Financial Regulatory Forum

ANALYSIS-CFTC speculation limits may pass quietly, unchanged

By Reuters Staff
December 20, 2010

U.S. Commodity Futures Trading Commission Chairman Gary GenslerBy Christopher Doering

WASHINGTON, Dec 17 (Reuters) – New U.S. rules to limit speculation in commodity markets could move forward quickly, and with few alterations, after objections by the measure’s most vocal supporter unexpectedly delayed a key vote.

Gary Gensler, head of the U.S. Commodity Futures Trading Commission, abruptly postponed a vote on Thursday to open proposed new position limits to public comment, evidence of mounting pressures internally as the agency implements dozens of rules meant to make markets safer and more transparent.

The agency must carefully balance the laws it is required to implement as part of the sweeping Dodd-Frank financial overhaul with the opinions of its five commissioners, who disagree on how they should get there.

Gensler has managed to maneuver around the two Republican commissioners who have several times voted against releasing new rules, concerned they could damage the market. This week he pushed forward with a plan to set up special exchanges to trade swaps after delaying a vote last week due to objections.

He faced concerns from the opposite corner on Thursday — Bart Chilton, a Democrat and most ardent supporter of limits, who argued that the two-part approach would leave markets unprotected from rampant speculation for too long.

Those who follow the CFTC believe Chilton will eventually support releasing the position-limit plan for 60 days of public comment.

Sources familiar with the CFTC’s thinking say the commissioners are leaning toward signing the document on their own — a common practice but one that has been avoided as part of the recent rulemaking — rather than at a public meeting.

A second vote would be required to pass it.

“I think Bart basically said he would vote for it, he just wasn’t going to vote for it yesterday,” a source who lobbies on behalf of the financial industry and follows CFTC rulemaking closely told Reuters.

“He’s holding the whole thing hostage to get what he wants, which is something to go into effect immediately, regardless of the lack of swap position data.”

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See Bart Chilton on Insider: http://link.reuters.com/nax32r

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PHASED APPROACH

In contrast to Chilton, commissioners Jill Sommers and Scott O’Malia, both Republicans, have voiced concern about the speed of reforms and a lack of information about the proposals. The last and longest-serving commissioner, Michael Dunn,

remains the wild card but has regularly voted to solicit public comment before deciding whether to support the plans.

The measure discussed on Thursday would apply position limits across futures and swaps in the energy, metals and agricultural markets to limit the influx of investor funds blamed by some for the run-up in oil and grain prices to record highs in 2008.

It would do so in two phases: setting limits on spot-month contracts using a formula similar to what U.S. exchanges already use to establish their less formal “accountability” limits; then setting them on all-month contracts once the agency assesses the size of the vast swaps market.

Chilton, an outspoken commissioner, wants action in the interim. He has criticized the CFTC for dragging its heals on position limits and wants it to move quicker.

“I can’t see myself supporting the proposed rule as is unless we do all we can to ensure we are using all our authorities as discussed yesterday with regard to position points,” he said in an email on Friday.

“Despite what was said, I’m not convinced that there is agreement on what would be done in the interim, before we implement position limits,” he added.

SECOND DELAY, DIFFERENT OBJECTIONS

It marked the second time in two weeks the CFTC abruptly held off on a vote. A plan outlining requirements for swap execution facilities was delayed last week before the CFTC approved releasing it for public comment on Thursday.

Analysts said Wall Street banks and big traders such as Royal Dutch Shell and Cargill generally came out ahead in the position-limits proposal that CFTC staff put forward at Thursday’s hearing, which axed some of the most objectionable elements of a previous plan for energy markets in January.

“It looked like there was an effort to compromise, but … it appears that the effort to compromise may have put off some supporters,” said Craig Pirrong, a University of Houston academic who has been critical of Gensler’s approach.

He said the proposal was unlikely to backtrack on the key points — the exclusion of the “crowding out” rule that would have prevented many trading companies from hedging their physical supplies, or the inclusion of a tougher exemption for hedgers — but would still have to include some changes.

Gensler’s effort to ensure he had majority support for moving his position-limits plan forward was evident in the room on Thursday, as he huddled next to Chilton, and took the unusual move to call for a recess before announcing the vote on position limits had been delayed.

“Gensler has somewhat lost control of the process,” an industry source said. “This should be the easy part.”

(Editing by Dale Hudson)

((christopher.doering@thomsonreuters.com ; +202 898 8394

Reuters messaging:

christopher.doering.reuters.com@reuters.net))

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