exempt commercial and OTC markets also occurred. Determining the impact 
of any one factor is complicated because price changes in the physical 
and futures markets are closely linked and in the long run are 
influenced by the same market fundamentals. Generally, futures prices 
reflect traders' views of the impact of changes in the physical markets 
and spot prices are affected by these expressed views and vice versa. 
Given this interrelationship, it is not surprising that some market 
observers point to the changes in the energy futures and other 
derivatives markets as a possible explanation for price increases, 
while others, primarily the regulators, look to changes in the physical 
markets to explain the increases. However, given the changes in both 
markets, attributing causality to any one factor--much less a 
particular type of trading activity--is difficult. Regardless of the 
reason for the increases in prices, ongoing monitoring of both markets 
is warranted to ensure that the public interest is being protected as 
well as the integrity of the markets. 

Related to concerns about rising prices, some market observers and 
others have questioned whether CFTC's authority is broad enough to 
protect investors from fraudulent, manipulative, and abusive practices. 
The scope of CFTC's authority varies, depending on the market where the 
commodity is traded. Some markets are available for retail trading and 
receive direct CFTC oversight, while others are limited to professional 
traders (such as OTC energy derivatives markets) and receive less 
oversight. Other markets are largely unregulated. Given the changes in 
these markets in general and the growth in off-exchange trading in 
particular as well as ongoing questions about the relationship between 
exchange-traded and off-exchange markets, a reexamination of the scope 
of CFTC's authority is warranted. The results of CFTC's hearings on its 
existing regulatory structure and the similarities and differences 
between exchange-traded and exempt markets may be instructive for such 
a reexamination. While participants on all sides of this issue have 
perspectives that call for further consideration, these are public 
policy decisions that ultimately will be made by Congress. Unless 
resolved, questions will continue about the scope of CFTC's authority. 

In the interim, we have identified a number of process issues that CFTC 
can address to strengthen its enforcement and surveillance programs. 

* First, CFTC has attempted to provide the public with more meaningful 
information through the COT reports. While this effort has expanded the 
reporting for some agricultural commodities, it has remained virtually 
unchanged for energy commodities that have a high level of public and 
industry interest. Not having complete information on trading in energy 
commodities impairs the ability of traders to make fully informed 
decisions. 

* Second, CFTC's oversight of regulated exchanges involves a range of 
surveillance activities that have resulted in a number of commission- 
related enforcement actions. However, CFTC does not maintain complete 
records of its surveillance activities. Currently, the commission does 
not maintain written records on all surveillance follow-up activities, 
particularly in instances where no potential violation was found. 
Without such records, CFTC staff cannot fully demonstrate the actions 
they are taking to combat fraud and manipulation in the markets. 

* Third, as is the case with most enforcement agencies, CFTC has had 
limited success in identifying meaningful outcome-based performance 
measures. However, agencies can use a variety of methods to evaluate 
program effectiveness, such as expert panel reviews, customer service 
surveys, and process and outcome evaluations. Without meaningful 
measures for program effectiveness, CFTC may be missing opportunities 
to identify significant trends in certain activities or markets and to 
better target its limited resources. 

Matter for Congressional Consideration: 

In light of recent developments in derivatives markets and as part of 
CFTC's reauthorization process, Congress should consider further 
exploring whether the current regulatory structure for energy 
derivatives, in particular for those traded in exempt commercial 
markets, provides adequately for fair trading and accurate pricing of 
energy commodities. 

Recommendations for Executive Action: 

To improve the oversight and available information on energy futures 
trading, we recommend that the Acting CFTC Chairman take the following 
three actions: 

* reexamine the classifications in the COT reports to determine if the 
commercial and noncommercial trading categories should be refined to 
improve the accuracy and relevance of public information provided to 
the energy futures markets; 

* explore ways to routinely maintain written records of inquiries into 
possible improper trading activity and the results of these inquiries 
to more fully determine the usefulness and extent of CFTC's 
surveillance, antifraud, and antimanipulation authorities; and: 

* examine ways to more fully demonstrate the effectiveness of CFTC 
enforcement activities by developing additional outcome-related 
performance measures that more fully reflect progress in meeting the 
program's overall goals. 

Agency Comments: 

We provided a draft of this report to the Commodity Futures Trading 
Commission for comment. In its written comments, CFTC said that the 
commission will reexamine classifications in the COT reports. CFTC also 
said that the commission will explore additional recordkeeping 
procedures for its staff, but that it must balance the time required 
for such additional tasks against the need to undertake market 
surveillance by an already-stretched surveillance staff. CFTC added 
that it has included the development of measures to evaluate the 
effectiveness of its enforcement program in its most recent strategic 
plan. The commission's comments are reprinted in appendix V. CFTC staff 
provided technical comments and corrections that we have incorporated 
in this report where appropriate. 

We will provide copies of this report to interested congressional 
committees. We are also sending a copy of this report to the Acting 
Chairman of the Commodity Futures Trading Commission, the Secretary of 
the Department of Energy, the Chairman of the Federal Energy Regulatory 
Commission, the Chairman of the Federal Trade Commission, the Acting 
U.S. Attorney General, and the Chairman of the Securities and Exchange 
Commission. We will make copies available to others upon request. In 
addition, this report will be available at no charge on the GAO Web 
site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-8678 or [email protected]. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix VI. 

Signed by: 

Orice M. Williams: 

Director, Financial Markets and Community Investment: 

List of Congressional Addressees: 

The Honorable Tom Harkin: 
Chairman: 
The Honorable Saxby Chambliss: 
Ranking Member: 
Committee on Agriculture, Nutrition and Forestry: 
United States Senate: 

The Honorable Jeff Bingaman: 
Chairman: 
The Honorable Pete V. Domenici: 
Ranking Member: 
Committee on Energy and Natural Resources: 
United States Senate: 

The Honorable Carl Levin: 
Chairman: 
The Honorable Norm Coleman: 
Ranking Member: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Collin C. Peterson: 
Chairman: 
The Honorable Bob Goodlatte: 
Ranking Republican Member: 
Committee on Agriculture: 
House of Representatives: 

The Honorable John Dingell: 
Chairman: 
The Honorable Joe Barton: 
Ranking Member: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Henry A. Waxman: 
Chairman: 
The Honorable Tom Davis: 
Ranking Member: 
Committee on Oversight and Government Reform: 
House of Representatives: 

The Honorable Bob Etheridge: 
Chairman: 
The Honorable Jerry Moran: 
Ranking Member: 
Subcommittee on General Farm Commodities and Risk Management: 
Committee on Agriculture: 
House of Representatives: 

The Honorable Maria Cantwell: 
United States Senate: 

The Honorable Norm Coleman: 
United States Senate: 

The Honorable Daniel Inouye: 
United States Senate: 

The Honorable Robert Menendez: 
United States Senate: 

The Honorable Ben Nelson: 
United States Senate: 

The Honorable Olympia Snowe: 
United States Senate: 

The Honorable Robert Andrews: 
House of Representatives: 

The Honorable Tammy Baldwin: 
House of Representatives: 

The Honorable Jim Cooper: 
House of Representatives: 

The Honorable Peter DeFazio: 
House of Representatives: 

The Honorable John J. Duncan, Jr.: 
House of Representatives: 

The Honorable Scott Garrett: 
House of Representatives: 

The Honorable Doc Hastings: 
House of Representatives: 

The Honorable Mike Honda: 
House of Representatives: 

The Honorable Darlene Hooley: 
House of Representatives: 

The Honorable Dale Kildee: 
House of Representatives: 

The Honorable John Larson: 
House of Representatives: 

The Honorable Bill Pascrell, Jr..
House of Representatives: 

The Honorable Cathy McMorris Rodgers: 
House of Representatives: 

The Honorable Mike Rogers (MI): 
House of Representatives: 

The Honorable Steven Rothman: 
House of Representatives: 

The Honorable Lucille Roybal-Allard: 
House of Representatives: 

The Honorable Mike Simpson: 
House of Representatives: 

The Honorable Adam Smith: 
House of Representatives: 

The Honorable Greg Walden: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

To examine trends and patterns of trading activity in the energy 
derivatives markets and physical markets, we analyzed data on futures, 
spot, and over-the-counter (OTC) derivative markets. We gathered 
information on spot prices for crude oil, unleaded gasoline, heating 
oil, and natural gas from the U.S. Department of Energy's Energy 
Information Administration (EIA). We obtained daily futures settlement 
prices and average daily volume data for the four commodities from the 
New York Mercantile Exchange, Inc. (NYMEX). We collected data on the 
size of the global OTC commodity derivatives market--including energy, 
but excluding precious metals--from the Bank for International 
Settlements. We also obtained information on the numbers of 
participants and outstanding positions in energy futures markets by 
different categories of traders from the Commodity Futures Trading 
Commission (CFTC). These CFTC data cover the period from July 2003 
through December 2006. We determined that data from these sources were 
sufficiently reliable for the purposes of this report. 

