Energy trading on futures exchanges is slumping as increased oversight from regulators hinders transactions, according to Platts, a company publishing prices for physical commodities including oil.
The amount of light, sweet crude futures handled by CME Group Inc. (CME:US), the world’s largest derivatives exchange, slumped 22 percent to an average of 489,658 contracts a day in May from a year earlier, the bourse’s data show. Natural gas trades fell the same amount. Brent crude transactions on Intercontinental Exchange Inc. (ICE:US) were 9 percent fewer in the first six months than the same period in 2013.
Banks including Barclays Plc, JPMorgan Chase & Co. and Morgan Stanley reduced their commodity businesses over the past several years as returns declined and regulatory scrutiny intensified. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 restricted banks from trading for their own account, under the Volcker Rule, and expanded oversight of commodities derivatives.
“Regulators of course, with the best intentions, were trying to protect interests of the people that are involved with production and consumers that are hedging,” Jorge Montepeque, global director of market pricing at Platts, said at a conference in Tokyo today. “But the end result is that there are fewer people now to hedge with.”
Montepeque didn’t say which regulations reduced trading. Total energy trading slumped 18 percent in May on CME and by 19 percent on ICE, according to his presentation.
Cross-border regulatory uncertainty is a growing concern for traders, Chris Grams, spokesman for CME Group, which operates the New York Mercantile Exchange, said by e-mail. For example, global commodity firms are less willing to hedge risks outside of Europe because the European Union treats cleared futures traded on non-EU exchanges as over-the-counter derivatives, which then count toward the clearing threshold for non-financial customers.
“We continue to work with regulators on equivalence standards that would resolve the issue,” Grams said.
Trading volume fell in May because of reduced price volatility in oil markets, ICE spokeswoman Claire Miller said in an e-mailed response to questions, adding that they rebounded in June as price movements increased again. Brent crude jumped last month because of escalating violence in Iraq.
“ICE is investing substantial time and resources to ensure that new regulatory reforms maximize and enhance market efficiencies, while minimizing unintended consequences such as a reduction in market liquidity,” Miller said.
Traders who use futures to hedge “complained that their access to markets has actually suffered since regulators came in to protect them,” Montepeque said. Platts, a unit of New York-based McGraw Hill Financial Inc. (MHFI:US), competes with Bloomberg LP and other companies in providing energy markets news and information.
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