Hedging remains legal. Fortunately, Washington’s version of “financial reform” reforms nothing, and that is as it should be. Free markets must prevail: It’s how true value is tested and defined, how pricing is determined, in formal and informal trading, second upon second, day after day, from soup and nuts to oil and gas.

Smart investors who find a margin via a flip will flip. Underfunded regulators charged with finding systemic illness in derivatives trading won’t detect it. Investors and traders rightly seek the edge, finding the outer limits of what may be a bubble, and they hope to be on the outside—not still on the inside—when it bursts.

Washington has a poor track record of noticing market idiosyncrasies. Former Securities and Exchange Commission chairman Chris Cox told Oil and Gas Investor at its Energy Capital Week in 2009 that enough laws and regulations already existed in the years leading up to September 2008 to have discovered irregularities in the financial system. But, enough enforcement funding did not exist. While more laws are thrown at policing agencies, more funding is not.

Michael Loesch, former CFTC chief of staff and counsel to Cox at the SEC on enforcement matters, told Investor at its The Oil & Gas Summit this spring that Commodity Futures Trading Commission staffing was shifted to Ponzi schemes after September 2008 and that its “resources will be shifted back to energy-market manipulation.” Among millions of contracts and trades, some would be suspicious, statistically, but the CFTC had indentified only 40 worth investigating.

Hedging remains a leading insurance for oil and gas producers as ongoing concerns. Among 25 producers Morgan Stanley & Co. Inc. E&P analyst Stephen Richardson covers, their 2010 gas-hedge ceilings range from $6.10 per million Btu to $12.64. Fixed swaps range from $4.94 to $10.15. Volume hedged for 2010 is 87% by SandRidge Energy Inc., 80% by Pioneer Natural Resources Co., 76% by Range Resources Corp. and 74% by Anadarko Petroleum Corp.

Among the 25 producers, the smallest percent of 2010 gas production hedged is 2% by EOG Resources Inc. Second-least was shale-gas-focused Southwestern Energy Corp. at 17%; however, it added gas hedges the day after Richardson’s report to total 26% of second-half 2010 production at $5.25, locking in 31% of full-year 2010 volume at some $6.85.

Exco Resources Inc. added 2011 hedges in early July. “Expect more of the same from E&Ps as this year progresses, locking in cash flows when the forward strip offers opportunities,” Tudor, Pickering, Holt & Co. Securities Inc. analysts forecast. Exco took $5.50 for an additional 3.7 billion cubic feet of 2011 volume and $5.85 for an additional 3.7 Bcf in 2012.

The TPH analysts report, “E&P managers are typically eternal optimists and hope for successful drilling and higher commodity prices, but, during the past six months, a pragmatic hedge to 2010, 2011 and 2012 commodity prices has taken hold. We would expect to see E&P companies bridge the gap with further 2010 and forward hedges as the year progresses, locking in cash flows while maintaining planned capital expenditures.”

Some producers may still decline to hedge but remain free to choose. A good sign that Washington’s “financial reform” might do no harm: Socialists don’t like the legislation, saying it doesn’t protect enough Americans from themselves, from taking risks or from needing to read fine print.

Law professor and former corporate attorney Steven Davidoff blogs for The New York Times: “Admittedly, the bill is full of political compromises that will never satisfy anyone.” It does require more than 100 new studies, he notes. That’s business-school code for “bury in research.” For example, there have been hundreds of studies on what could be good American energy policy. And, yet, no policy.

Meanwhile, Washington has already admitted to being unable to deal with more than one Gulf of Mexico oil leak at once, thus it continues to seek a moratorium on deepwater drilling. This “one well at a time” regime will assure an overwhelming U.S. oil-production decline rate. According to the TPH analysts, there were 33 deepwater rigs at work in the Gulf in late April; in mid-July, there were six. Hopefully, Washington won’t destroy other free markets too.