WASHINGTON Nov 5 The U.S. derivatives regulator on Tuesday launched a plan to curb commodity market speculation, reviving a crucial Wall Street reform after a judge knocked down an earlier version of its rule on position limits.
The redrafted rule by the Commodity Futures Trading Commission will allow exemptions for positions held by firms in which banks own stakes of up to 50 percent, the agency said in documents prepared ahead of a public vote.
An earlier version of the rule had set the hurdle at 10 percent, a level that was deemed draconian by the industry, which then gained a victory over the agency when a District Court vacated the rule in September 2012.
The rule has been one of the most hotly debated aspects of an overhaul of Wall Street after the financial crisis. It comes as some of the largest global banks face political pressure to reduce their control over commodities markets.
The Dodd-Frank law gave the CFTC greater powers to limit positions held by large traders to prevent them from cornering the market, while exempting farmers and others who use futures and swaps to protect against price swings.
The CFTC's public vote on the proposed rule is normally a sign that a majority of commissioners is in favor. The rule will then be opened up for comment.
The easier so-called aggregation hurdles for firms - above which they need to count positions their affiliates hold to their own - removes an important irritant for banks, which had complained it would send costs soaring.
To use the exemption, trading firms - often large banks such as Goldman Sachs and Barclays - will need to prove they do not control the affiliate. Above that only non-consolidated units can be exempted.
Reuters had first reported the main changes in the CFTC's newly drafted rule.
The CFTC's rules will limit a trader's maximum size in derivatives to 25 percent of the estimated deliverable supply of the underlying commodity, for a range of agricultural, energy and metal contracts.
The new rule also reintroduced so-called conditional limits, which allow traders to hold five times as much as that limit in cash-settled contracts provided that they do not hold a single position physical-settled contracts.
The text of the rule, which was several hundred pages long according to CFTC staff, will also change certain details of what constitutes hedging - an activity that is exempted from position limits under the Dodd-Frank law.
The rule will no longer allow an exemption for derivative contracts entered into by traders to make good rent they pay on empty storage facilities, CFTC staff said.
The agency had found no sufficient link between market prices and storage facility rents to allow the practice, a form of anticipatory hedging, the staff said.
The CFTC staff also said that futures exchange CME Group Inc had provided new estimates of deliverable supply that were higher than the CFTC had initially used, so that the percentage position limits were also higher.