Financial Regulatory Forum

Divide grows on setting U.S. energy position limits

By Reuters Staff
September 16, 2009

Traders work in the Crude & Natural Gas Options pit at the New York Mercantile Exchange June 10, 2009.   REUTERS/Shannon Stapleton By Christopher Doering
WASHINGTON, Sept 16 (Reuters) – The top U.S. futures regulator and two main commodity exchanges were conflicted on Wednesday over who should set tougher position limits if the the Commodity Futures Trading Commission proceeds to take action to curb market manipulation.

At issue is whether the CFTC or exchanges — such as IntercontinentalExchange Inc and CME Group — should take the lead if the agency decides to set how many futures contracts can be held, so-called position limits, by traders in the energy arena.

A decision from the CFTC is expected this autumn as part of a campaign to reign in excessive speculation that has been blamed for sending oil prices to record highs last year.

To protect against market manipulation, the CFTC already sets limits on the contracts each investor can control in some agricultural commodities.

Its success is evidence the CFTC also could handle energy, Bart Chilton, a CFTC commissioner and chair of its Energy and Environmental Markets Advisory Committee and others argue.

“I’m convinced we could do it,” said Chilton at a meeting the committee held in New York. “I’m certainly not going to support anything that is crazy and overzealous.”

But not all CFTC commissioners were convinced, saying that the exchanges have had a great deal of experience on setting position limits.

“I am concerned about what type of organizational structure do we have to have at the CFTC if at the end of the day, we end up setting position limits across the board,” said CFTC’s Michael Dunn.

The exchanges are the best positioned to determine position limits because they know their respective markets, have contacts with the participants and know their trading patterns, said De’Ana Dow, a managing director of government relations for the CME, which owns the New York Mercantile Exchange.

“In terms of the resources and the impact of the commission taking the responsibility of setting position limits, I think it will be a very difficult task,” Dow said.

Currently, exchanges try to prevent manipulation and congestion by imposing limits on energy products in the last three trading days before a contract expires. The exchanges have accountability levels that trigger additional oversight tools, if a position exceeds a certain size.

Jeffrey Sprecher, chief executive of ICE, opposed the CME’s view and instead called for the CFTC to take the reins on position limits.

“The market itself still does not have confidence in what we have done,” Sprecher said.

The CME’s comments came on the same day it provided recommendations for position limits in energy products, including the creation of a “hard” position limit.

“I believe that we should continue to seriously consider the benefits of position limits,” CFTC Chairman Gary Gensler said at Wednesday’s hearing.

There also are efforts by lawmakers in both the House and Senate to impose position limits on commodities such as oil as part of a broader plan to boost market oversight and expand the power of the CFTC.

Some top Wall Street firms have expressed concern that a regulatory crackdown would scare business to foreign exchanges, shrink trading volumes, raise costs for some businesses engaged in hedging and impair market efficiency.

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