The US House of Representatives approved a wide reaching US financial reform bill June 30, after a $19 billion fee on banks was removed on opposition primarily from Massachusetts Republican Senator Scott Brown.
The Senate is expected to vote on the bill following its July 4 recess, but whether the bill is approved depends on the success of Democrats to defeat a Republican filibuster.
The 2,300-page bill contains plenty for the oil industry to chew on. The legislation may end up requiring that most over-the-counter swaps be cleared on an regulated exchange and impose position limits on those trades.
The responsibility for carrying those provisions out would lie primarily with the Commodity Futures Trading Commission, which could be a problem, as the CFTC is short on funding.
The CFTC will need a large increase in funding in order to implement the reform bill, commissioner Scott O'Malia said this week.
"We are going to be challenged to bring in OTC data... to understand and quantify it," O'Malia said, speaking at a Futures Industry Association luncheon.
"It will be a big challenge to bring in the OTC market," O'Malia said. "Can we disaggregate [the data] enough to see whose positions are being traded where?"
CFTC currently is not technologically advanced enough to implement the bill's requirements, he said.
"I'm not sure what century we are in on technology, but we are not in the 21st Century for sure," he said. For example, O'Malia said that in order to search through hundreds of comments on proposed regulations, he must wade through documents in PDF form, organized only by date.
O'Malia also pointed out that the CFTC -- responsible for overseeing the entire US commodities futures market -- has just as many servers as the local privately-owned copy service center.
CFTC, therefore, has asked for a sizable increase in funding. "We have requested for a 50% increase, with half of that... contingent upon passing the legislation," O'Malia said. "We'll need every dime of it -- there's no doubt about it -- to implement this thing."
It is not yet clear if the financial reform bill will require CFTC to impose position limits, or take a softer approach, and simply give the agency the power to impose limits.
"Assuming we get the legislation sooner rather than later, my belief is that we probably ought to take a time out and begin to figure out what the legislation says about position limits," O'Malia said. "We are going to execute whatever they give us."
On the sidelines of the luncheon, O'Malia said he could not give a timeline on the implementation.
Meanwhile, O'Malia also said on the sidelines that he was concerned that implementing position limits may have no impact on prices, or could move prices higher. O'Malia was asked to respond to analyst Phil Verleger's assertion that position limits, by reducing speculative activity, can limit the contango in oil markets, thus driving inventories lower, and prices higher.
"I've raised it at our hearing on position limits and I said let's look back at those commodities that had positions limits," he said. For instance, prices for agricultural commodities in 2007 rose despite limits.
"Position limits did not tamp down prices, did not restrict prices," O'Malia said. "You had massive moves."
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