CFTC Urged to Curb Speculation as Wall Street Resists

Commodity Futures Trading Commission Chairman Gary Gensler
Commodity Futures Trading Commission Chairman Gary Gensler. Photographer: Brendan Hoffman/Bloomberg

U.S. regulators this week are considering rules aimed at curbing speculation in commodities trading, as Wall Street firms call for delay and companies including Delta Airlines Inc. urge strict limits.

The Commodity Futures Trading Commission will miss a mid-January deadline to impose trading restrictions on commodities including oil, natural gas, silver and gold, CFTC Chairman Gary Gensler told a House Agriculture subcommittee today at a hearing in Washington. CFTC commissioners will consider the so-called position limits at a meeting tomorrow.

“If we were to propose something tomorrow, it will have a healthy comment period from the public, and that will by its very nature go past the January date,” he said. “So I will tell Congress that no, we will not finalize this by that statutory date.”

The CFTC has received hundreds of comments on how to implement the limits -- included in the Dodd-Frank Act to curb the influence of big traders in markets for crude, gasoline heating oil and natural gas. Commissioners have discussed position limits in at least 75 of their more than 400 meetings with firms including banks, oil companies and hedge funds, according to the CFTC’s website.


The agency may phase-in limits on speculative trading in energy, metals and agriculture commodities, Gensler said. Commissioners will weigh splitting proposals for position limits between spot month and all other months combined, and may move expeditiously on the spot month plan, he said last week.

The law gives the CFTC until January to impose restrictions on energy and metals trading, and until April to place a cap on agricultural contracts.

The commission may suggest a formula for how to set limits based on open interest in the market using data the agency is seeking to gather, and hard limits would be set once sufficient information is available, Gensler said.

Position limits have been imposed by the CFTC on other commodities, and lawmakers and regulators have been debating whether and how to curb energy speculation for more than two years. The focus on the role of speculators intensified in 2008 when oil prices reached a record $147.27 a barrel.

“The speculative bubble in oil prices has concrete detrimental consequences for the real economy,” said Richard B. Hirst, general counsel to Delta, in a Dec. 13 letter that encouraged the CFTC to move “aggressively” to limit the number of contracts a single firm can hold.

Industry Lobbying

The financial industry has recommended that the commission delay setting limits. The Securities Industry and Financial Markets Association, a New York- and Washington-based trade group, said in a Nov. 23 letter that the CFTC first needs sufficient data to gauge the “appropriateness” of the rules.

Morgan Stanley and the Futures Industry Association, a Washington trade group, proposed that the commission set interim rules. CME Group Inc., the world’s largest futures market, pushed the CFTC to defer setting limits until regulators have “the data needed to accurately set and enforce those limits.”

Companies including Goldman Sachs Group Inc., Vitol and Cargill Inc. have met with the CFTC about the rules, according to the commission’s website.

‘Opaque Market’

Limits are needed because two decades of market deregulation “resulted in an opaque market that catered to the needs of financial speculators rather than bona-fide hedgers and consumers,” said Robert J. Hirsch, president of Hirsch Fuels Inc., a heating oil company in Hauppauge, New York, in a Nov. 19 letter to the CFTC.

The House hearing was the first time the agriculture panel debated the financial law since it was enacted in July and since regulators began drafting regulations. Gensler testified alongside CFTC Commissioner Bart Chilton, a fellow Democrat who has urged the agency to resist calls to delay the limits.

“We see little merit to the argument that the CFTC has not sufficiently considered the imposition of such limits,” said Jim Collura, vice president of the New England Fuel Institute, a coalition of home energy providers, in testimony prepared for the House hearing.

“We are discouraged that, despite ample evidence of excessive speculation in commodities markets that some continue to doubt, question and outright deny that speculation was and ever could be excessive,” said Collura, who was testifying on behalf of the Commodity Markets Oversight Coalition whose members include energy and agricultural businesses, end-users of raw materials and consumer groups.

Terrence Duffy, executive chairman at CME Group, Jeffrey Sprecher, chairman and chief executive officer of Intercontinental Exchange Inc., and Robert Jones, senior vice president at ABN Amro Clearing Chicago LLC, also appeared before the 18-member panel.


Businesses are having an increasingly difficult time hedging commodity price risk because of the large concentration of speculators in the markets, Chilton said.

“We shouldn’t be getting around the law,” Chilton said. “We should be about working to do what we were instructed to do, to protect markets and help consumers. Congress passed the new law. We must implement it in a thoughtful manner. End of story in my book.”

The Dodd-Frank bill expanded the CFTC’s authority to the over-the-counter derivatives market for the first time since the first swaps were introduced 30 years ago. Before the law passed, traders could buy futures on regulated exchanges, or they could privately negotiate for unregulated lookalike contracts.

The so-called swaps loophole allowed traders to sidestep limits by buying derivatives, contracts whose value is derived from commodities, stocks, bonds, loans, and currencies, or linked to specific events such as changes in interest rates. Some firms use them to lock in prices for goods they buy or sell, while speculators may use them to bet on the markets.


Derivatives played a role in the 2006 collapse of Amaranth Advisors LLC, a hedge fund that lost $6.6 billion on natural gas bets. Amaranth amassed a large position in unregulated swaps after being ordered to reduce its position on the regulated exchange.

The new rules will limit the number of contracts one firm can hold both on exchanges and in the private market, while exempting transactions used to hedge commercial risk. The CFTC hasn’t published rules defining which companies will be exempt.

Putting caps on swaps trading “poses a unique challenge” compared with limits in the future market, and the CFTC lacks the data that would distinguish hedging transactions from speculation, Gensler said.

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