Letter to the Honorable Gary Gensler, Chairman of the U.S. Commodity Futures Trading Commission

Letter

U.S. Senator Barbara A. Mikulski (D-Md.) is fighting to level the playing field for American consumers by regulating speculation in the oil market. Currently, oil speculators can purchase oil futures for only a fraction of the cost as a down payment.

The Senator joined 11 of her colleagues in sending a letter to Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), asking him to use the authority granted to him under the Restoring American Financial Stability Act of 2010, which the Senator supported and gives regulators the authority to combat speculation in so-called futures markets.

"Supply and demand should determine the price of oil--not Wall Street speculators. This trading practice drives up the price of gas for middle class families and businesses whose checkbooks are already stretched and strained," Senator Mikulski said. "I'm not interested in regulations that make it easy for the sharks and whales to do business -- I'm concerned about the minnows. I want regulations that protect American consumers from being gouged by big business at the gas pump."

Oil trades by speculators have jumped 35 percent since the latest round of civil unrest began late January in North Africa and then the Middle East. During that same period, U.S. gas prices have soared by almost 40 percent.

Speculators can buy $100 worth of oil futures with only $6 down. However, the Commission has the authority to call for higher margin requirements from exchanges where oil futures and various other commodities are traded. Other commodities traded in these same exchanges often require 50 percent down, instead of an extremely low six percent.

The letter was co-signed by Senator Mikulski and Senators Maria Cantwell (D-Wash.), Barbara Boxer (D-Calif.), Al Franken (D-Minn.), Jeff Merkley (D-Ore.), Patty Murray (D-Wash.), Robert Menendez (D-N.J.), Mark Begich (D-Alaska), John D. Rockefeller IV (D-W.Va.), Carl Levin (D-Mich.), Sherrod Brown (D-Ohio) and Bernie Sanders (I-Vermont).

"The loser in this game of oil speculation is the American consumer. Rising oil futures translate into higher gas prices, and that means Americans have less money in their pockets to pay for basic needs," wrote the Senators.

Senator Mikulski also voted against H.R. 1, the Republican Continuing Resolution which would have cut CFTC's budget by $56 million and severely hampered its ability to restrict oil speculation.

"Republicans want to take the cop off the beat when it comes to reckless speculation. When Wall Street bets on the price of oil, middle class families and businesses lose," Senator Mikulski said.

The full text of the letter follows:

The Honorable Gary Gensler
Chairman
U.S. Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, DC 20581

Dear Chairman Gensler,

There is strong evidence the recent surge in gas prices has little to do with the fundamental supply and demand for oil. Government data confirm that oil speculators are driving the price increase. We urge you to restore integrity to our energy markets by exercising the CFTC's authority to require higher margin levels for speculative oil futures contracts.

Speculators are seizing on recent political turmoil in North Africa and the Middle East to drive energy prices to unwarranted levels. The Commitment of Traders Report reveals that speculators have flooded into the market in recent weeks. Since protests began in Egypt on January 25, 2011, money managers have increased their long positions in NYMEX West Texas Intermediate crude oil futures contracts by more than 35 percent, or the equivalent of 75 million barrels of oil. Oil speculators have increased long positions on the Intercontinental Exchange by nearly 50 percent. At the same time, actual true hedgers have reduced their long positions in the oil futures markets.

The loser in this game of oil speculation is the American consumer. Rising oil futures translate into higher gas prices, and that means Americans have less money in their pockets to pay for basic needs.

In the Dodd-Frank Wall Street Reform and Consumer Protection Act, we empowered your Commission with a number of new tools to rein in excessive speculation and prevent market failures. In addition to mandating speculative position limits, we removed the broad statutory restriction that prohibited the CFTC from imposing higher margin requirements. Section 736 authorizes the CFTC to require higher margin requirements in order to protect the financial integrity of the futures trading markets. Now is the time to exercise that authority. New margin requirements could take effect as soon as July, but the CFTC must begin the rulemaking process now. Higher margin levels would reduce incentives for excessive speculation by requiring investors to back their bets with real capital.

For the same reason we don't let pharmaceutical companies approve their own drugs, we shouldn't let futures exchanges self-regulate by setting their own margin requirements. This hands-off, self-regulatory approach has led to a fundamentally inequitable system in which ordinary investors are required to post 50 percent margin to buy a stock, but Wall Street traders post only six percent to purchase a risky and volatile futures contract.

We urge you to act quickly to raise the margin requirements imposed on speculative oil contracts. The margin increase should only apply to speculators, not true hedgers. This is consistent with current exchange policies that apply different margin requirements for investors and bona fide hedgers. With your leadership, we can discourage damaging and excessive speculation in the oil markets and bring down gas prices.

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