By Douwe Miedema
WASHINGTON Nov 5 The U.S. derivatives regulator
on Tuesday reintroduced a plan to curb commodity market
speculation, reviving a crucial Wall Street reform after a judge
knocked down an earlier version of its rules on position limits.
The Commodity Futures Trading Commission proposal will set
caps on the number of contracts that a single trader can hold in
energy, metal and agricultural markets, a measure aimed at
capping speculation that some blamed for the spike in raw
material and food prices prior to the 2008 financial crisis.
The redrafted rules sought to answer some of the deficits
that a judge pointed out last year. The agency cited two of the
biggest cases of market manipulation in history - the Hunt
Brothers' silver corner and hedge fund Amaranth natural gas bet
- as evidence of why curbs were necessary.
The new rules will also make it easier for big banks such as
Goldman Sachs Group Inc and Barclays PLC to
remain in the market by allowing them to exclude positions held
by entities in which the banks own minority stakes - a key
trigger for the banks to sue the agency.
They may now ignore positions held by affiliates in which
they own up to 50 percent of the shares but do not control - far
above the 10 percent in an earlier rule - or in affiliates in
which they own more than 50 percent but which are not
"The ... restriction that was in before was very excessive
and that was a sensible adjustment," said Craig Pirrong, a
finance professor at the University of Houston who has been
critical of efforts to set limits on positions.
The rules have been one of the most hotly debated aspects of
the 2010 Dodd-Frank law and is re-emerging as some of the
largest global banks face political pressure to reduce their
control over commodities markets.
Still, the plan could prove to be far less rigorous than
feared by markets, data provided by the world's largest futures
exchange the CME Group Inc showed.
The maximum position traders would be allowed to hold could
in some cases dramatically rise rather than become tighter, the
numbers showed, in one specific contract almost 10 times as much
as is currently the case.
Reuters had first reported the main changes in the CFTC's
newly drafted rule.
Also at the meeting, Democrat Commissioner Bart Chilton
announced he would soon leave the agency, creating a possible
power vacuum if no successor is found soon for Chairman Gary
Gensler, who also leaves this year.
With his shoulder-long peroxide blond hair, and his
ubiquitous references to pop culture in speeches, Chilton is a
striking figure amongst financial regulators - as well as a
strong proponent of position limits.
Position limits have long been used in agricultural markets
to curb speculation, but Congress gave the CFTC far greater
powers to impose them after the crisis. The agency will now
extend the practice to oil, gas and metals markets.
The calculation method the CFTC uses remains similar:
traders may hold futures and swaps amounting to 25 percent of
the estimated deliverable supply of the underlying commodity in
the spot-month contract.
The estimates will be provided by CME and revised regularly,
the CFTC said.
The financial industry's fight to fend off new limits may be
losing some of its vigor as large pension funds and other
institutional investors - which plowed more than $400 billion
into raw material markets over the past decade - show signs of
cooling interest in the asset class.
The limits were partly a response to the 2008 surge in oil
and grain prices, which some blamed on the influx of new
capital. But with investor appetite waning, traders are less
likely to breach the new limits.
The rule also provides a better legal argument to underscore
why the CFTC thinks Congress has mandated it to implement the
position limits, something that the U.S. district court had said
On top of that, the agency also provided a finding of why
position limits were necessary to curb speculation - something
the court had not specifically asked for but that it said it was
doing anyway to be on the safe side.
Staff at the agency had found that they were necessary by
looking at the manipulation of the silver market by the Hunt
Brothers in 1979 and the cornering of the natural gas market by
hedge fund Amaranth in the 2000s.
While the redrafted rule eases a major irritant for big
banks by lowering the thresholds for aggregating positions, it
threatens to create a new rift with commodity merchants such as
Cargill Inc looking to hedge certain transactions.
"The CFTC's new proposal will likely be at least as
controversial as the last. Commercial users will likely have
difficulties with the narrowed definition of hedging," said a
former CFTC staffer who worked on the rule.
The text of the rule proposal changes details of what can
legally be defined as hedging, an activity that is exempted from
position limits under the Dodd-Frank law. It kept certain
exemptions, but removed others.
Commercial commodity traders would no longer be allowed to
take derivative positions in anticipation of having to pay rent
for storage facilities that were in fact empty and were not
actually needed, CFTC staff said at the meeting.
Staff had found no evidence that rents were related to
market prices, and had therefore proposed not to exempt this
type of anticipatory hedging. But others forms will still be
allowed, the CFTC staffers said.
The new rule also reintroduced so-called conditional limits,
which allow traders to hold five times the limit in cash-settled
contracts, provided that they do not hold a single position in