We used monthly averages of the EIA spot prices and NYMEX futures 
prices to depict price trends over the past 20 years and illustrate the 
strong relationship between spot and futures prices. Also, we adjusted 
the prices to remove the effects of inflation so that prices would be 
comparable across years. We also adjusted the prices using monthly 
deflation factors that we derived from the seasonally adjusted implicit 
price deflator for gross domestic product from the Bureau of Economic 
Analysis, as of February 28, 2007. 

We used the futures price data obtained from NYMEX to calculate the 
volatility of energy futures prices. These data covered the period from 
January 1987 through December 2006 for crude oil, unleaded gasoline, 
and heating oil. The period for natural gas was from April 1990 through 
December 2006, when that contract began trading on NYMEX. We calculated 
the historical volatility of the futures prices as the standard 
deviation of the natural logarithm of relative changes in daily 
settlement prices. Monthly volatility figures were calculated from the 
trading days of each month and expressed on an annual basis. We 
annualized the monthly figures by multiplying daily volatility by the 
square root of 250, which represents an approximation of the number of 
trading days in a year. We also calculated annual volatility for each 
of the four commodities as the average of the monthly mean 
volatilities. We used the front month futures contract--that is, the 
nearest traded contract month--because it is the most frequently used 
maturity for measuring price and volatility and is the most heavily 
traded contract. 

To identify the opinions of market participants and analysts about the 
effect of energy derivatives trading on prices, we interviewed 
officials from CFTC, the Federal Energy Regulatory Commission, and EIA; 
managers from trading facilities, including NYMEX and the 
IntercontinentalExchange (ICE); academics knowledgeable about energy 
and finance; and market participants representing investment banks, 
hedge funds, and oil producers and refiners. We selected banks to 
interview on the basis of their perceived level of involvement in 
energy markets. The hedge funds we interviewed were identified through 
the assistance of the Managed Funds Association--a membership 
organization representing the hedge fund industry--which contacted its 
members involved in energy trading to identify hedge funds who were 
willing to be interviewed. We selected oil producers and refiners on 
the basis of their size and role in U.S. energy markets. We also 
gathered information from several trade associations, including those 
representing users of energy commodities, and interviewed former CFTC 
officials. Although we gathered the views of a wide range of market 
participants and observers, these sources do not necessarily represent 
the views of all market participants and observers. We also reviewed 
studies by governmental and nongovernmental observers, including CFTC; 
NYMEX; the Senate's Permanent Subcommittee on Investigations, Committee 
on Homeland Security and Governmental Affairs; and a report prepared 
for the attorneys general of four midwestern states. In addition, we 
reviewed public statements from relevant government officials, such as 
the current Federal Reserve chairman and his predecessor. To understand 
the effects of supply and demand conditions in the physical energy 
markets, we examined data and analysis from EIA and prior GAO reports. 

To examine CFTC's resources and authority for protecting market users 
from fraudulent, manipulative, and abusive practices in the trading of 
energy futures contracts, we describe CFTC's current and past 
regulatory authority and approach by reviewing the Commodity Exchange 
Act (CEA), as amended; CFTC's President's Budget and Performance Plan 
for fiscal year 2007; CFTC's 2004 Annual Report; and other information 
from CFTC. We obtained information on CFTC's regulatory role and the 
exempt commercial and OTC markets from officials at CFTC, EIA, and 
NYMEX and from market participants. In addition, we reviewed 
information on CFTC's regulatory role contained in the Federal Register 
and congressional hearing testimony. To describe the concerns regarding 
OTC derivative trading and the scope of CFTC's regulatory authority, we 
obtained information from federal agency officials and an industry 
trade association. To describe the hedging and speculative trading of 
market participants, we reviewed various reports that addressed those 
concerns, and we interviewed several market participants. 

To examine how CFTC monitors and detects market abuses in the trading 
of energy futures, and enforcement actions taken in response to 
identified abuses, we gathered information from officials at CFTC 
headquarters and the New York Regional Office. We reviewed CFTC 
regulations and other documents on its surveillance and enforcement 
programs and observed a CFTC monthly surveillance meeting. We gathered 
information from market participants and experts regarding CFTC's 
oversight activities. To examine CFTC's enforcement program and how 
CFTC coordinates with other regulators and authorities, we gathered and 
analyzed data on CFTC's enforcement cases, interviewed CFTC and other 
federal agency officials and staff on coordination activities and 
agreements, and reviewed CFTC Office of the Inspector General reports. 
We also reviewed the Office of Management and Budget's PART assessment 
of CFTC's enforcement program. 

[End of section] 

Appendix II: Types of Contracts and Transactions for Energy Commodities 
in the Physical and Financial Markets: 

Table 2: 

Markets: Physical; 
Type of contract or transaction: Spot; 
Features: Bilateral over-the-counter (OTC) transactions for immediate 
delivery or near-term delivery and payment representing a specific 
price and location. Industry analysts publish price data gathered from 
market participants. 

Markets: Physical; 
Type of contract or transaction: Forward; 
Features: Bilateral OTC transactions in which the seller agrees to 
deliver to the buyer a specified quantity and quality of an asset or a 
commodity at a specified date at an agreed-upon price or pricing 
formula and where delivery is contemplated. 

Markets: Financial; 
Type of contract or transaction: Derivatives traded on U.S. regulated 
exchanges; 
Features: Futures contracts are standardized contracts for a specific 
product at a specific location, where delivery is not usually made and 
contracts are offset prior to expiration. Transactions are executed on 
an exchange regulated by the Commodity Futures Trading Commission 
(CFTC), such as the New York Mercantile Exchange. The exchange publicly 
disseminates price and other data; Options on futures contracts are 
contracts that give a buyer the right, but not the obligation, to buy 
or sell a specific quantity of futures contracts within a designated 
period at a designated price. 

Markets: Financial; 
Type of contract or transaction: Derivatives traded on foreign boards 
of trade subject to foreign regulation; 
Features: As in the United States, standardized contracts for a 
specific product at a specific location, where delivery is not usually 
made and contracts are usually offset prior to expiration. Sales are 
executed on an exchange, such as the IntercontinentalExchange (ICE) 
Futures in London that is subject to regulation by the U.K. Financial 
Services Authority; 
Foreign boards of trade are able to provide direct access to U.S. 
market participants by obtaining "no-action" relief from CFTC staff. 

Markets: Financial; 
Type of contract or transaction: Derivatives traded on exempt 
commercial markets; 
Features: Standardized contracts for a specific product at a specific 
location, where delivery is not usually contemplated because contracts 
are usually offset prior to expiration or are cash settled and are 
based on prices from a regulated futures exchange or another source. 
Transactions are executed on an electronic trading platform, such as 
ICE, involving "eligible commercial entities." Exempt commercial 
markets may offer a clearing service for certain derivatives contracts; 
Exempt commercial markets may offer trading both in contracts that are 
subject to the Commodity Exchange Act and contracts that are not. 

Markets: Financial; 
Type of contract or transaction: Bilateral OTC derivatives; 
Features: Derivatives contracts that are privately negotiated, 
bilateral contracts between eligible counter parties, often involving a 
swap dealer. The contracts are financially settled and are based on 
prices from a regulated futures exchange or another source; 
OTC swaps are a promise between two parties to make a series of 
payments to each other, of which at least one series is based on a 
commodity price; 
OTC options: OTC markets also offer options to buy or sell other 
assets. 

Sources: CFTC and GAO. 

Note: Forward contracts have characteristics that make them similar to 
futures derivative contracts traded in a financial market. Both 
contracts represent agreements in which one party agrees to purchase a 
specified amount of an economic good at a specified price from another 
party at a future date or during some future period. For the purposes 
of this table, we chose to place forward contracts in the physical 
market category, rather than the financial market category, because 
parties entering into forward contracts are more likely to have the 
intention of exchanging the commodity than are parties entering into 
futures contracts. Parties entering into derivatives contracts rarely 
carry out an exchange of the physical commodity, as their purpose in 
entering the transaction is to assume or offset price risk. 

