"London Loophole"

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The so-called London Loophole was a regulatory gap in the oversight of the UK’s main energy futures market that allowed U.S.-based counterparties to trade futures contracts on U.S.-delivered commodities from terminals in the United States but via an exchange registered in London. This enabled them to avoid U.S. position limits and reporting requirements.[1] [2]

A voluntary agreement was made between the CFTC, the FSA and exchange operators in order to combat the loophole; it applied "similar" position limits and reporting requirements on London-registered exchanges as a condition of their "no action" exemptions from the CFTC when they accept business from U.S. based counterparties.[3]

Nevertheless, Senator Carl Levin introduced the "Close the London Loophole Act" in June 2008 to "ensure that the Commodity Futures Trading Commission (CFTC) has the same authority to detect, prevent, and punish manipulation and excessive speculation for traders in the United States who trade crude U.S. oil or other energy commodities on foreign commodity exchanges as the CFTC has for traders who trade on U.S. exchanges." [4]

Levin said the CFTC obtained the information it needed "to detect price manipulation and excessive speculation involving U.S. energy trades on foreign exchanges only through voluntary data-sharing agreements it arranges with the relevant foreign regulators." That meant that in many cases the CFTC could only take action against a U.S. trader on a foreign exchange with the cooperation of the foreign regulator, Levin said. The "Close the London Loophole Act" was designed to give the CFTC "clear legal authority" and a legal obligation, to obtain data from foreign exchanges operating in the U.S. through trading terminals.