Crude oil options traders on the floor of the New York Mercantile Exchange.

In addition to providing meaningful guidelines for the carbon trading markets, the American Clean Energy and Security Act of 2009 (ACES) should be commended for looking to close many of the regulatory loopholes used by speculators to manipulate energy prices in the US.

Under the newly formalized ACES bill, Congress would establish uniform position limits, reporting requirements, and market oversight in the oil, natural gas, coal, and electricity markets. Steps that would help the regulatory authority reduce excessive speculation and greatly improve the transparency of these markets going forward.

The bill also calls for energy index funds to report their activities to the regulator on a quarterly basis to ensure that individual participants do not exceed their position limits, and that these funds are not contributing to patterns of excess speculation. Swap dealers in the energy markets would also be subject to reporting requirements under the ACES bill to help the regulator gain a better understanding of the counter-party risk exposures in the marketplace.

As well as repealing many of the regulatory exemptions granted to the US energy markets over the past decade, the ACES bill looks to establish comprehensive oversight provisions for the carbon markets. A brief outline of the measures included in the ACES bill for carbon trading is as follows:

• Carbon trading will be open to all market participants (Sec. 724).
• Carbon allowances can be banked to comply with current and future allowance obligations and borrowed from future years (limited to 15% of compliance obligations and subject to an 8% annual interest rate under Sec. 725).
• A Strategic Reserves Pool of allowances will be created using 1-3% of the annual emission permits available under the cap to reduce price spikes in the carbon markets. The strategic reserve would be used to increase the supply of allowances in the market if carbon prices rose more than 60% above its three year rolling average price. Proceeds from these auctions would be used to purchase international forestry offset credits (Sec. 726).
• Regulatory authority will be determined by the President to 1) provide for the effective and comprehensive market oversight of the carbon markets, 2) prohibit fraud, market manipulation and excess speculation, 3) ensure transparency, 4) enforce position limits, 5) determine appropriate margin requirements, 6) limit or eliminate counter-party risk, 7) establish standards for trading facilities and clearing organizations, 8) ensure market integrity and 9) determine to what extent primary offset projects should be subject to such regulations (Section 401).
• Default rules for regulation recommend that 1) any single participant should not control more than 10% of the open interest in any regulated allowance derivative, and 2) all regulated allowance derivatives shall be executed on or through a designated exchange (Section 401).
• The new regulating authority will be given the same authority to enforce compliance obligations as the CFTC (Section 401).
• Fines for market manipulation (deceptive practices, corning the market, defrauding participants, spread of misleading information, false documentation) may not exceed $25mln or 20 years in prison and trading prohibitions may not exceed 5 years (Section 401).
• Regulatory exemptions are to be granted to participants by the Commission for energy trades deemed to serve as bona fide hedges to their commercial businesses (Section 351).
• The Commodities Exchange Act is to be amended to include eligibility requirements that must be met in order to purchase a credit default swap (Section 355).

In sum, the ACES bill provides market regulators with the authority needed to meet the challenges of market manipulation and ensure transparency in the carbon markets. Moreover, the bill recognizes the fact that there are “significant gaps in the oversight of the markets” and puts energy speculators on notice that these regulatory gaps are about to close.