[End of table] 

[End of section] 

Appendix III: New York Mercantile Exchange Surveillance and Enforcement 
Activities: 

NYMEX Conducts Surveillance of Both Market and Trading Activities: 

Under CFTC regulations, NYMEX is responsible for establishing and 
enforcing rules governing its member conduct and trading, preventing 
market manipulation, ensuring that futures industry professionals meet 
qualifications, and examining members for financial strength. In 
carrying out these responsibilities, NYMEX officials told us that 
NYMEX's surveillance program is designed to monitor market and trade 
practices. They said that NYMEX relies on automated detailed 
information for each transaction to identify the buyer, seller, and 
clearing members who maintain customer accounts, and to identify 
whether a person is a member of NYMEX. The market surveillance 
activities focus on monitoring for possible manipulation by market 
participants. Specifically, NYMEX officials monitor large trader data, 
the "street book" speculative position limits and accountability 
levels, exemptions to speculative position limits, position 
concentrations, and the relationship between cash and futures 
prices.[Footnote 67] A speculative position limit is the maximum net 
position that a market participant may hold in a specified contract 
month of a listed NYMEX contract, and is set by NYMEX. Market 
participants that are bona fide hedgers are eligible to apply for, and 
receive under certain conditions, limited exemptions from speculative 
position limits. 

NYMEX officials said that they monitor speculative position limits, and 
if a limit is about to be reached or has been hit, they record the 
overage and contact the customer to find out if there is a logical 
explanation for the overage that is linked to a bona fide commercial 
exposure. They added that if there is a logical explanation, the 
customer may be allowed to keep the position and file for a formal 
exemption; however, if there is no logical explanation, then NYMEX 
officials will direct the position to be reduced. The officials said 
they follow such directives with a warning letter to the customer. If 
the position is not reduced, the officials said that another warning 
letter is then to be issued. As a final step, NYMEX could hold a 
hearing before its business conduct committee to deny the customer 
access to the exchange. However, this has never happened, according to 
NYMEX officials. They also said that customers may obtain exemptions to 
speculative position limits on a case-by-case basis and for a period of 
12 months. The officials said that exemptions are not given if they 
could disrupt the markets, and that the exemptions are monitored for 
possible changing circumstances, such as reorganizations or Moody's 
downgrading a party's equity rating. 

NYMEX also monitors trading by customers using multiple brokers. For 
example, NYMEX officials stated that large oil companies may use 
several brokers to trade--that is, each broker may trade using its own 
account to hide what it is doing from other companies. However, NYMEX 
officials said that all of the company's accounts are aggregated, and 
that its staff will analyze the trading and large trader data and 
contact the customer if there are any surveillance issues. In addition, 
NYMEX has established the maximum daily trading limits for each 
commodity contract. These limits are the maximum price advance or 
decline from the prior day's settlement price and, if exceeded, trading 
stops for a period. NYMEX officials said that the exchange has changed 
these limits over the years, and the officials could not recall the 
last time a trading limit was reached. Furthermore, the limits were 
completely eliminated for NYMEX's New York Commodity Exchange (COMEX) 
division, which trades precious metals. According to NYMEX officials, 
suspending trading would give traders time to count and balance their 
positions before resuming trading. Unfortunately, the officials 
continued, if trading on NYMEX is suspended, the price discovery 
mechanism on which the OTC and cash markets depend is also suspended. 
They added that CFTC does not provide any requirements for price limits 
and, in fact, favors ongoing price discovery. 

In addition to market surveillance, NYMEX conducts trade practice 
surveillance. According to NYMEX officials, this surveillance focuses 
on persons who handle contract orders either on the trading floor or 
electronically, as well as on persons and firms engaging in proprietary 
trading for their own accounts. NYMEX seeks to identify trading 
practice abuses, such as prearranged trading, front running, providing 
tips on proprietary information, and accommodating trades. Prearranged 
trading is the noncompetitive trading between brokers in accordance 
with an expressed or implied agreement or understanding and is a 
violation of CEA and CFTC regulations. Front running is taking a 
futures or option position based on, for example, a customer order in 
the same or related future or option. This practice is also known as 
trading ahead. Accommodation trading is noncompetitive trading entered 
into by a trader, usually to assist another with illegal trades. NYMEX 
officials stated that trade practice surveillance information may be 
used as part of market surveillance, but this surveillance is not as 
focused on price movements and involves different types of monitoring, 
such as physically observing floor trading by people entering orders, 
and, in effect, is similar to "police on the beat." The officials added 
that with their recent use of the Chicago Mercantile Exchange's Globex 
electronic trading system to trade energy futures, their trade practice 
surveillance system is changing, with more emphasis on monitoring 
access to, and activity on, the Globex system in NYMEX contracts. 

NYMEX Uses Information from Surveillance Activities and Other Sources 
for Enforcement Cases: 

As a self-regulatory organization (SRO), NYMEX has the authority to 
pursue instances of suspected manipulation or other attempts of 
fraudulent or abusive trading. NYMEX officials stated that the exchange 
conducts its own enforcement activities, and CFTC expects NYMEX as an 
SRO to handle issues relating to exchange members. However, NYMEX will 
request CFTC's assistance if needed, especially for issues relating to 
nonexchange members. If NYMEX officials become aware of potentially 
abusive practices outside of their authority, they will notify the 
appropriate federal regulator, such as CFTC. Information from NYMEX 
surveillance activities and other sources is used to investigate 
potential abuses. Other sources of information include referrals from 
CFTC, traders, and customers. NYMEX officials investigate these 
referrals; if there is evidence of wrongdoing, they may open an 
investigation case. For each case that is pursued, they record 
information, including the source of the referral and investigation 
activities. Interviews conducted during an investigation may be taped 
and transcribed. From January 2000 through May 2006, NYMEX opened 706 
investigations. However, if a referral did not result in a case that 
was pursued, NYMEX does not document how each referral was handled. For 
example, if a referral regarding a trade resulted in a NYMEX official 
making a telephone call and finding that there was no apparent 
violation, NYMEX officials said staff would not create a written record 
to log how the referral was handled or the result of the inquiry. 

NYMEX officials told us that when NYMEX pursues a case, such as 
prearranged trading, the case is brought before the exchange's business 
conduct committee (BCC).[Footnote 68] According to NYMEX, the BCC 
(which includes three public members and other committee members), is 
structured in a manner analogous to a grand jury proceeding and 
determines, on the basis of the evidence in an investigative report and 
any written response from the person accused in the case, whether there 
is a reasonable basis to believe an exchange rule violation occurred. 
NYMEX officials told us that a BCC meeting is scheduled for every other 
month; however, in some months, there are no cases to discuss and no 
meetings are held. They added that the BCC hears about two or three 
dozen cases annually. Once a case is heard, the BCC may then direct the 
compliance department to issue a complaint, or, in the case of minor 
violations, a written warning. The person named in the complaint has 10 
days to respond, and he or she may make a settlement offer at any time 
prior to the conclusion of a hearing. Settlement offers must be 
approved by NYMEX's board of directors. From January 2000 through May 
2006, NYMEX opened more than 700 investigations, most involving trading 
violations, and, of those, 125 were BCC-issued complaints (see table 
2).[Footnote 69] 

Table 3: Number of NYMEX Enforcement Cases Opened, Complaints Issued, 
Settlement, and Hearings, January 2000-May 2006: 

Year: 2000; 
Number of investigations opened[A]: 101; 
Number of complaints issued[B]: 19; 
Number of respondents[C]: 21; 
Number settled at BCC[D]: 4; 
Number settled at Adjudication[E]: 13; 
Number contested at hearings and adjudication[F]: 2; 
Hearing results[G]: Dismissed. Charges affirmed on appeal; 
fine and suspension reduced.[B]. 

Year: 2001; 
Number of investigations opened[A]: 88; 
Number of complaints issued[B]: 21; 
Number of respondents[C]: 28; 
Number settled at BCC[D]: 3; 
Number settled at Adjudication[E]: 22; 
Number contested at hearings and adjudication[F]: 0; 
Hearing results[G]: [Empty]. 

Year: 2002; 
Number of investigations opened[A]: 115; 
Number of complaints issued[B]: 21; 
Number of respondents[C]: 27; 
Number settled at BCC[D]: 9; 
Number settled at Adjudication[E]: 16; 
Number contested at hearings and adjudication[F]: 0; 
Hearing results[G]: [Empty]. 

Year: 2003; 
Number of investigations opened[A]: 123; 
Number of complaints issued[B]: 16; 
Number of respondents[C]: 22; 
Number settled at BCC[D]: 9; 
Number settled at Adjudication[E]: 14; 
Number contested at hearings and adjudication[F]: 1; 
Hearing results[G]: Rule violations found; 
fine. 

Year: 2004; 
Number of investigations opened[A]: 111; 
Number of complaints issued[B]: 18; 
Number of respondents[C]: 28; 
Number settled at BCC[D]: 11; 
Number settled at Adjudication[E]: 11; 
Number contested at hearings and adjudication[F]: 0; 
Hearing results[G]: [Empty]. 

Year: 2005; 
Number of investigations opened[A]: 97; 
Number of complaints issued[B]: 24; 
Number of respondents[C]: 37; 
Number settled at BCC[D]: 3; 
Number settled at Adjudication[E]: 23; 
Number contested at hearings and adjudication[F]: 1; 
Hearing results[G]: Decision pending. 

