Some major players in the derivatives industry this week blasted a preliminary proposal by federal commodities regulators that would place more restrictions on over-the-counter derivatives dealers seeking exemptions from speculative position limits on futures contracts.

The Commodity Futures Trading Commission's proposal came in response to complaints from some lawmakers last year who said that speculators were driving up oil and agricultural prices and the CFTC did not do enough to stop them.

Although the agency has found no evidence that speculators contributed to the record-high prices, it said last September it planned to re-examine how dealers, such as Goldman Sachs (GS) and Morgan Stanley (MS) are granted exemptions from position limits. It suggested eliminating hedge exemptions for swap dealers and replacing it with a stricter new type of "limited risk management" exemption category that would impose additional reporting requirements and force dealers to certify that their clients do not exceed position limits.

But big players in the industry, including CME Group Inc. (CME), the Futures Industry Association and the International Swaps and Derivatives Association all said this week they will oppose efforts to eliminate hedge exemptions for swaps dealers.

"FIA would not support repealing the dealer hedge exemption or replacing it with a limited risk management exemption," the industry group's President John Damgard told the CFTC in a comment letter. "In our view, repealing the hedge exemption would harm those who rely on U.S. futures markets by calling into question the sound economic analysis that has served as the foundation for the commission's bona fide hedging definition for decades."

Swap dealers often use futures exchanges to hedge business risks from their over-the-counter business. Much of this business is done with traders like pension funds that seek to gain exposure to commodities as a way to diversify their portfolios. Rather than invest directly in the futures markets, these funds go to swap dealers and invest over-the-counter through indexes which track the performance of a basket of commodities over time.

If commodity prices go up, the funds receive a pay-out from the swap dealers. The swap dealers then replicate their exposure in the index by purchasing exchange-traded futures contracts.

Some have argued these so-called index speculators are to blame for last year's price spikes.

The CFTC's proposal, if enacted as written, would likely force the agency to have to impose limits for all commodities. That would be a departure from current practices. While the CFTC sets position limits for some agricultural products, exchanges are given discretion for setting limits on other commodities like metal and energy. Many of those contracts are only subject to position limits in the last few days of trading.

CME Group Inc. (CME) Chief Executive Craig Donohue told the CFTC in his letter that setting limits on most futures contracts is best left to the exchanges.

"Exchanges are in the best position to understand their listed contracts and their customers' risk management needs, and to provide appropriate hedge, risk management or swap exemptions," he wrote.

The CFTC's plans to examine hedge exemptions coupled with the continued rise in oil prices in recent weeks could lead to another wild summer on Capitol Hill as lawmakers may again call on the CFTC to rein in excessive speculation.

Already several bills on the subject have been introduced this congressional session, and lawmakers appear poised to approve sweeping changes to the regulation of financial markets as a whole.

"It's coming back and it's coming back strong," said CFTC Commissioner Bart Chilton.

Michael Masters, a hedge fund manager and frequent witness at congressional hearings, said he has been in talks with lawmakers recently and urged them to stay on top of the speculation issue.

Masters, who is known for his view that "index speculators" contributed to a commodity price bubble last year, said in his comments he commends the CFTC's latest efforts, but they still may not go far enough. Anyone wishing to exceed aggregate limits on and off exchange, he said, should be subject to two conditions. These conditions would entail forcing all counterparties to "fill out Form 40" declaring what type of trader they are and agreeing to report on a daily basis "a list of all traders with futures-equivalent positions" that exceed limits, among other things.

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