UPDATE: Exchanges, Banks To Caution CFTC Against Metal Trading Curbs

Imposing new speculative trading limits on metals futures contracts is unwarranted and could have an adverse impact on U.S. markets, some exchange and bank officials will tell the Commodity Futures Trading Commission Thursday.

They will make their comments during a day-long hearing on the topic at the CFTC's headquarters, where regulators there are already considering imposing strict new limits on some key energy contracts including crude oil. The hard look at speculation in the commodities markets comes in response to criticism the agency received in 2008, when oil prices peaked to record-highs. Critics at the time blamed speculators for driving prices up, and accused the CFTC of lax oversight.

CFTC Chairman Gary Gensler is holding the hearing on metals as the next step in looking toward the possible imposition of trading limits on all commodities of "finite" supply.

But few of Thursday's speakers are expected to offer support for limits on metals trading, in contrast to the tone at hearings last summer on the merits of limits on energy derivatives markets. Last summer, Gensler and a second commissioner, Bart Chilton, indicated that they supported position limits on oil and other energy derivatives. CME Group Inc. (CME), the leading U.S. commodities exchange operator, also gave qualified support for limits. This time, only Chilton has advocated for metals limits. Speakers from the trading world plan to tell him that heading down that path isn't wise and could have unintended consequences.

"The only impact that CFTC-imposed limits will have in the metals markets will be to shift business away from U.S. exchanges to less regulated or even wholly unregulated markets that are beyond the commission's jurisdictional reach," CME Group Inc.'s (CME) global chief regulatory officer Thomas LaSala said in prepared remarks. LaSala will note that price discovery in the metals markets is truly global and not controlled strictly by U.S. markets. "Accordingly, position limits imposed by the commission in the metals markets cannot reasonably be justified based on protection of the price discovery function," he said.

Others on Thursday will also make the argument that there is no economic backing to justify imposing metals trading limits. The CFTC's own economists have found no evidence that excessive speculation drove record oil prices in 2008, they will say, and there is a similar lack of evidence for metals.

"I do not see any price distortion as a result of speculation," Barclays Capital managing director of commodities research Kevin Norrish said in prepared remarks. "Fundamental factors have been behind price rises in the past few years."

Although metals have not been at the center of the speculation debate in the same way crude oil has, some have repeatedly raised concerns about alleged manipulation of the gold and silver markets by a few key market players such as Wall Street firms.

In response to these concerns, the CFTC's enforcement division in 2008 launched a silver probe, but the findings have not yet been announced.

One of the staunchest believers in the allegations of gold manipulation--the chairman of the Gold Anti-Trust Action Committee--will also be on hand to testify Thursday.

But others, including LaSala and John J. Lothian, a commodity trading advisor, futures broker and the head of a well-known markets newsletter, will urge the CFTC not to pay attention to arguments that there has been manipulation.

"Those who believe gold and silver markets are manipulated to keep prices low are nothing more than politically opportunistic rent seekers in my book," Lothian planned to say. "They are parasites on the body public profiting from selling fear and seeking political change that will benefit their world view and related market position."

CFTC Chairman Gary Gensler in his opening remarks Thursday will suggest that the CFTC is still in a exploratory phase on position limits for metals and that the agency will map out its course of action based on the feedback it receives.

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

(Brian Baskin in New York contributed to this article)

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