Year: 2006; 
Number of investigations opened[A]: 71; 
Number of complaints issued[B]: 6; 
Number of respondents[C]: 9; 
Number settled at BCC[D]: 2; 
Number settled at Adjudication[E]: 4; 
Number contested at hearings and adjudication[F]: 0; 
Hearing results[G]: [Empty]. 

Source: GAO analysis of NYMEX data. 

Note: The number of complaints and respondents do not correspond to the 
settled and hearing numbers on a one-for-one basis. 

[A] Number of investigations opened is based on investigations opened 
within the calendar years 2000, 2001, 2002, 2003, 2004, 2005 and 
through May 2006 (and taken from an annual review of the Compliance 
Department conducted by NYMEX's legal staff for a report to the Board). 
Not all inquiries become formal investigations. For instance, in 2005, 
the market surveillance area reported 887 "cases" on their rule 
violation and e-inquiry log. The vast majority of these were routine 
position limit reviews, exchange for physical and exchange of futures 
for swaps inquiries, and unreported reviews that never became formal 
investigations. The trade practice area logs "inquires," which may or 
may not evolve into formal investigations. 

[B] Number of complaints issued represents the number of complaints 
issued by the BCC during the year specified, but only for 
investigations opened in one of the target years (2000 through May 
2006). 

[C] Number of respondents represents the number of individuals charged 
in the various BCC cases. 

[D] Number settled at BCC represents the number of individuals who 
settled cases from a target year before the BCC. 

[E] Number settled at adjudication represents the number of individuals 
who settled cases from a target year before the adjudication committee, 
which has authority similar to a judge and jury. 

[F] Number contested at hearings and adjudication indicates any cases 
that were contested (rather than settled) and proceeded to a hearing or 
adjudication. 

[G] Hearing results also encompass the results of adjudications. 

[End of table] 

Settlement of NYMEX complaints may result in settlement offers, fines, 
or disciplinary actions. Settlement offers exceeding $25,000, or cases 
contested by the respondent, are referred to NYMEX's adjudication 
committee for settlement consideration or for a full disciplinary 
hearing. The adjudication committee is authorized to conduct hearings 
where the facts of the case are presented and argued by the respondent 
or their attorney and exchange compliance counsel. At the conclusion of 
the hearing, the committee issues a decision regarding any sanctions. 
Sanctions can include a cease-and-desist order, a fine of up to 
$250,000 for each rule violation, suspension, or expulsion from 
membership. For example, NYMEX settled a $100,000 case on Morgan 
Stanley in 2002, a $2.5 million case on BP Product North America, Inc., 
in 2003, and a $300,000 case on Shell in 2005. NYMEX officials stated 
that no one has been expelled from the exchange since 1998 for failure 
to pay a fine. According to the officials, the adjudication committee 
is scheduled to meet at least once a month. They added that about 40 
percent of the cases are resolved at adjudication and cases rarely go 
to a full hearing. If a hearing does occur, the decisions can be 
appealed to NYMEX's appeals committee, which makes a final 
determination within the exchange. Cases then can be appealed further 
to CFTC, but cases involving an appeal of an exchange appeals committee 
decision rarely are contested or proceed to a hearing. NYMEX officials 
said that the commission rarely, if ever, overturns a NYMEX ruling. 
NYMEX publishes its final disciplinary actions of the exchange. All 
settlements or adjudications are published in its monthly publication 
The Open Interest (formerly, Barrels, Bars and BTUs) and sent to the 
National Futures Association, where they are included in the publicly 
accessible disciplinary log called "BASIC," which contains reports from 
all U.S. futures exchanges and from CFTC. Warning letters are not 
reported, but they are used internally in prosecuting disciplinary 
cases. NYMEX also reports its enforcement actions to CFTC. 

To maintain its designation as a contract market, NYMEX must 
demonstrate to CFTC its capacity to comply with the CEA's core 
principles. In addition, CFTC conducts rule enforcement reviews and 
publicly reports on how NYMEX exercises its enforcement authority and 
other areas of operations. In 2004, CFTC reported that NYMEX's 
disciplinary program provided reasonable sanctions for a majority of 
the cases where the exchange took disciplinary action, and that its 
dispute resolution program had fair and equitable procedures. The 
report was generally positive and reported that NYMEX's procedures 
provided for the recording and safe storage of trade information. 
Furthermore, NYMEX's surveillance of trade practices was deemed to be 
adequate, with thorough and well-documented investigations. NYMEX 
officials told us that a CFTC rule enforcement review was recently 
initiated at the exchange. 

[End of section] 

Appendix IV: Commodity Futures Trading Commission's Energy-Related 
Enforcement Actions, August 2001 - September 2006: 

Table 3 reflects information obtained from CFTC showing the energy- 
related enforcement actions it took by CFTC from August 2001 through 
September 2006. The enforcement cases were against individuals and 
companies, and the information used to initiate the investigation 
originated from both within CFTC and from outside of the commission. 
The actions mostly focused on attempts to manipulate energy commodity 
prices through alleged attempts of false reporting; some also involved 
alleged wash sales or trades--transactions intended to give the 
appearance that purchases and sales have been made, without incurring 
market risk or changing the trader's market position, prearranged 
trading, and recordkeeping violations. CFTC's information also shows a 
wide range of civil monetary penalties. 

Table 4: Energy-Related Enforcement Actions Filed by CFTC, August 2001- 
September 2006: 

Date case filed: 09/2006; 
CFTC enforcement case: Dominion Resources, Inc; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: False reporting; 
Civil monetary penalties: $4.3 million. 

Date case filed: 06/2006; 
CFTC enforcement case: BP Products North America, Inc; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Manipulation, cornering the market, and attempted 
manipulation; 
Civil monetary penalties: In litigation. 

Date case filed: 01/2006; 
CFTC enforcement case: Shell Trading US Company and Shell International 
Trading and Shipping Co., Nigel Catterall; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Prearranged trading; 
Civil monetary penalties: $300,000. 

Date case filed: 09/2005; 
CFTC enforcement case: Joseph Foley; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $350,000. 

Date case filed: 05/2005; 
CFTC enforcement case: Brion Scott McKenna; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Manipulation; 
Civil monetary penalties: Registration revoked. 

Date case filed: 04/2005; 
CFTC enforcement case: Andrew Richmond; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $60,000. 

Date case filed: 02/2005; 
CFTC enforcement case: Christopher McDonald, Michael Whalen, and Paul 
Atha; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/ External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $350,000 $200,000 In litigation. 

Date case filed: 02/2005; 
CFTC enforcement case: Matthew Reed, Darrell Danyluk, Shawn Mclaughlin, 
and Concord Energy; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/ individual): CFTC; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: In litigation $350,000 $450,000 $800,000. 

Date case filed: 02/2005; 
CFTC enforcement case: Jeffrey A. Bradley, Robert Martin; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: In litigation In litigation. 

Date case filed: 02/2005; 
CFTC enforcement case: Denette Johnson, Courtney Cubbison Moore, John 
Tracy, Robert Harp, Anthony Dizona, and Kelly Dyer; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: All in litigation. 

Date case filed: 02/2005; 
CFTC enforcement case: Michael Whitney; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: In litigation. 

Date case filed: 12/2004; 
CFTC enforcement case: Mirant Americas Energy Marketing, L.P; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $12.5 million. 

Date case filed: 11/2004; 
CFTC enforcement case: Cinergy Marketing and Trading, L.P; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: False reporting; 
Civil monetary penalties: $3 million. 

Date case filed: 11/2004; 
CFTC enforcement case: BP Energy Company; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Wash trades; 
Civil monetary penalties: $100,000. 

Date case filed: 08/2004; 
CFTC enforcement case: Byron Biggs; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Wash trades; 
Civil monetary penalties: $30,000. 

Date case filed: 07/2004; 
CFTC enforcement case: United Energy and Dana Christopher Bray; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Recordkeeping violations; 
Civil monetary penalties: $33,000. 

Date case filed: 07/2004; 
CFTC enforcement case: NRG Energy, Inc; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: False reporting; 
Civil monetary penalties: $2 million. 

Date case filed: 07/2004; 
CFTC enforcement case: Coral Energy Resources, L.P; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $30 million. 

Date case filed: 07/2004; 
CFTC enforcement case: Western Gas Resources; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $7 million. 

Date case filed: 01/2004; 
CFTC enforcement case: Robert Benjamin Harmon, Jr; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Wash trades; 
Civil monetary penalties: $7,500. 

Date case filed: 05/2004; 
CFTC enforcement case: Joseph Knauth; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Wash trades; 
Civil monetary penalties: $25,000. 

