Financial Regulatory Forum

U.S. regulator seeks tighter controls on commodity trading

By Reuters Staff
July 7, 2009

Chairman of U.S. Commodity Futures Trading Commission Gary Gensler (R) and Securities and Exchange Commission Chairman Mary Schapiro.    By Russell Blinch
   WASHINGTON, July 7 (Reuters) – The top regulator of U.S. futures markets is considering a clampdown on excessive speculation in energy and commodity trading by restricting holdings of big players, part of a broader move by the Obama administration to stabilize the financial markets.
   Commodity Futures Trading Commission Chairman Gary Gensler said in a statement on Tuesday that the agency will hold hearings in the next few weeks to seek comments from consumers and market players on whether to set position limits on all commodity futures contracts.
   “Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities such as crude oil, heating oil, natural gas, gasoline and other energy products,” said Gensler, who took office on May 26.
   CME Group Inc slumped more than 5 percent to $282.06 on Gensler’s statements, while IntercontinentalExchange dropped more than 12 percent to $98.03 a share.
   William Blair and Co said in a research note that the stock sank on fears of CFTC imposing restrictions on futures trading, noting that energy futures comprised up to a quarter of revenue for each of the exchanges.
   The CFTC will also seek comment on who should qualify for exemptions from position limits.
   Oil prices soared to a record above $147 a barrel last July and grains contracts surged to historic levels as some market players complained that hot money distorted futures markets.
   Last month the Obama administration sent Congress a wide-ranging plan to tighten U.S. financial regulation and prevent another banking and market crisis, including tougher oversight of over-the-counter derivatives.
   Phil Flynn, analyst at PFGBEST Research in Chicago, said Gensler was bowing to political pressure and the tightening of position limits won’t be effective unless traders are restricted on a worldwide basis.
   “I think it’s kind of a witch hunt,” said Flynn. “I don’t think speculation was the cause of oil going to $147, nor was it the cause of it going to $37.”
   Currently, CFTC does not set position limits on oil and other energy contracts, although futures exchanges do. CFTC has position limits on some agricultural contracts.
   “The commission will be seeking views on applying position limits consistently across all markets and participants, including index funds and managers of exchange-traded funds; whether such limits would enhance market integrity and efficiency; whether CFTC needs additional authority to fully accomplish these goals; and how the commission should determine appropriate levels for each market,” said the statement.
   
   TIGHTER REGULATIONS COULD HURT LIQUIDITY
   In Chicago, some players may welcome the moves if it removes speculative froth from markets that were roiled last year by huge price swings. Some farm groups complained traditional hedging was impossible under such conditions.
   But others worry that if the CFTC is too tough all speculators would be hit, which could hurt market flows.
   “I would urge CFTC to use caution and you have to remember the speculator is an important part of the market. After all, the exchange was formed by a group of merchants and speculators,” said Jack Scoville, analyst for The Price Group.
   Added Mike Fitzpatrick, vice president of MF Global, “Without speculators bringing liquidity to the markets, they couldn’t function properly, with an even higher cost to consumers.”
   A slew of anti-speculation bills are pending in Congress and the CFTC’s move could prove popular among lawmakers, especially among Democrats.
   “It is a relief to know that the Obama Administration does not plan to stand by silently while inflated crude oil prices top $70 per barrel despite ample oil supplies and low demand,” said Senator Carl Levin, a Democrat from Michigan who led investigations into the impact of oil price speculation. Oil is now trading at more than $62 a barrel.
   Gensler said CFTC also would revise its weekly Commitments of Traders report to show the activities of swaps dealers and hedge funds. He said the “enhancements” would appear in the near term but did not set a date.
   He said the hearings during July and August would help determine how CFTC should use its powers to ensure fair trading. No hearing dates were announced.
   Besides showing hedge fund and swaps positions, the Commitments of Traders report will be modified to show data on foreign contracts linked to U.S. contracts and on contracts that play a leading role in setting prices.
 (Additional reporting by Charles Abbott, Samuel Nelson in Chicago and Matthew Robinson and Gene Ramos in New York; editing by Jim Marshall)

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