While I blogged about the potential regulation of the UK equity market by the SEC nearly two weeks ago, it took the collapse of Amaranth to draw my attention to the fact that a growing part of the US energy derivatives market is now regulated by the UK.
In January 2006, the Intercontinental Exchange (ICE) was permitted to use its trading terminals in the United States for the trading of US (WTI) crude oil futures on ICE Futures in London (formerly the International Petroleum Exchange or IPE). This was not a totally new contract because ICE simply took its electronically traded, standardized OTC contracts and offered them on ICE Futures. Therefore, these contracts have seen high initial adoption and rapid growth in the last few months. WTI volumes in ICE Futures are now about half of the NYMEX volumes. We now have a liquid contract on a US commodity that is predominantly traded by US participants using terminals in the US, but the contract is on an exchange (ICE Futures) which is located and regulated in the UK, though it is owned by a US entity (ICE).
More interesting is the fact that ICE also runs a large quasi futures market in energy derivatives. These are OTC contracts for regulatory purposes but are standardized, electronically traded and cleared through London’s LCH. LCH is UK regulated, but it is also a Designated Clearing Organization in the US. Amaranth served to remind us that when it comes to natural gas “futures”, ICE is today larger than NYMEX.
Even before Amaranth, the US political system was worried about this just as the UK is worried about potential regulation of UK equities by the US. The US Senate has prepared a report arguing for greater US (CFTC) regulation of the derivatives traded at ICE (“The role of market speculation in rising oil and gas prices: A need to put the cop back on the beat”, Staff Report prepared by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, United States Senate, June 2006).
Incidentally, this week the US SEC met with Euronext regulators about the potential acquisition of Euronext by NYSE. The SEC’s press release states: “The regulators also affirmed that joint ownership or affiliation of markets alone would not lead to regulation from one jurisdiction becoming applicable in the other and stated their shared belief in the importance of local regulation of local markets.” That sounds categorical until one reads it again more carefully and realizes that it means nothing at all. Today there are no purely local markets. US investors do trade UK stocks at the LSE and the LSE is no longer a purely local market. All bets are then off.