Date case filed: 05/2004; 
CFTC enforcement case: Enron Corporation and; 
Hunter S. Shively; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Manipulation or attempted manipulation. Enron only: 
Operating illegal futures exchange and trading an off-exchange 
agricultural futures contract; 
Civil monetary penalties: $35 million $300,000. 

Date case filed: 01/2004; 
CFTC enforcement case: Calpine Corporation; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: False reporting; 
Civil monetary penalties: $1.5 million. 

Date case filed: 01/2004; 
CFTC enforcement case: ONEOK, Inc., ONEOK Energy Marketing and Trading 
Co., L.P; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): Individual; 
Reason for charges: False reporting; 
Civil monetary penalties: $3 million. 

Date case filed: 01/2004; 
CFTC enforcement case: Entergy Koch Trading L.P; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: False reporting; 
Civil monetary penalties: $3 million. 

Date case filed: 01/2004; 
CFTC enforcement case: e prime; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $16 million. 

Date case filed: 01/2004; 
CFTC enforcement case: Aquila Merchant Services; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $26.5 million. 

Date case filed: 11/2003; 
CFTC enforcement case: CMS Marketing Services and Trading; 
CMS Field Services; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $16 million. 

Date case filed: 11/2003; 
CFTC enforcement case: Reliant Energy Services, Inc; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Attempted manipulation and false reporting, and 
wash sales; 
Civil monetary penalties: $18 million. 

Date case filed: 09/2003; 
CFTC enforcement case: William Taylor; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Attempted Manipulation; 
Civil monetary penalties: $155,000. 

Date case filed: 09/2003; 
CFTC enforcement case: Michael Garber, NYMEX floor broker; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Wash sales, reported non-bona fide prices, and 
noncompetitive trading; 
Civil monetary penalties: $7,500. 

Date case filed: 09/2003; 
CFTC enforcement case: American Electric Power Company (AEP) and AEP 
Energy Services (AEPES); 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/ individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $30 million. 

Date case filed: 09/2003; 
CFTC enforcement case: Duke Energy Trading and Marketing, L.L.C; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $28 million. 

Date case filed: 07/2003; 
CFTC enforcement case: Enserco Energy; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $3 million. 

Date case filed: 07/2003; 
CFTC enforcement case: Williams Companies and Williams Energy Marketing 
and Trading; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $20 million. 

Date case filed: 07/2003; 
CFTC enforcement case: W. D. Energy Services, Inc. (Encana); 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $20 million. 

Date case filed: 03/2003; 
CFTC enforcement case: Christopher Chapman; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): External; 
Reason for charges: Fraudulent trading; 
Civil monetary penalties: $240,000. 

Date case filed: 03/2003; 
CFTC enforcement case: El Paso Merchant Energy; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC/External; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $20 million. 

Date case filed: 12/2002; 
CFTC enforcement case: Dynegy Marketing and Trade and West Coast Power; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Attempted manipulation and false reporting; 
Civil monetary penalties: $5 million. 

Date case filed: 08/2001; 
CFTC enforcement case: Robert Kristufek; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Attempted manipulation; 
Civil monetary penalties: $155,000. 

Date case filed: 08/2001; 
CFTC enforcement case: Thomas Johns, Michael Griswold, and Avista 
Energy; 
Initial source of information CFTC used to initiate the investigation 
(CFTC/ external/individual): CFTC; 
Reason for charges: Attempted manipulation; 
Civil monetary penalties: $50,000 $110,000 $2.1 million. 

Source: CFTC. 

Note: According to CFTC, AEPES entered into a deferred prosecution 
agreement with the Department of Justice and the U.S. Attorney's Office 
for the Southern District of Ohio to avoid federal criminal charges. 
The agreement requires AEPES to pay a $30 million criminal penalty to 
resolve an investigation into AEPES' false reporting of natural gas 
trades. In addition, AEP accepted a settlement agreement with the 
Federal Energy Regulatory Commission (FERC) to resolve an investigation 
into the natural gas storage and transportation activities of two 
intrastate pipeline units formerly owned by AEP and AEP-affiliated 
marketers. The FERC settlement requires AEP to pay a $21 million civil 
penalty and adopt a compliance plan to prevent future violations. The 
total settlement with the U.S. government was $81 million. 

[End of table] 

[End of section] 

Appendix V: Comments from the Commodity: 

U.S. Commodity Futures Trading Commission: 
Three Lafayette Centre: 
1155 21st Street, NW: 
Washington, DC 20581: 

Walter L. Lukken: 
Acting Chairman: 

(202) 418-5014: 
(202) 418-5550 Facsimile: 
[email protected]: 

October 5, 2007: 

Orice M. Williams: 
Director: 
Financial Markets and Community Investment: 
U.S. General Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. Williams: 

Thank you for all of the time, attention, and effort that GAO has 
devoted to understanding the nation's energy futures markets and 
reviewing the oversight of those markets by the Commodity Futures 
Trading Commission (CFTC or Commission). We are pleased that the GAO 
recognized the Commission's vigorous oversight of the regulated futures 
markets. This letter responds to specific GAO recommendations for 
improved information, recordkeeping, and evaluations below. 

In this report, GAO suggested one matter for Congressional 
consideration. GAO stated that "[i]n light of recent developments in 
derivatives markets and as part of CFTC's reauthorization process, 
Congress should further explore whether the current regulatory 
structure for energy derivatives, in particular for those traded in 
exempt commercial markets, provides adequately for fair trading and 
accurate pricing of energy commodities." 

The appropriate regulatory structure for energy derivatives has been a 
matter of consideration for the Congress, the courts, and the CFTC at 
various times during the past twenty years as the industry and the role 
it plays in the nation's economy has evolved. This matter is currently 
of great interest to the Commission, which held a public hearing on 
September 18, 2007 to examine the oversight of trading on regulated 
futures exchanges and Exempt Commercial Markets (ECMs). Witnesses 
included members of the energy trading community, financial services 
trade associations, and energy consumer groups. The Commission 
anticipates providing Congress with recommendations in the near future 
to help inform the debate. 

GAO also recommends that the Chairman of the CFTC take three actions to 
improve oversight and available information of energy futures trading. 

1. Re-examine classifications in the COT reports to determine whether 
the commercial and non- commercial trading categories should be refined 
to improve the accuracy and relevance of public information provided in 
the energy futures markets. 

As discussed in the report, the Commission is publishing additional 
information about commodity index traders in certain agricultural 
commodities traded on Designated Contract Markets. As part of that 
decision, the staff examined the possibility of similarly expanding the 
information available about energy and metals trading. The staff found 
that in the case of energy and metals markets, however, there are 
alternative U.S. and non-U.S. exchanges and a multitude of OTC markets 
and derivative products. Many swap dealers, in addition to their 
commodity index-related OTC activity, enter into other OTC derivative 
transactions in individual commodities, both with commercial firms 
hedging price risk and with speculators taking on price risk. In 
addition, some swap dealers are very actively engaged in commercial 
activity in the underlying cash market, such as a physical 
merchandising or dealing activity. As a result of these other 
activities, the overall futures positions held by these energy and 
metals traders in Commission-regulated markets do not necessarily 
correspond closely with their hedging of OTC commodity index 
transactions. It would be difficult, if not impossible, to link these 
residual futures positions with any particular part of the underlying 
activity that makes up the "book" of the swap dealer. At that time, the 
Commission concluded that including the energy and metal markets in 
supplemental COT information would seriously mislead the public as to 
the actual amount of index trading and the amount of commercial trading 
that was present in those markets. 

Nevertheless, the Commission will re-examine classifications in the COT 
reports to determine whether the COT reports should be refined to 
improve accuracy and relevance of public information about energy 
futures markets. 

2. Explore ways to routinely maintain written records of inquiries to 
more fully determine the usefulness and extent of its surveillance, 
anti-fraud, and anti-manipulation authorities. 

As the report makes clear, the written records of surveillance 
inquiries that are further pursued are adequately documented. However,, 
GAO has recommended documenting the decision not to further pursue 
surveillance inquiries ï¿½ something that is not currently done. The 
Commission agrees further documentation of decisions about surveillance 
inquiries could assist the Commission in the management of its staff 
resources and could be beneficial to Congressional oversight. 
Accordingly, the Commission will explore additional record keeping 
procedures for staff, but must balance the time required for such 
additional tasks against the need to undertake market surveillance by 
an already-stretched surveillance staff 

3. Examine ways to more fully demonstrate effectiveness of its 
enforcement activities by developing additional outcome-related 
performance measures that more fully reflect progress on meeting the 
program's overall goals. 

