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Sovereign funds' influence grows

By David Cho
In print: Wednesday, August 13, 2008

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Sovereign wealth funds, the massive investment pools run by foreign governments, are now among the biggest speculators in the trading of oil and other vital goods like corn and cotton in the United States, according to interviews with brokers who handle their investments at leading Wall Street banks, veteran traders and congressional investigators.

Some lawmakers say the unregulated activity of sovereign wealth funds and other speculators such as hedge funds have contributed to the dramatic swing in oil prices in recent months.

The agency regulating the market said it had not picked up on this activity by sovereign wealth funds. In a June letter, the Commodity Futures Trading Commission told lawmakers that its monitoring showed these funds were not a significant factor in commodity trading.

But the commission is not detecting the growing influence of foreign funds because they invest through Wall Street brokers known as "swap dealers" who often operate on unregulated markets, sources familiar with the transactions said.

Several Democrats say the Republican-led commission won't use its authority to clamp down on such unregulated activity because it doesn't want to hurt the influential Wall Street firms it favors.

"It took prodding from Congress to persuade the CFTC to finally request information from swap dealers about the participation of sovereign wealth funds in the commodity markets," said Rep. John D. Dingell, D-Mich., chairman of the Committee on Energy and Commerce. "The regulatory body in charge of policing our futures markets has been remarkably incurious about the role sovereign wealth funds play in commodity markets."

Commission officials say their data show that fundamental factors of supply and demand, not financial actors, are the best explanation for the runup in oil prices and their precipitous fall.

The officials have ordered swap dealers to open their books and reveal to the agency more information about the unregulated activities of sovereign wealth funds and other financial actors, commission spokeswoman Ianthe Zabel said. The findings will be published in a report in mid September, she said.