Another Dodd donor debacle: ICE and oil speculators

The hits keep on coming on Chris Dodd's flaky first quarter finance report.

We learned he raised $44,000 from usurious payday lenders. So, could he find some donors even more anti-consumer than that bunch?

Answer: Yes. 

Dodd raised $18,400 from executives at the Intercontinental Exchange. "one of the nation’s leading exchanges trading credit default swaps and other risky financial instruments."

Actually, what the Intercontinental Exchange  (a/k/a "ICE") did in 2008 is far more problematic.

ICE runs a computerised derivative exchange in oil futures in London. Evidently, the UK under Gordon Brown  (hmm , A Labour Party pol ) has had lax regulation of derivative trading by expatriate American financiers.  

ICE exploited the "Enron Loophole" which provided less oversight over formerly in-house computer traders.  This drew the ire of U.S. regulators

As a result, capital zoomed to new unregulated exchanges like Atlanta-based ICE, an American firm operating under U.K. regulation, where trading volume tripled from 2005 to 2008, representing 47.8% of global oil futures trading. And participants in the new electronic markets didn't even have to file "large trade reports" with the CFTC, obscuring trading details across the fastest growing exchanges. That's scary murkiness.

In addition, while the 1936 Commodity Futures Exchange Act once curtailed excessive speculation, the Enron loophole redefined who a speculator was, and more importantly, wasn't. If investment banks could claim they were "hedging" certain derivative trades, they could avoid speculation limits set by the exchanges altogether

This created what was called a "dark market" for oil futures. 

More than 30 percent, experts say, exchanged in so-called "dark markets," the exact size and scope unknown to U.S. regulators. "If you can trade out of the sight of U.S. regulators, you can manipulate these markets," said Michael Greenberger, a former top staffer at the Commodities Futures Trading Commission, or CFTC, which regulates the trading of commodities like oil in this country.....

More and more fingers are pointing at one of the least-known but most powerful foreign exchanges - the InterContinental Exchange, or ICE. By the end of 2007, the all-electronic exchange accounted for nearly a 50 percent market share of all global oil futures contracts, a total of 138.5 million contracts - up 49 percent from 2006.Today it boasts more than 2,100 individual traders representing virtually all of the major players in oil - banks, hedge funds, energy companies, investment giants.And according to a securities filing, two of those giants, Goldman Sachs and Morgan Stanley, were founding partners of ICE.

Remember back to the summer of 2008 with $4/gallon gasoline and $140/bbl crude oil. Well, that dire situation finally caused U.S. authorities to really start squeezing ICE to get it's London shop into compliance with US trading standard.

ICE originally denied it was abetting uncontrolled speculation That was their story in June. By July, they had caved.

LONDON, July 15 (Reuters) - ICE Futures Europe, the energy exchange, is willing to adopt U.S. trading limits for its contract in U.S. crude oil, its chairman said on Tuesday

What was the result of imposing U.S. margin and transparency standards to Gordon Brown's unregulated exchange?  A poster at Redstate cribbed off this "after-action" report from the CFTC

With regards to the 2008 spike, there is a case to be made that there was heavy speculative influence and ICE Futures Europe appears to have been the epicenter. While only circumstantial in nature, good evidence of this can be seen in the Release 5511-08 from the U.S. Commodity Futures Trading Commission titled CFTC Conditions Foreign Access on Adoption of Position Limits on London Crude Oil Contract (1) and the events that transpired in the months that followed. Here is he meat of the June 17 amendment: 

… ICE Futures Europe will follow similar U.S. hedge exemption requirements and will report violations of any such provisions to the CFTC. This action also formalizes the recently-announced information-sharing arrangement between the CFTC and the U.K. Financial Services Authority by requiring ICE Futures Europe to provide the CFTC with detailed market information (equivalent to U.S. standards) for surveillance purposes, as a condition of direct access to U.S. customers. The CFTC will incorporate the foreign exchange’s data directly into the CFTC’s Commitments of Traders report, which is a weekly report categorizing traders and positions. Commission staff intends to apply these new foreign access conditions to any future requests for direct foreign access to U.S. customers for contracts that cash settle against those listed on any U.S. exchange. The revised Commission staff foreign access conditions must be satisfied by ICE Futures Europe within 120 days.

Within weeks of being advised that U.S. standards would be applied to ICE's London shop oil futures dropped from $140/bbl to the more "normal" level of $100/bbl (They've plunged 50% more since; but economically depressed demand is the generally accepted rationale for this market drop). Of course, the damage from the summer 2008 oil spike on the global economy had already happened.

I don't know how much money ICE made in profits from its effectively unregulated oil futures market in London in 2008.  I also don't know how much of this was money fleeced from CT homeowners and drivers.

I do know that $18,000 of it ended up paying for Chris Dodd's senate campaign.