Enforcement agencies generally have great difficulty demonstrating 
their effectiveness. In short, it is easy to measure actions, such as 
cases brought, cases won, and penalties imposed, but it is very 
difficult to measure prevented actions ï¿½ that is, how many violations 
of the law have been deterred. Nevertheless, the Commission, like other 
law enforcement agencies, wishes to improve effectiveness in this area. 
The Commission agrees with the GAO that this matter should be examined 
and has included in the Commission's most recent Strategic Plan the 
development of measures to evaluate the effectiveness of the 
Commission's enforcement efforts. 

To that end, the Commission had requested in the past, and will 
continue to request, funding to study the feasibility of developing 
measures that better reflect program effectiveness including: 

* developing novel ways of measuring results, for instance surveying 
industry experts, investigating methodologies for determining non-
compliance,
* developing measures that quantify increased efficiencies, and
* developing measures and targets for the collection of fines. 

We have been unsuccessful to date securing funding for this project but 
we will continue to seek resources for the expertise needed to 
undertake this project. 

Again, I want to thank you and your staff for their work on this 
project and look forward to working with you on your next study 
involving the CFTC. 

Sincerely, 

Signed by: 

Walter Lukken: 

Acting Chairman: 

[End of section] 

Appendix VI: GAO Contract and Staff Acknowledgments: 

GAO Contact: 

Orice Williams (202) 512-8678 or [email protected]: 

Staff Acknowledgments: 

In addition to the individual named above, Godwin Agbara, Kevin Averyt, 
Ross Campbell, Emily Chalmers, Jordan Corey, Patrick Dynes, Philip 
Farah, John Forrester, Austin Kelly, Marc Molino, Paul Thompson, Rich 
Tsuhara, and John Wanska (retired, Assistant Director) made key 
contributions to this report. 

[End of section] 

Related GAO Products: 

Energy Markets: Factors Contributing to Higher Gasoline Prices. GAO-06- 
412T. Washington, D.C.: February 1, 2006. 

Natural Gas and Electricity Markets: Federal Government Actions to 
Improve Private Price Indices and Stakeholder Reaction. GAO-06-275. 
Washington, D.C.: December 15, 2005. 

SEC and CFTC Penalties: Continued Progress Made in Collection Efforts, 
but Greater SEC Management Attention Is Needed. GAO-05-670. Washington, 
D.C.: August 31, 2005. 

Mutual Fund Industry: SEC's Revised Examination Approach Offers 
Potential Benefits, but Significant Oversight Challenges Remain. GAO- 
05-415. Washington, D.C.: August 17, 2005. 

National Energy Policy: Inventory of Major Federal Energy Programs and 
Status of Policy Recommendations. GAO-05-379. Washington, D.C.: June 
10, 2005. 

Motor Fuels: Understanding the Factors That Influence the Retail Price 
of Gasoline. GAO-05-525SP. Washington, D.C.: May 2005. 

Mutual Fund Trading Abuses: SEC Consistently Applied Procedures in 
Setting Penalties, but Could Strengthen Certain Internal Controls. GAO- 
05-385. Washington, D.C.: May 16, 2005. 

Financial Regulation: Industry Changes Prompt Need to Reconsider U.S. 
Regulatory Structure. GAO-05-61. Washington, D.C.: October 6, 2004. 

Natural Gas: Domestic Nitrogen Fertilizer Production Depends on Natural 
Gas Availability and Prices. GAO-03-1148. Washington, D.C.: September 
30, 2003. 

SEC and CFTC Fines Follow-up: Collection Programs Are Improving, but 
Further Steps Are Warranted. GAO-03-795. Washington, D.C.: July 15, 
2003. 

Natural Gas: Analysis of Changes in Market Price. GAO-03-46. 
Washington, D.C.: December 18, 2002. 

SEC and CFTC: Most Fines Collected, but Improvements Needed in the Use 
of Treasury's Collection Service. GAO-01-900. Washington, D.C.: 

July 16, 2001. 

Energy Markets: Results of Studies Assessing High Electricity Prices in 
California. GAO-01-857. Washington, D.C.: June 29, 2001. 

Commodity Exchange Act: Issues Related to the Regulation of Electronic 
Trading Systems. GAO/GGD-00-99. Washington, D.C.: May 5, 2000. 

CFTC and SEC: Issues Related to the Shad-Johnson Jurisdictional Accord. 
GAO/GGD-00-89. Washington, D.C.: April 6, 2000. 

Financial Regulatory Coordination: The Role and Functioning of the 
President's Working Group. GAO/GGD-00-46. Washington, D.C.: January 21, 
2000. 

The Commodity Exchange Act: Issues Related to the Commodity Futures 
Trading Commission's Reauthorization. GAO/GGD-99-74. Washington, D.C.: 
May 5, 1999. 

CFTC Enforcement: Actions Taken to Strengthen the Division of 
Enforcement. GAO/GGD-98-193. Washington, D.C.: August 28, 1998. 

OTC Derivatives: Additional Oversight Could Reduce Costly Sales 
Practice Disputes. GAO/GGD-98-5. Washington, D.C.: October 2, 1997. 

CFTC/SEC Enforcement Programs: Status and Potential Impact of a Merger. 
GAO/T-GGD-96-36. Washington, D.C.: October 25, 1995. 

Financial Market Regulation: Benefits and Risks of Merging SEC and 
CFTC. GAO/T-GGD-95-153. Washington, D.C.: May 3, 1995. 

Energy Security and Policy: Analysis of the Pricing of Crude Oil and 
Petroleum Products. GAO/RCED-93-17. Washington, D.C.: March 19, 1993. 

Securities and Futures: How the Markets Developed and How They Are 
Regulated. GAO/GGD-86-26. Washington, D.C.: May 15, 1986. 

[End of section] 

Footnotes: 

[1] Our analysis of energy prices and energy financial markets 
generally is limited to the period from January 2002 through December 
2006. A "derivative" is a financial instrument, traded on-or off- 
exchange, the price of which for energy directly depends on the value 
of one or more underlying energy commodities. Derivatives involve the 
trading of rights or obligations on the basis of the underlying 
product, but they do not directly transfer property. 

[2] CFTC's technical definition of a "futures contract" encompasses the 
following characteristics: (1) the contract price is determined at 
initiation of the contract; (2) the contract obligates each party to 
the contract to fulfill the contract at the specified price; (3) the 
contract is used to assume or shift price risk; and (4) the delivery 
obligation may be satisfied by delivery or offset (i.e., liquidating a 
purchase of futures contracts through the sale of an equal number of 
contracts of the same delivery month, or liquidating a short sale of 
futures through the purchase of an equal number of contracts of the 
same delivery month). A futures contract is a type of derivative. 

[3] CFTC defines "hedge fund" as a private investment fund or pool that 
trades and invests in various assets, such as securities, commodities, 
currency, and derivatives, on behalf of its clients, typically wealthy 
individuals. In a "commodity index fund," prices are tied to the price 
of a basket of various commodity futures. 

[4] See section 3 of the Commodity Exchange Act, 7 U.S.C. ï¿½ 5 (2004). 

[5] The LTRS includes the daily reports filed with CFTC showing the 
futures and options positions of traders that hold positions at or 
above specific exchange or CFTC-set reporting levels. Commodity traders 
or brokers that carry these accounts must make daily reports about the 
size of the position by commodity, by delivery month, and by whether 
the position is controlled by a commercial or noncommercial trader. 
Commercial participants generally are those that are engaged in 
business activities--including producing, merchandising, or processing 
a cash commodity or managing risk--that hedge using the futures or 
options markets. Noncommercial participants do not have an interest in 
the underlying commodity but trade in the energy futures markets to 
realize a profit. 

[6] The CEA defines "exempt commodity" as a commodity that is "not an 
excluded commodity or an agricultural commodity." 7 U.S.C. ï¿½ 1a(14). In 
practice, this definition primarily encompasses energy and metal 
commodities. 

[7] In October 2005, NYMEX began to offer a new futures contract for 
reformulated gasoline blendstock known as "RB." This new contract 
traded alongside the existing gasoline contract known as "HU" until 
January 2007, when NYMEX discontinued trading in that contract. 

[8] CFTC economists used the term "managed money traders" to describe a 
large category of speculative traders. See Michael S. Haigh, Jana 
Hranaiova, and James A. Overdahl, "Price Dynamics, Price Discovery and 
Large Futures Trader Interactions in the Energy Complex," U.S. 
Commodity Futures Trading Commission, Office of the Chief Economist, 
April 28, 2005, draft working paper available on CFTC's Web site. As 
stated in the paper, the views expressed therein are those of the 
authors and do not reflect the views of CFTC or its staff. 

[9] CPOs are individuals or firms in businesses similar to investment 
trusts or syndicates that solicit or accept funds, securities, or 
property for the purpose of trading futures or commodity options. CTAs 
are individuals or firms that, for pay, issue analyses or reports 
concerning commodities, including the advisability of trading futures 
or commodity options. For the purposes of the working paper, the 
authors used the term "managed money traders" to include all registered 
CPOs and CTAs. 

