CME Chief Sees Contradiction In New U.S. Futures Oversight
July 15 2009 - 12:22PM
Dow Jones News
A renewed push in Washington to limit commodity futures trading
runs counter to lawmakers' goal of bringing more over-the-counter
trading onto exchange platforms, according to the top executive at
CME Group Inc. (CME).
U.S. lawmakers have reignited the debate on "excessive
speculation" in energy markets, calling for tighter regulation at a
time when the Obama administration is also trying to push more
over-the-counter derivatives trade onto exchange-run
clearinghouses.
CME Chief Executive Craig Donohue said proposals to tighten
oversight of the energy markets through increased position limits
on trading could drive more trading off-exchange.
"They're working at cross-purposes," Donohue said in an
interview with Dow Jones Newswires. "The word I would use is
antithetical."
While exchanges stand to gain revenue from clearing more OTC
products, this pales next to the potential loss in business if
tighter regulations drive trading elsewhere.
Putting caps on trading activity in any market encourages
participants to do business elsewhere, Donohue said, which could
mean markets or jurisdictions with less oversight.
About 34% of CME's revenue comes from commodity futures markets,
while rival IntercontinentalExchange Inc. (ICE) derives 41% from
the segment.
"You very much run the risk of siphoning trading activity away
from well-regulated, transparent markets where you have reporting
of transactions and large positions, and effectively a front-line
regulator in the form of the exchange," said Donohue.
Shares in CME and ICE have fallen heavily since the CFTC
announced plans on July 7 to hold hearings on new oversight
proposals, though both stocks made strong gains Wednesday.
CME is caught in the middle of the evolving debate, a year after
the sector shrugged off similar efforts to tighten regulation of
energy markets.
The Chicago-based company operates the world's biggest futures
markets in energy and agricultural commodities, and also plans to
clear trades in over-the-counter instruments such as credit
derivatives and interest-rate swaps.
Atlanta-based ICE has voiced similar concerns.
"[P]osition and accountability limits can inadvertently result
in the transfer of cleared, transparent positions back into
bilateral markets where neither limits nor reporting exist," ICE
officials said in a statement.
Donohue said CME will raise the issue at the CFTC hearings,
which have yet to be scheduled, but he has indicated the focus of
his comments to the CFTC will be on "education."
Derivatives exchanges and brokers are preparing for another
debate around the issue of speculation in futures markets fueling
price volatility in the underlying commodities.
The matter came to a head last summer as crude oil climbed to
its historic $147-a-barrel high, but studies by the CFTC and other
groups attributed price movements to supply-and-demand factors, and
no new legislation was passed.
Regulators are taking another look at the issue after a report
from Sen. Carl Levin, D-Mich., in June found that commodity index
traders drove wheat prices beyond normal levels in the last three
years.
CME shares were up about 4% at $279.63 in recent trading while
ICE was 8% higher at $92.35.
However, recent losses trimmed most of the gains that exchange
stocks saw after the U.S. Treasury announced in May that it would
push clearing for standardized over-the-counter products, which
could translate to big business for ICE and CME.
CME's Donohue said he expected the coming CFTC hearings would
demonstrate, again, that commodity pricing reflects fundamental
supply-and-demand factors, along with other economic factors such
as the relative value of the U.S. dollar.
"Ultimately, people will want to be grounded by facts and strong
economic analysis, versus just political rhetoric," he said.
"Nobody wants to see this business move offshore or into markets
that the U.S. government can't see and can't regulate."
-By Jacob Bunge, Dow Jones Newswires; 312-750 4117;
jacob.bunge@dowjones.com