Financial Regulatory Forum

U.S. CFTC supports some limit exemptions – Gensler

By Reuters Staff
July 29, 2009

CFTC Chairman Gary Gensler (file photo)By Ayesha Rascoe and Christopher Doering
WASHINGTON, July 29 (Reuters) – Commodity Futures Trading Commission Chairman Gary Gensler said Wednesday he supports exemptions from tough new investor limits for bona fide hedgers but he is concerned about allowances for those managing financial risk.

“While I believe that we should maintain exemptions for bona fide hedgers, I am concerned that granting exemptions for financial risk management can defeat the effectiveness of position limits,” Gensler said at the opening of a second day of hearings into tightening regulatory oversight of U.S. futures markets.

The CFTC is conducting a series of hearings to explore whether to set investor position limits in the energy markets, to help prevent market manipulation by dominant players. It will also examine whether some traders exceed those limits.

But top Wall Street firms expressed concern on Wednesday that a crackdown by the U.S. futures market regulator would shrink trading volumes and impair market efficiency if certain traders were not allowed to exceed position limits, an executive said Wednesday.

“We believe that eliminating or limiting swap dealer hedge exemptions not only will not address the ‘swap loophole’ but actually will have several negative consequences,” Donald Casturo, managing director of Goldman Sachs Group Inc , said in prepared remarks.

Swaps are private and usually one-on-one transactions tailored to the need of the buyer and seller. They have grown in popularity as a way of avoiding big margin calls on futures exchanges while still obtaining a hedge for bank financing.

“Those transactions are vital to the counterparties entering into them for risk-management or investment purposes, both of which are legitimate and important objectives,” said Blythe Masters, managing director and head of the global commodities group at J.P. Morgan.

The CFTC has vowed to clamp down on excessive speculation in energy and commodity trading, especially in oil which soared to $147 a year ago. Oil and other commodity prices, while volatile, have largely climbed down from last year’s highs.

This hearing “seems to me to be a euphemism for what we can do to make sure that crude doesn’t trade over $140 again,” said Henry Jarecki, chairman of Gresham Investment Management. “Oil prices were indeed remarkably high last year. But such high prices were also found in steel, coal, and cobalt, and they don’t trade on the futures markets at all.”

Eliminating exemptions for swap dealers could drive more traders to outside futures exchanges and cause the market to splinter, spreading exposure among more swap dealers and other financial intermediaries, Casturo said.

Instead the CFTC should be careful to impose position limits that are “low enough to prevent excessive speculation while still being high enough so as not to restrict the level of speculation that is necessary to ensure a balance between commercial and speculative interests,” he said.

To protect against market manipulation, the CFTC sets limits on the amount of contracts each investor can hold in some agricultural commodities. But the futures exchanges set limits for energy products such as oil futures.

During the first day of hearings on Tuesday, CFTC chairman Gensler said 70 parties exceeded accountability levels on the four major energy contracts during the last year.

The move to toughen oversight marks a turnaround for the CFTC, whose hands-off approach toward regulation drew criticism last year when commodity prices rocketed. With a number of anti-speculation bills pending in Congress, the CFTC’s actions have been praised by some lawmakers, especially Democrats.

(Editing by Russell Blinch and Jim Marshall)

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