[10] To account for the effects of inflation on prices, prices are 
adjusted to reflect prices in the base year of 2006. 

[11] This scenario assumes that minimal costs are associated with 
holding the oil over the 2-week period. 

[12] Futures Trading Practices Act of 1992 (Pub. L. No. 102-546 (Oct. 
28, 1992)). Among other things, this act added a new provision to the 
CEA authorizing the commission, by rule, regulation, or order, to 
exempt any agreement, contract, or transaction, or class thereof, when 
entered into between "appropriate persons" from the exchange-trading, 
or any other, requirement of the act (other than the provision 
establishing CFTC's jurisdiction). Pub. L. No. 102-546 ï¿½ 502. In April 
1993, CFTC promulgated a final order generally exempting from the CEA 
qualifying energy contracts entered by commercial participants and 
certain other specified entities. 58 Fed. Reg. 21286 (Apr. 20, 1993). 

[13] Pub. L. No. 106-554 ï¿½ 1(a)(5), title 1 ï¿½ï¿½ 103-106 (Dec. 21, 2000). 

[14] Another type of futures exchange that is subject to CFTC 
regulatory oversight is a derivatives transaction execution facility, 
which is a trading facility that limits access to mostly institutional 
traders rather than retail traders. Like a futures market, a 
derivatives transaction execution facility must register with CFTC but 
is subject to less regulation. To date, no exchange has applied to 
register as such a facility. 

[15] President's Working Group on Financial Markets, Over-the-Counter 
Derivatives Markets and the Commodity Exchange Act (Nov. 9, 1999). 
Members of the President's Working Group on Financial Markets include 
the Chairman of CFTC, the Secretary of the Treasury, the Chairman of 
the Board of Governors of the Federal Reserve, and the Chairman of SEC. 

[16] GAO, Financial Regulation: Industry Changes Prompt Need to 
Reconsider U.S. Regulatory Structure, GAO-05-61 (Washington, D.C.: Oct. 
6, 2004). 

[17] CFTC's other major operating units are the Office of the Chief 
Economist, Office of the General Counsel, and Office of the Executive 
Director. A derivatives clearing organization is a clearinghouse or 
similar organization that enables each party to a transaction to 
substitute the credit of the clearinghouse for the credit of the 
parties, provides for the settlement or netting of obligations from the 
transaction, or otherwise provides services mutualizing or transferring 
the credit risk from the transaction. 

[18] Futures commission merchants are individuals, associations, 
partnerships, corporations, and trusts that solicit or accept orders 
for the purchase or sale of any commodity for future delivery on or 
subject to the rules of any exchange and that accept payment from or 
extend credit to those whose orders are accepted. 

[19] As of January 1, 2007, CFTC closed its Minneapolis field office. 

[20] Because energy commodities are related, specific types of events 
or conditions may affect all four energy commodities in a similar 
fashion. For example, the supply and demand fundamentals for crude oil 
have a direct effect on the supply, demand, and price of gasoline and 
heating oil because they are refined from crude oil. Crude oil market 
fundamentals also may affect natural gas because some consumers can use 
it as a substitute for crude oil products. If the price of crude oil 
rises, demand for natural gas as a substitute may rise, thereby 
increasing its price. However, natural gas prices are not always 
closely related to crude oil prices. 

[21] The OPEC members are Algeria, Angola, Indonesia, Iran, Iraq, 
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, 
and Venezuela. [hyperlink, 
Http://www.eia.doe.gov/emeu/cabs/AOMC/Overview.html]. 

[22] GAO, Motor Fuels: Understanding the Factors That Influence the 
Retail Price of Gasoline, GAO-05-525SP (Washington, D.C.: May 2005). 

[23] GAO, Energy Markets: Factors Contributing to Higher Gasoline 
Prices, GAO-06-412T (Washington, D.C.: Feb. 1, 2006); and GAO-05-525SP. 

[24] GAO-06-412T. 

[25] GAO, Gasoline Markets: Special Gasoline Blends Reduce Emissions 
and Improve Air Quality, but Complicate Supply and Contribute to Higher 
Prices, GAO-05-421 (Washington, D.C.: June 17, 2005). 

[26] GAO-05-525SP. 

[27] Mark N. Cooper, The Role of Supply, Demand and Financial Commodity 
Markets in the Natural Gas Price Spiral, prepared for Midwest Attorneys 
General Natural Gas Working Group (Illinois, Iowa, Missouri, and 
Wisconsin: March 2006). 

[28] The CFTC report did not look at the effects of recent trends in 
volume or the number of large traders on prices. 

[29] "Standard deviation" is a measure of the dispersion of a set of 
data around its mean. When used to measure volatility, standard 
deviation measures the dispersion of daily percentage price changes 
around the average percentage price change. 

[30] CFTC collects data on traders holding positions at or above 
specific reporting levels set by the commission. This information is 
collected as part of CFTC's LTRS. 

[31] Senate's Permanent Subcommittee on Investigations, Committee on 
Homeland Security and Governmental Affairs, The Role of Market 
Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on 
the Beat, S. Prt. 109-65, 109th Cong., 2nd Sess. (June 27, 2006). 

[32] The Bank for International Settlements is an international 
organization that fosters international monetary and financial 
cooperation and serves as a bank for central banks. 

[33] The "notional amount" is the amount upon which payments between 
parties to certain types of derivatives contracts are based. The 
notional amount is not exchanged between the parties, but instead 
represents a hypothetical underlying quantity upon which payment 
obligations are computed. The Bank for International Settlements data 
on OTC derivatives include forwards, swaps, and options. 

[34] The CEA antimanipulation and antifraud prohibitions do not apply 
to excluded derivative and swap transactions. 7 U.S.C. ï¿½ 2(d)-(g). The 
antimanipulation prohibitions apply to off-exchange transactions in 
exempt commodities. The antifraud provisions apply to transactions in 
exempt commodities only under particular circumstances. 

[35] 17 C.F.R. ï¿½ 36.3; see 7 U.S.C. ï¿½ 2(h)(4)(D). 

[36] On June 22, 2007, CFTC published for comment a proposed rule that, 
among other things, is intended to clarify that a person holding or 
controlling reportable positions on a futures exchange must keep 
records of and make available to CFTC information about all of the 
trader's transactions in the commodity reported, including any 
transactions in the exempt commercial markets, such as OTC energy 
derivatives. 72 Fed. Reg. 34413 (June 22, 2007). 

[37] 7 U.S.C. ï¿½ 7. Part 38 of the CFTC rules sets forth the procedures 
and criteria for designation as a contract market. Among other things, 
these procedures and criteria include guidance on compliance with CEA 
designation criteria and acceptable practices in compliance with the 
core principles. See 17 C.F.R. Part 38. 

[38] 7 U.S.C. ï¿½ 7a-2(c)(3). 

[39] 17 C.F.R. Parts 155, 166. 

[40] Under a special call for 2(h)(3) (exempt commodity) markets, ICE, 
which is not subject to the oversight CFTC has over futures markets 
such as NYMEX, is providing large trader data to CFTC. The COT report 
was first published monthly in 1962. Since 1995, it has been available 
for free at CFTC's Web site; since 2000, it has been published weekly. 

[41] 71 Fed. Reg. 35627, 35630-31 (June 21, 2006). 

[42] 17 C.F.R. ï¿½ 36.3. CFTC's antifraud authority under the CEA applies 
only to transactions within the commission's authority. Therefore, 
CFTC's antifraud authority would not apply to cash or forward 
transactions on exempt commercial markets. 

[43] As discussed in footnote 54, a ruling by one federal appellate 
court means that the CEA antifraud provision may not apply to off- 
exchange transactions conducted on a principal-to-principal basis. 

[44] These requirements are contained in CFTC rule 36.3. 

[45] 7 U.S.C. ï¿½ 2(h)(4)(D). 

[46] 7 U.S.C. ï¿½ 2(h)(5). 

[47] In a recent CFTC complaint filed against Amaranth Advisors, LLC; 
Amaranth Advisors (Calgary), ULC; and Brian Hunter, CFTC alleges that 
the defendants attempted to manipulate the price of natural gas 
contracts on NYMEX in 2006. CFTC v. Amaranth Advisors, LLC, '07 CIV 
6682 (SD NY, July 25, 2007). 

[48] ICE also trades financially settled contracts. 

[49] 7 U.S.C. ï¿½ 2(h)(3). The term "eligible commercial entity" is 
defined at 7 U.S.C. ï¿½ 1a(11). In general, these participants are 
entities such as financial institutions, commodity pools, or large 
businesses that, by virtue of their regulatory or financial status, are 
permitted to engage in transactions not available to other 
participants, such as retail customers. 

