July 1 (Bloomberg) -- The Commodity Futures Trading Commission will use all of its regulatory power to ensure fair operations of futures markets for oil, agriculture, currencies and interest rates, the agency’s chairman said.

“It’s important that the CFTC use all of its current authorities to vigorously fulfill its mission that markets are free of fraud and manipulation,” Gary Gensler, who was sworn in as chairman on May 26, said in an interview yesterday. In his first week, he “asked the staff here to report up options and recommendations with regard to these markets, particularly as it relates to the markets for physical commodities.”

Gensler, 51, is reviewing his agency’s powers as U.S. lawmakers urge a crackdown of market speculators that they say caused last year’s record-high prices for oil, wheat, corn and other goods. Senator Bernie Sanders, a Vermont independent, introduced legislation that would make the CFTC invoke emergency authority to stop oil speculation. Representative Bart Stupak, a Michigan Democrat, has sought limits on credit derivatives.

The CFTC is responsible for regulating $5 trillion in daily trading of futures contracts including transactions for crude oil, foreign currency and agriculture products.

Gensler said this year that speculators contributed to an asset bubble in commodities in 2008. He broke ranks with the former acting chairman of the CFTC, Walter Lukken, who testified to Congress on Sept. 11 that there wasn’t “strong evidence” index traders were driving up prices.

Gensler wouldn’t say in the interview if he thought the same thing was happening this year.

Divorced From Reality

Oil prices “appear to have been divorced from the underlying fundamentals of weak demand, ample supply and high inventories,” Adam Sieminski, chief energy economist in Washington for Deutsche Bank AG, said in a June 5 note.

Crude oil prices reached a record $147.27 a barrel in July 2008, and after falling at the end of last year, have surged again. Crude oil futures touched an eight-month high yesterday on the New York Mercantile Exchange before settling at $69.89 a barrel. Prices are up 57 percent this year.

Sieminski cited three “major macro-economic indicators” to explain the rise in prices -- optimism in the global economy, a weakening in the U.S. dollar and more money being invested in commodity index funds.

Total assets under management for one company’s group of commodity exchange-traded funds “is now greater than it was at the peak of 2008,” Sieminski wrote.

“Fundamentals do not support the price spike,” Nobuo Tanaka, the executive director of the Paris-based International Energy Agency, told reporters yesterday in Washington.

Wheat Prices

Gensler also declined to say whether he agreed with a report issued by the Senate Homeland Security and Governmental Affairs Subcommittee on Investigations that concluded wheat prices were inflated by index investors.

Speculation “created unwarranted costs and risks for wheat farmers, grain merchants, grain processors and consumers,” Senator Carl Levin, a Michigan Democrat who leads the subcommittee, told reporters June 23. Index traders “have undermined the futures market.”

Gensler said he would be able to better respond to the report “in the coming weeks.”

“That’s at the core of what we do here at the CFTC, to ensure that the futures markets are properly functioning, that as a futures contract comes into expiration, that the cash markets and the futures markets converge,” Gensler said. “So we’re taking a very close look at the report, looking closely at the recommendations and some of those recommendations specifically with regard to exchange traded funds.”

Credit-Default Swaps

Gensler reiterated the Obama administration’s call for more regulation of derivatives markets.

“It’s crucial we get broad regulatory reform for over-the- counter derivatives, that also includes regulating the dealers and bringing products onto transparent regulated exchanges,” he said.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. Credit- default swaps were created initially as a way for banks to hedge their risk from loans. They became a popular vehicle for hedge funds, insurance companies and other asset managers to speculate on the quality of debt or on the creditworthiness of companies because they were often easier and cheaper to trade than bonds.

Gensler was asked about Stupak’s proposal to ban “naked” credit-default swaps, a derivatives agreement where the investor doesn’t own the underlying debt on the contracts being purchased.

“I do believe that it’s appropriate, given their unique nature, to consider additional rules for credit-default swaps, and by additional, I mean additional to what we do for all swaps,” Gensler said.

To contact the reporters on this story: Tina Seeley in Washington at tseeley@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: July 1, 2009 00:00 EDT