Should All Energy Futures and Derivatives Contracts Trade on Regulated Exchanges?

Michael Giberson

If the energy-trading world were an iceberg, public markets like the New York Mercantile Exchange would be the exposed tip. The over-the-counter market would be the vast, hidden bulk.

So begins a good overview of energy trading from the WSJ, “Talking about trades,” which actually reflects a passing understanding of the commercial world.

Contrast this with the statement of Sen. Thomas Harkin as he introduces the “Derivatives Trading Integrity Act”:

Over the years, the Commodity Futures Trading Commission (CFTC) and Congress have accommodated the swaps industry by allowing instruments that are essentially futures contracts to be privately negotiated without the safeguards provided through exchange trading….

“The economic downturn in this country is forcing us to examine all contributing factors to the crisis in our financial markets,” said Harkin. “By restoring reasonable safeguards and regulation of swaps, including credit default swaps, along with all futures contracts, this legislation will go a long way toward ensuring confidence in the markets and reestablishing soundness and integrity that the financial system needs.

“My bill will end the unregulated ‘casino capitalism’ that has turned the swaps industry into a ticking timebomb. And it will bring these transactions out into the sunlight where they can be monitored and appropriately regulated.”

So you take that iceberg and bring it out in to the sunlight (so it can be “monitored and appropriately regulated” to Harkin’s liking) — yeah, that will get you transparency…. and a really big wet spot.

Will it get you a more efficient energy market? No, mostly just a wet spot.

The Streetwise Professor opines, “That’s a really dumb idea, even from a senator,” and then he explains why.