[50] 7 U.S.C. ï¿½ 2(h)(2),(4). As we have previously noted in this 
report, if the electronic trading facility upon which these exempt 
contracts are traded becomes a significant price discovery market, it 
may be subject to CFTC rules on the timely dissemination of pricing 
data and trading volume and information. Also, a facility relying on 
the exemption must notify the commission of its intent to operate; 
provide the name of the facility; describe the types of commodity 
categories being traded; identify its clearing facility, if any; 
certify that the facility will comply with the terms of the exemptions; 
certify that the owners of the trading facility are not otherwise 
statutorily disqualified under the CEA; either provide the commission 
with real-time access to its trading system and protocols, or provide 
CFTC with such reports as it may request; maintain books and records 
for 5 years; agree to provide the commission with specific information 
on a special call basis; agree to submit to CFTC's subpoena authority; 
agree to comply with all applicable laws and require the same of its 
participants; and not represent that the facility is registered with or 
in any way recognized by CFTC. 17 C.F.R. ï¿½ 36.3; see 7 U.S.C. ï¿½ 
2(h)(5). 

[51] Eva Gutierrez, A Framework for the Surveillance of Derivatives 
Activities, International Monetary Fund Working Paper WP/05/61 
(Washington, D.C.: March 2005). 

[52] Over-the-Counter Derivatives Markets and the Commodity Exchange 
Act. 

[53] As stated by CFTC, the purpose of the proposed regulation is to 
make it explicit that persons holding or controlling reportable 
positions on a reporting market must retain books and records and make 
available to the commission upon request any pertinent information with 
respect to all other positions and transactions in the commodity in 
which the trader has a reportable position, including positions held or 
controlled or transactions executed over-the-counter or pursuant to 
sections 2(d), 2(g) or 2(h)(1)-(2) of the CEA or part 35 of the 
commission's regulations, on exempt commercial markets operating 
pursuant to sections 2(h)(3)-(5) of the CEA, on exempt boards of trade 
operating pursuant to Section 5d of the CEA, and on foreign boards of 
trade (hereinafter referred to collectively as non-reporting 
transactions); and to make the regulation clearer and more complete 
with respect to hedging activity. The purpose of the amendments is to 
clarify CFTC's regulatory reporting requirements for such traders. 72 
Fed. Reg. 34413. 

[54] Section 4b of the CEA is CFTC's main antifraud authority. In a 
November 2000 decision, the 7th Circuit Court of Appeals ruled that 
CFTC only could use section 4b in intermediated transactions--those 
involving a broker. Commodity Trend Service, Inc. v. CFTC, 233 F.3d 
981, 991-992 (7th Cir. 2000). As amended by the CFMA, the CEA permits 
off-exchange futures and options transactions that are done on a 
principal-to-principal basis, such as energy transactions pursuant to 
CEA sections 2(h)(1) and 2(h)(3). According to CFTC, House and Senate 
CFTC reauthorization bills introduced during the 109th Congress (H.R. 
4473 and S. 1566) would have amended section 4b to clarify that 
Congress intends for CFTC to enforce section 4b in connection with off- 
exchange principal-to-principal futures transactions, including exempt 
commodity transactions in energy under section 2(h) as well as all 
transactions conducted on derivatives transaction execution facilities. 

[55] Commodity Futures Trading Commission, Performance and 
Accountability Report: Fiscal Year 2005 (Washington, D.C.: November 
2005). 

[56] The LTRS data also can be used to identify violations of 
speculative position limits. The CEA authorizes CFTC to impose limits 
on the size of speculative positions in futures markets to protect 
futures markets from excessive speculation that can cause unreasonable 
or unwarranted price fluctuations. Exchanges establish speculative 
limits for energy products. Violations of exchange speculative limits 
may be charged by the commission as violations of section 4a of the 
CEA, if the exchange rules have been approved by the commission. 

[57] In re Indiana Farm Bureau Cooperative Association, [1982-1984 
Transfer Binder] Comm. Fut. L. Rep. (CCH) P21,796 at 27,281, n.2 (CFTC: 
Dec. 17, 1982) (explaining that "[i]n order to prove a successful 
manipulation, it is necessary to demonstrate that the accused 
intentionally caused an 'artificial price,' that is, a price which does 
not reflect the market or economic forces of supply and demand.") One 
of the purposes of the CEA is to prevent market manipulation. Curran v. 
Merrill Lynch, Pierce, Fenner & Smith, Inc., 622 F.2d 216, 235 (6th 
Cir. 1980) (noting the "Congressional intent [in enacting the act] to 
protect the public from fraud and price manipulation"). Sections 6(c), 
6(d), and 9(a)(2) of the CEA, 7 U.S.C. ï¿½ï¿½ 9, 13b, 13(a)(2), make it 
illegal for any person to manipulate or attempt to manipulate the 
market price of any commodity, in interstate commerce, or for future 
delivery on or subject to the rules of any registered entity (including 
any contract market), or to corner or attempt to corner any such 
commodity or knowingly deliver or cause to be delivered false, 
misleading, or knowingly inaccurate reports concerning crop or market 
information or conditions that affect or tend to affect the price of 
any commodity in interstate commerce. As a result of the commission 
carrying out the statutory mandate through enforcement actions and 
administrative decisions, a body of federal and commission case law has 
emerged to define manipulation under the act. Generally, the following 
factors are assessed in manipulation cases: (1) that the accused had 
the ability to influence market prices, (2) that the accused 
specifically intended to do so, (3) that artificial prices existed, and 
(4) that the accused caused an artificial price. In re Cox, [1986-1987 
Transfer Binder] Comm. Fut. L. Rep. (CCH) ï¿½ 23,786 at 34,061 (CFTC: 
July 15, 1987). 

[58] A position is a long or short interest in the market in the form 
of one or more contracts. 

[59] GAO, Long-Term Capital Management: Regulators Need to Focus 
Greater Attention on Systemic Risk, GAO/GGD-00-3 (Washington, D.C.: 
Oct. 29, 1999). 

[60] Section 9(a)(2) of the CEA prohibits "(a)ny person to manipulate 
or attempt to manipulate the price of any commodity in interstate 
commerce, or for future delivery on or subject to the rules of any 
registered entity, or to corner or attempt to corner any such commodity 
or knowingly to deliver or cause to be delivered for transmission 
through the mails or interstate commerce by telegraph, telephone, 

wireless, or other means of communication false or misleading or 
knowingly inaccurate reports concerning crop or market information or 
conditions that affect or tend to affect the price of any commodity 
interstate commerceï¿½." 

[61] Section 9 of the CEA, 7 U.S.C. ï¿½ 13(a)(2), makes it a felony for 
any person to manipulate or attempt to manipulate the price of any 
commodity in interstate commerce as well as the prices of futures 
contracts. 

[62] See Order to Show Cause and Notice of Proposed Penalties, FERC 
Docket No. IN07-26-000 (July 26, 2007). 

[63] CFTC v. BP Products North America, Inc., No. 06C 3503 (N.D. Ill. 
filed June 28, 2006). 

[64] GAO reports cited in the PART assessment: CFTC Enforcement: 
Actions Taken to Strengthen the Division of Enforcement, GAO/GGD-98-193 
(Washington, D.C.: Aug. 23, 1998); SEC and CFTC Fines Follow-Up 
Collection Programs Are Improving, but Further Steps Are Warranted, GAO-
03-795 (Washington, D.C.: July 15, 2003); Results Act: Observations on 
CFTC's Annual Performance Plan, GAO/T-GGD-99-10 (Washington, D.C.: Oct. 
8, 1998); and Results Act: Observations on CFTC's Strategic Plan, GAO/T-
GGD-98-17 (Washington, D.C.: Oct. 22, 1997). 

[65] GAO, Results Oriented Government: GPRA Has Established a Solid 
Foundation for Achieving Greater Results, GAO-04-594T (Washington, 
D.C.: Mar. 31, 2004). 

[66] GAO, Program Evaluation: OMB's PART Reviews Increased Agencies' 
Attention to Improving Evidence of Program Results, GAO-07-67 
(Washington, D.C.: Oct. 28, 2005). 

[67] The street book is a daily record showing details of each futures 
and option transaction, including date, price quantity, market, 
commodity, future, and name of the person for whom the trade was made. 

[68] There is a NYMEX BCC and COMEX BCC. A BCC meeting is scheduled to 
meet every month, alternatively for NYMEX and COMEX. 

[69] NYMEX said that not all inquiries become formal investigations. 
For example, in 2005, the Market Surveillance area reported 887 cases, 
but the vase majority of these were routine position limit reviews, 
inquires about exchange for physical and exchange of futures for swaps, 
and unreported reviews that never became formal investigations. The 
Trade Practice area logs inquiries that may or may not evolve to formal 
investigations. 

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