EXCLUSIVE-U.S. regulator sees December plan on position limits

By Reuters Staff
November 11, 2009

By Christopher Doering
WASHINGTON, Nov 10 (Reuters) – The Commodity Futures Trading Commission is moving toward issuing a proposal in early December to rein in excessive speculation in energy markets by setting hard limits on positions investor entities can hold in a contract.


Bart Chilton, one of five CFTC commissioners, said until a draft is completed it will be difficult to determine where the commission stands as an entity, but there is a broad understanding “that there are issues that need to be addressed and that doing nothing is not an option.”

“I think there will be” position limits, Chilton told Reuters in an interview.

“I don’t want to prejudge where we’ll be specifically but if I had to guess where we’ll come out ultimately I believe that there will be hard position limits … for energy commodities and for other physical commodities” such as metals, he said.

The CFTC announced in July it was considering clamping down on big market players by implementing position limits in energy futures trading and other physical commodities. The agency already sets limits on some agricultural contracts. [ID:nCFTCREG]

CFTC commissioners and staff are meeting regularly with groups trying to garner their opinions, Chilton said. He added there are still several issues to address before a proposal can be put in writing and open to a period of public comment.

Prices for a slew of essential commodities — including oil, wheat, and copper — surged last year on what some analysts said was excessive speculation and big money inflows. Crude oil reached a record of $147 a barrel.

At the time, many lawmakers criticized CFTC for not doing enough to tamp down the influx of hot money from hedge funds. Legislation working its way through Congress would empower the CFTC to set aggregate limits across markets for physically deliverable commodities such as
oil.

Officials from the IntercontinentalExchange Inc <ICE.N>, or ICE, and the Chicago Mercantile Exchange <CME.O>, the world’s largest exchange, have urged the CFTC to be wary of unintended consequences in their efforts to curb speculation.

Exchanges currently 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.

The exchanges said the CFTC risks increasing volatility, distorting pricing functions and pushing traders to less regulated offshore markets.

During the interview, Chilton said he:
- supports mandatory position limits on all physical commodities.
- wants to err on the high side at first for position limits and look to “fine tune” or “ratchet down the position limits based upon the individual markets in the future.” He said he did not want to “clamp down so tightly on position limits that traders move to less transparent markets or overseas.”
- supports establishing a percentage to cap what portion of the market can be controlled by noncommercial speculators. Chilton said he did not know what percentage that should be.
- hedge exemptions need to be established and approved by the CFTC and not the exchanges. They also need to be verifiable “so anytime we want them to prove that they need that exemption they have to be willing to do so otherwise we’ll revoke the exemption.”
(Reporting by Christopher Doering; Editing by David Gregorio)

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