The top U.S. commodities regulator will consider today steps to curb speculation in raw materials including oil, gold and wheat as part of the most sweeping rewrite of Wall Street rules since the 1930s.
Four of five members of the Commodity Futures Trading Commission said they will vote in favor of publishing a two-part proposal to restrict the number of contracts one firm can hold. The plan, if approved after a 60-day public comment period, would limit traders to 25 percent of deliverable supply in the contract nearest to expiration, followed by an all-month ceiling of 10 percent of open interest up to the first 25,000 contracts and 2.5 percent thereafter.
The Dodd-Frank Act gave the CFTC until January to rein in speculation in the energy and metals markets and until April for agricultural commodities. Yesterday, CFTC Chairman Gary Gensler told lawmakers that the commission wouldn’t meet next month’s deadline because it doesn’t yet have sufficient data.
“At the core of our obligation is to protect market integrity,” Gensler said at the hearing today. The rule will shield the markets from excessive speculation by ensuring positions aren’t too concentrated, he said.
Gensler, along with Commissioners Bart Chilton, Scott O’Malia and Michael Dunn said they will vote today in favor of publishing the rule for comment. Dunn and O’Malia said they may not ultimately support imposing position limits. Commissioner Jill Sommers said she would vote against the rule.
“It’s bad policy to promulgate regulations that are not enforceable,” Sommers said, adding that the commission lacks the data needed to enforce effective caps.
After the comment period, the commission will need to vote on whether to impose position limits. The CFTC didn’t say when that vote will take place or when the rules would take effect.
Regulators and lawmakers are attempting to curb commodity speculation amid concern that investors contributed to oil reaching the record high of $147.27 a barrel in 2008. The CFTC received hundreds of public comments on position limits and held at least 75 meetings on the subject since July, according to its website.
The law is named for its primary authors, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and House Financial Services Chairman Barney Frank, a Massachusetts Democrat. It aims to stem systemic risk by requiring most interest-rate, credit-default and other swaps be processed by clearinghouses after being traded on exchanges or swap-execution facilities.
The financial overhaul expanded the CFTC’s authority to the over-the-counter derivatives market for the first time since swaps were introduced 30 years ago. Before the law passed, traders could buy futures on regulated exchanges, or they could privately negotiate for unregulated, look-alike contracts.
That situation allowed traders to sidestep limits by buying derivatives, contracts whose value is linked to commodities, stocks, bonds, loans, and currencies or 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.
The proposal limits trades on both exchanges and in look-alike derivatives. Such contracts 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 cap on contracts nearest to expiration would be similar to rules now in place on exchanges. The New York Mercantile Exchange, for example, limits traders to 1,000 natural gas futures in the last three days before the contract expires. The CFTC is still gathering the information needed to set and enforce caps in the over-the-counter market, Gensler said yesterday.
“Without specific swaps data, we have no ability to claim we are applying enforceable limits without understanding the full size of the market,” O’Malia said in a statement.
The plan exempts so-called bona fide hedgers who use contracts to offset commercial risk. Swaps dealers, who sell derivatives, are free from limits as long as the transaction is made on behalf of an end-user, while facing caps for trades made to mitigate bets dealt to speculators.
Traders holding only cash-settled contracts, which don’t provide for physical delivery of a commodity, would be allowed to hold up to five times the cap in the spot month.
The proposal covers 28 commodities, including crude, natural gas, gasoline, heating oil, gold, silver, copper, platinum, palladium, corn, oats, rice, soybeans, soybean meal, soybean oil, wheat, feeder cattle, live cattle, lean hogs, milk, cocoa, coffee, orange juice, sugar and cotton.
The commission estimated that the spot-month rules would affect 70 traders in agricultural contracts, six in base metals, eight in precious metals and 40 in energy. The combined caps may affect 80 agriculture traders, 25 in base metals, 20 in precious metals and 10 in energy.