Financial Regulatory Forum

U.S. regulator CFTC proposes enforcing limits on energy trades

By Reuters Staff
January 14, 2010

By Ayesha Rascoe and Tom Doggett

WASHINGTON, Jan 14 (Reuters) – The top U.S. futures market regulator on Thursday moved to limit the role of big traders in once high-flying energy markets, unveiling proposals to put a hard cap on the size of positions that dealers can hold but offering a limited exemption for big financial hedgers.

The long-awaited proposals, part of the Obama

administration’s push to overhaul financial markets, will apply to the four most-traded energy contracts on the two major exchanges, the New York Mercantile Exchange and the IntercontinentalExchange.

But it remains to be seen if the limits — which the Commodity Futures Trading Commision said would affect only the 10 biggest position holders if implemented today — are sufficient to satisfy lawmakers who have clamored for regulatory action since oil prices surged to a record $147 in 2008.

The CFTC’s proposals, subject to a 90-day period of public comment before approval, did not appear strenuous compared to the exchange’s own guidelines.

A CFTC official said that if the rules were applied today, for example, the limit for NYMEX crude oil contracts across all months would be 98,100 contracts.

The NYMEX’s own so-called “accountability levels”, which were frequently exceeded, is 20,000 contracts across all months.

“I think that first we’re going to err on the high side. We don’t want to do any damage,” Chilton said in a video interview with Reuters Insider ahead of the CFTC releasing its proposal.

The CFTC wants to avoid pushing trade to unregulated or overseas exchanges, Chilton said.

It will also seek public comments on whether the other commodities like metals, coffee, sugar and cocoa should be subject to similar position limits.

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Reuters Insider interview: http://link.reuters.com/vup43h

Proposal: http://r.reuters.com/qyh63h

Proposed rule making Q&A : http://r.reuters.com/ryh63h

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The CFTC has position limits for agricultural markets, but not for energy and metals. For those commodities, exchanges have their own accountability limits, which Chilton compared to “speed limit signs on a dark, desert highway” and said they were “really not enforced.

In contrast, the CFTC’s new limits “will be hard cap,

mandatory positions that we will take very seriously and we will ensure traders abide by those limits,” he said.

Asked whether the limits would force any large funds to liquidate positions, Chilton said the proposal would be geared to the largest players who have “the most potential to have untoward influence on the market.”

“We will be dealing with the largest of the large, and I think some of them may have to change some of what they’re doing,” he said.

Exemptions need to be limited to those players who have “legitimate business purposes,” he said.

CFTC CHAIRMAN PROMISED TO GET TOUGH

The proposal is the first major regulatory reform for the CFTC since Gary Gensler, a former Goldman Sachs executive, became chairman in May with promises to get tough on the volatile world of commodity trading.

His actions parallel reforms pending in Congress and

dovetails with the Obama administration’s proposals to bring over-the-counter derivatives under federal regulation.

There has been intense debate among analysts whether

excessive speculation and big money inflows were responsible for the wild swing in energy prices in 2008.

Until recently, the once-staid agency was faulted for its hands-off approach. Lawmakers criticized CFTC for not doing enough to tamp down the influx of hot money from hedge funds.

Some believe that Gensler, dogged by his prior opposition while a Treasury official to regulate financial instruments, will use position limits as proof he was serious in promises to Congress to increase market oversight.

Efforts to tighten positions limits have drawn their fair share of critics. The ICE and the Chicago Mercantile Exchange, the world’s largest exchange which owns the NYMEX, have urged the CFTC to be cautious.

Opponents say limits could actually make markets more

volatile, distort pricing functions and push traders to

less-regulated offshore markets.

The UK’s Financial Services Authority recently issued its own plan for overhauling OTC markets, which sharply contrasted with European Union and U.S. plans. The FSA said while it supported preventing manipulation, position limits were not the most effective way to curb manipulation and volatile prices.

Commodity traders have been bracing for tougher trading limits since the CFTC announced in July it was going to review setting limits for commodities of finite supply, but the actual impact of new regulations may be difficult to gauge.

Several large exchange-traded funds have been forced to suspend share issuance or adjust their strategies to appease regulators, while some major players are working out ways to shift toward trading of physical commodities.

(Writing by Roberta Rampton; additional reporting by

Christopher Doering; Editing by Russell Blinch, Walter Bagley and Marguerita Choy)

((roberta.rampton@thomsonreuters.com; +202 898 8376; Reuters

Messaging: roberta.rampton.reuters.com@reuters.net))

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