Financial Regulatory Forum

PREVIEW – Odds stacked against CFTC metals position limits

By Reuters Staff
March 23, 2010

By Frank Tang and Christopher Doering

NEW YORK/WASHINGTON, March 23 (Reuters) – The top U.S. futures regulator, which has struggled to gain support for a plan to curb concentration in energy markets, could face even tougher resistance on Thursday as it considers whether similar provisions are needed for metals.

The Commodity Futures Trading Commission will hold a day-long hearing to determine whether it needs to write a rule to create speculative position limits for gold, silver and copper markets to prevent price manipulation.

Commissioners will hear from metals markets players who oppose position limits and are expected to argue that limits will drive trade to unregulated or overseas markets.

A group of gold and silver “bugs” who believe governments and banks artificially depress precious metals prices are expected to ask the commission to prevent price manipulation in metals markets.

Bart Chilton — one of five CFTC commissioners and the most outspoken in favor of position limits across all commodities of finite supply — tamped down support for metals curbs ahead of the hearing, but said he remained optimistic.

“At this point I don’t think there is support on the

commission,” Chilton said in an interview with Reuters.

“I hope this (hearing) will be educational, informative and it may shift opinions in favor of position limits for metals.”

Thirty years ago, the Hunt brothers of Texas were convicted for trying to corner the silver market after they used the futures to accumulate physical stocks, driving prices above $50 an ounce by 1980 from less than $2 per ounce in 1973.

It was the most notorious case of U.S. metals price

manipulation, and prompted the CFTC to require futures

exchanges to set position limits for commodities outside of grains, where the commission had long enforced limits.

The CFTC announced in January a plan to set and enforce its own speculative limits in oil and gas markets.

The commission was under pressure from Congress to respond to widespread consumer concern about energy prices in the wake of the oil price spike in 2008.

Three of the five commissioners — Democrat Michael Dunn and Republicans Jill Sommers and Scott O’Malia — have expressed concerns the energy proposal could drive trade to markets outside the CFTC’s jurisdiction.

The CFTC will accept public comments on the energy proposal until April 26 before weighing whether and how to move ahead.

Some of the comments have come from precious metals bugs who are clamoring to get similar limits for gold and silver.

“We have 10 years’ worth of evidence that the gold and silver markets have been manipulated, and the prices have been suppressed,” said Bill Murphy, chairman of the Gold Anti-Trust Action Committee (GATA), who will speak at the metals hearing.

TRADERS WORRY LIMITS COULD HURT MARKETS

Outside this group, there has been little public outcry and political pressure for curbs on gold and silver speculation.

Metal traders are concerned CFTC limits could sharply reduce liquidity as investment banks, hedge funds and commercial hedgers would reduce positions ahead of changes.

Less liquidity would hurt producers and users who use the markets to hedge their physical risk, said Bill O’Neill, managing partner at LOGIC Advisors, a commodities consultant.

“I don’t expect the CFTC to take any dire actions that will inhibit trade,” O’Neill said.

Gold and silver are mainly seen as investment vehicles, often held as a hedge against inflation, making the markets distinct from consumable commodities such as oil, wheat or even copper, traditionally used to make other goods.

That could make it hard for the CFTC to clamp down on speculation, said Michael Greenberger, a law professor at the University of Maryland and a former CFTC official.

“This hearing is a little more tricky than the past hearings the CFTC has held,” said Greenberger in an interview with Reuters Insider. “The question about whether … to tamp down on speculation, is really pretty difficult for the commission to deal with.”

Traders argue metals speculation in already adequately monitored by COMEX and NYMEX, the exchanges where metals futures trade. Both COMEX and NYMEX are part of CME Group, slated to present testimony at the hearing.

“Imposing position limits will skew the relationship between the futures market — which is relatively transparent — and the physical markets, which are opaque and unregulated,” said Jeffrey Christian, managing director at commodities research and consulting firm CPM Group in New York, who will speak at the hearing.

Base metals such as copper, nickel and zinc are mainly traded in over-the-counter markets in London and Asia.

“I hope that (the CFTC’s actions) will not affect our markets with unintended consequences of more offshore

business,” said George Gero, chairman of the Commodities Floor Brokers and Traders Association.

Jonathan Jossen, a COMEX gold floor trader, said he worried the threat of more regulation could hurt liquidity.

“They (the CFTC) are trying to go into an arena which has not had an issue in the last several years. If somebody wants to buy or sell gold, let them do it. You’re not allowed to corner the market as we are pretty well-regulated,” he said.

(Editing by Roberta Rampton and David Gregorio)

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

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Keywords: REGULATION CFTC/METALS

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