UPDATE 4-CFTC delays tough commodity speculation crack-down

Thu Dec 16, 2010 9:35pm GMT

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 * CFTC delays vote on position limits; next meeting Jan 13
 * Gensler: rule needs a little more time to complete
 * Chilton says would have voted no; Sommers: "bad policy"
 * Plan had heeded objections of Wall St, big traders
 (Recasts, adds comment by Gensler in paragraph 3)
 By Christopher Doering and Ayesha Rascoe
 WASHINGTON, Dec 16 (Reuters) - The U.S. futures regulator
on Thursday unexpectedly delayed its most aggressive measures
yet to prevent speculators from distorting commodity markets
after it failed to find enough support for a procedural vote.
 A draft proposal to apply position limits across commodity
futures and swaps markets ran into objections both from
commissioners who want the agency to act quicker to crack down
and those who fear moving too fast will damage the market.
 The surprise set-back for the Commodity Futures Trading
Commission's most contentious reform is the latest sign of
slowing progress in implementing the sweeping Dodd-Frank bill,
the biggest regulatory overhaul since the Great Depression.
Republicans have stepped up calls to tap the brakes.
 CFTC Chairman Gary Gensler, who initially said he supported
the proposal, told a hearing he would delay a vote on putting
the package out for a 60-day public comment period. A separate
vote would still be required to approve the rules.
 "I think it's just appropriate to let this one ripen a bit
more," Gensler said.
 The delay is unlikely to please Wall Street or big traders,
who had been eager for clarity on the rules. The industry had
appeared to win key concessions since January, when the CFTC
first proposed capping the influx of investor capital that some
blamed for driving oil and grain prices to records in 2008.
 One source at the hearing said it was clear Gensler did not
have majority support from the five-person commission.
 Gensler told reporters the commission would take it up
again when it was "ready," but he offered no timeline on when
it will complete the complex plan. The agency's next scheduled
rule-making session is Jan. 13.
 Bart Chilton, the most vocal proponent of cracking down on
speculators, told Reuters he would have voted against the plan,
which included a two-step approach to allow more time for the
agency to gather information on the opaque swaps market.
 "It appeared not enough of my colleagues are concerned
about the delay," Chilton said in an interview. "I wanted an
interim step that would allow us to address potentially
excessive concentrations in January. My proposal did that."
 Chilton said Gensler agreed to instruct CFTC staff to
implement his plan to set so-called position "points", which
would trigger a CFTC review and allow commissioners to vote
whether to force traders to reduce positions.
 Other commissioners voiced concerns about the speed of
reforms and a lack of information about the proposals.
 "I think it's bad policy to promulgate regulations that are
not enforceable," said Jill Sommers, a former official with the
industry-backed International Swaps and Derivatives Association
who has voted several times against releasing new CFTC rules.
 The proposal was part of efforts to boost oversight of the
$600 trillion global over-the-counter derivatives market
required under the Dodd-Frank bill.
 The bill gave the CFTC oversight of the swaps market, but
assessing the size of the vast size has slowed the rule-making
process. The proposal unveiled on Thursday set out general
formulas for calculating limits and applying those to the spot
month contract. But it suggested waiting until the agency has
more swaps data before expanding that to all months.
 The incoming Repbublican chairmen of the two House
committees that oversee U.S. financial markets warned
regulators on Thursday that hasty reforms "could damage
America's economic engine" and encouraged them to take time and
get the rules right the first time.
 "We stand ready to work with you even if that means we all
consider delaying statutory deadlines or moving forward with
legislation to preserve a viable American derivatives
marketplace," wrote Spencer Bachus, who will chair the
Financial Services Committee, and Frank Lucas, who will become
Agriculture Committee chairman.
 In a package of documents released ahead of the hearing,
the CFTC said the plan to restrict the number of swaps and
futures contracts that speculators can hold in energy, metals
and agricultural derivative markets could affect nearly 80
agricultural traders and dozens of metals and energy players.
 But the rules would likely have offered some relief for
companies such as Goldman Sachs (GS.N) and Royal Dutch Shell
(RDSa.L) that argued overly strict rules could reduce market
liquidity, elevate volatility and make the markets more risky.
 Compared to the previous proposal in January, which applied
only to energy markets, the new rules attempted to draw a
clearer line between financial players who have flooded
commodity markets with over $350 billion over the past decade,
and the traditional traders who often take large positions to
hedge their own -- or customers' -- physical trading.
 "The truly inane aspects of the previous proposal, e.g.
crowding out and the limited risk management exemption, have
been jettisoned," said Craig Pirrong, a finance professor at
the University of Houston.
 "So the main sticking point now is the narrow bona fide
hedge exemption."
 FACTBOX-Details of the rules proposed     [ID:nN09137318]
 FACTBOX-CFTC rulemaking to-do list        [ID:nN29292443]
 CFTC comment file:            r.reuters.com/bav67q
 Take a Look                                 [ID:nCFTCREG]
 Q+A-How tough will CFTC be?               [ID:nN07224645]
 John Kemp Column on Position Limits       [ID:nN07224645]
 Graphs of investors vs prices:r.reuters.com/fav32r
 Bart Chilton on Insider:   link.reuters.com/nax32r
 Under the proposed rules, the big banks would have claimed
an "unlimited bona fide hedge exemption" -- allowing them to
engage in hedging on behalf of big producers or raw material
customers without counting against their own limits.
 This replaced a more limited risk management exemption
proposed in January.
 But trades to offset swap deals with speculators or
investors would still be subject to the limits, and the CFTC
narrowed the bona fide hedger definition, seeking to limit it
only to those who have a legitimate physical business.
 The biggest change was the removal of a "crowding out"
provision that would have made it hard for any company to run
both speculative and hedging books. This had drawn widespread
criticism and was generally expected to be removed.
 The CFTC also appeared to relax a provision on aggregation,
which requires companies to combine positions across any firms
in which they own more than 10 percent. It said a firm may be
allowed to exclude those positions if the investment is passive
and the stakeholder does not participate in management.
 (Writing by Russell Blinch; Editing by Jonathan Leff)