3rd UPDATE: CFTC To Consider Energy Trading Limits
July 07 2009 - 3:43PM
Dow Jones News
U.S. commodities regulators, in an effort to crack down on
excessive speculation, plan to propose sweeping trading limits on
oil, natural gas and possibly other commodities.
U.S. Commodity Futures Trading Commission Chairman Gary Gensler
said Tuesday the agency will hold hearings this summer to consider
imposing position limits for "all commodities of finite supply."
The agency will also review whether swap dealers, index traders and
exchange-traded fund managers should be allowed to get around those
limits through special hedge exemptions.
"My firm belief is that we must aggressively use all existing
authorities to ensure market integrity," Gensler said.
If the CFTC ultimately decides to set limits across energy and
other commodities, it would be a major change from the current
policy, which hands off much of that authority to the
exchanges.
Currently, the CFTC imposes limits on certain agricultural
products and allows the exchanges to set limits on such other
commodities as energy and metals in order to protect against
manipulation.
While futures exchanges do subject traders to accountability
levels, which trigger additional oversight if exceeded, those
traders are not subject to position limits unless it's during the
last few days of trading before a contract's expiration. Exchanges
are not required to set limits to protect against excessive
speculation.
Gensler also said the agency is in the process of drastically
altering how it presents information to the public in its weekly
large trader report by incorporating data about swap dealers,
foreign contracts tied to U.S. futures contracts, professionally
managed market positions such as hedge funds, and certain contracts
that help set market prices.
Such a change would be a departure from the current format of
the reports, which only classify large traders as hedgers or
speculators and make it difficult to get a true picture of the
marketplace. Many large derivative dealers, such as Goldman Sachs
(GS) or Morgan Stanley (MS), may declare themselves as hedgers even
if their trading strategies combine price risk management and
speculation.
The decision to reconsider position limits and hedge exemptions
reflects a different attitude than the one that CFTC displayed last
summer when oil and agricultural commodities spiked to all-time
highs.
Some lawmakers believed the price spikes were tied to excessive
speculation by swap dealers and index traders, and they criticized
the agency for failing to take forceful action.
Much to some Democrats' chagrin, the CFTC - operating at the
time under Bush administration leadership - instead issued two
reports saying it had no definitive evidence that excessive
speculation caused prices to rise to such high levels.
But on Tuesday, many of those same Democrats expressed optimism
that the CFTC has changed its mindset.
"Such action is long overdue and essential to stopping the
excess speculation in our commodity markets," said Sen. Byron
Dorgan, D-N.D., who added that the agency also must immediately
"limit or revoke" many of the exemptions granted over the years to
speculators.
Some of the hearings this summer will focus on those exemptions
and also discuss in more detail a proposal the CFTC issued earlier
this year which would tighten the rules for how swap dealers
receive hedge exemptions.
"The different regulatory approach to position limits for
agriculture and other physical commodities deserves a thoughtful
review," Gensler said, noting that the agency will consider how to
apply position limits fairly for all market participants, including
"index traders and managers of exchange-traded funds."
H. Peter Haveles Jr., a Kaye Scholer LLP lawyer specializing in
financial markets, said the proposal takes position limits "a step
further as a tool to control price volatility."
"Now it's to regulate price movement and price volatility as
opposed to making sure there is no misconduct in the marketplace,"
Haveles said.
Although some Democrats on Tuesday appeared thrilled by the
CFTC's plans, market reaction was a bit more guarded.
"Having speculative position limits on deliverable futures is
very sensible. But like anything, the devil's in the details," said
Michael Cosgrove, New York-based head of commodities for brokerage
GFI Group Inc. "If you're allowed to have 10 lots , then the effect
on energy markets will be incalculably destructive."
A spokeswoman for CME Group Inc. (CME), which operates the New
York Mercantile Exchange, said the company is reviewing the
proposal but had no further comment. Representatives from the
Intercontinental Exchange (ICE), which offers electronic energy
trading, couldn't immediately be reached for comment.
ICE shares were recently down about 10% at $98.97 in a broad
market downturn. CME shares were down about 5% at $283.24.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com
(Gregory Meyer contributed to this article).