Financial Regulatory Forum

U.S. futures regulator to swiftly curb excessive speculation

By Reuters Staff
July 10, 2009

Futures trader in Chicago By Christopher Doering
WASHINGTON, July 10 (Reuters) – The Commodity Futures Trading Commission will move aggressively to rein in excessive speculation in energy and commodity markets by focusing on expanding its existing authority and could have new regulations in place by late October. Bart Chilton, one of five commissioners at the CFTC, said he could not predict what the agency will do, but he would like to see the proposed rules issued in September, then implemented by late October or November after a period of public comment.
“We’re looking at a pretty fast timeline,” Chilton told Reuters in an interview. “We’re going to use our authority to the fullest extent possible. That doesn’t mean we’re going to be draconian or go too far.”
In response to recent swings in oil prices, the CFTC announced this week it was considering clamping down on big market players by implementing position limits on futures contracts.
The surprise announcement marked an abrupt departure for the once-staid agency that drew criticisims for its hands-off approach toward market regulation during the last two decades.
A slew of essential commodities — including oil, wheat, copper and platinum — surged last year on what some analysts said was excessive speculation and big money inflows. Crude oil reached $147 a barrel, then deflated like other commodities amid financial turmoil.
Chilton defended the CFTC from critics who say the agency was overreacting. He said having open, public meetings is the right thing to do. He said the CFTC has tentatively scheduled hearings during the last week of July and first week of August.
“As long as we strike a reasonable balance with whatever sort of position that we end up instituting I don’t think we’ll drive folks from the market,” he said.
Shares in the two leading futures exchanges have been hit by CFTC’s reform plans. CME Group Inc  was off 2.3 percent to $261.17 a share on Friday, while IntercontinentalExchange dropped 1.6 percent to $84.50.
Some experts said CFTC Chairman Gary Gensler, dogged by his prior opposition to regulate financial instruments, could use position limits to show Congress he is serious about following through on this promise to increase market oversight.
“Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply,” Gensler said in a statement this week.
Chilton said during the interview that he strongly supported looking into position limits for metals, particularly gold and silver.
“We’re talking about energy in particular, but Gary’s statement said finite commodities so in my mind we also should be looking at the metals complex,” he noted.
The moves by the CFTC are part of the Obama administration’s efforts to overhaul the U.S. regulatory regime after critics said its laxity contributed to the global financial meltdown over the past several months.
Last month, the Obama administration sent Congress a wide-ranging plan to tighten U.S. financial regulation and prevent another banking and market crisis. Tougher oversight of over-the-counter derivatives were part of that plan.
There also are a slew of bills in Congress aimed at cracking down on so-called excessive speculation.
The climate change bill passed by the U.S. House would expand federal regulations by banning “naked” credit default swaps and requiring over-the-counter derivatives to go through central clearinghouses.
It also directs the CFTC to set position limits on energy traders and brings energy swaps under CFTC oversight.
A 247-page report from the Senate Permanent Subcommittee on Investigations in June blamed big speculators for overinflating wheat prices. The report said commodity index funds drove wheat prices so high that it became impossible for grain firms using the Chicago Board of Trade contracts to hedge their positions.
(Editing by Russell Blinch; Editing by David Gregorio) ((christopher.doering@thomsonreuters.com ; +202 898 8394))

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