* What: CFTC to release proposed position limit rule
* When: Thursday, Dec. 16, 09:30 a.m. EST
* CFTC may use formula while they gather more swaps data
By Christopher Doering
WASHINGTON, Dec 14 U.S. futures regulator will
unveil this week a broad framework for controlling speculation
in commodity markets but will likely delay imposing detailed
limits in the face of industry concerns that trading volumes
would dry up.
Capping the number of contracts that a single speculator
can hold is part of an almost three-year crusade to prevent
another damaging surge in prices. But it has proven to be one
of the most challenging parts of the Dodd-Frank U.S. financial
reform act for the U.S. Commodity Futures Trading Commission to
As a result, Chairman Gary Gensler seems set to take a
measured approach at Thursday's hearing, possibly releasing
only parts of the proposal and giving the agency more time to
collect data on the $600 trillion swaps market, experts say.
"They've started to gather information about these markets
but they don't have full transparency ... and there is some
concern that you don't have the information you really need to
come up with firm limits," said Dan Waldman, a partner with law
firm Arnold & Porter and a former chief counsel at the CFTC.
Even if it takes a softer approach out of concern it may
reduce liquidity, the limits would be the most aggressive
measures yet by the CFTC to temper the impact of financial
speculators in volatile commodities derivatives markets.
Major companies from BlackRock (BLK.N), which operates the
iShares ETFs, to Goldman Sachs (GS.N) to Royal Dutch Shell
(RDSa.L) are lobbying hard to prevent overly restrictive rules,
which they say could reduce investment, curtail liquidity,
increase volatility and undermine their hedging.
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 on speculators? [ID:nN07224645
Gensler said last week the proposals would include two
parts, one for the spot month and another for all months
combined. He has asked if the agency had the legal ability to
establish a formula, but wait to put the limits into force
until it knows more about the size of swaps markets.
Industry watchers are looking to see how closely the new
measures mirror those released in January, which attracted a
barrage of criticism from most market participants, even though
the absolute limit -- at 25 percent of deliverable supply in
the spot month -- was not seen as particularly onerous.
"They are concerned about how bona fide hedges will be
treated and applied, as well as how the CFTC applies its
aggregation policy to parties transacting in exempt commodity
markets," said Michael Sweeney, partner with Hunton &
In particular they will be asking:
* will the proposal be more or less onerous than limits
that are already in place in agricultural markets, or the
agency's energy markets proposal earlier this year?
* will the CFTC force companies to aggregate their holdings
across all of their accounts, regardless of whether they are
* how will exemptions be handled for companies that not
only hedge their own physical price risk, but also run
speculative books or offer swaps to customers?
At the heart of the issue is an ongoing debate over the
role of large-scale investors and speculators in commodity
markets, which until recent years were dominated by companies
that produced, consumed or traded the physical commodity.
Supporters say large, passive investors are distorting the
market, driving prices higher irrespective of fundamentals, and
should be limited; critics say these speculators don't affect
prices over the longer term, and worry that capping their
involvement would curtail liquidity and drive up volatility.
The CFTC's focus on commodity market investors dates to
early 2008, prior to the financial crisis, when the price of
oil, wheat and other commodity surged to records. Growing
pressure from consumers and lawmakers prompted the agency to
propose limits for oil and gas futures markets this year.
But the plan, which drew opposition from three CFTC
commissioners worried it would drive trading overseas or to
less-regulated over-the-counter markets, was withdrawn after
Congress gave the agency broader powers that included swaps.
The new, revised position limits plan will apply to all
physical commodities including metals and agricultural goods,
in addition to energy, and to both futures and swaps markets.
"Crude is around $90... I'm not saying it's speculators,
but it's our job to do what we can and now we have the law on
our side," CFTC Commissioner Bart Chilton, said last week.
For futures, limits will probably be based on open
interest, and are expected to be high in the beginning, similar
to what was proposed in January.[ID:nN19258225]
Limits for swaps -- and aggregate limits across futures and
swaps -- are trickier. The CFTC will not know the size of swaps
markets and who is trading them until it sets rules for the
trading, clearing and reporting of swaps, and players implement
them -- a process that will take months if not years.
The commissioners are likely to be at odds on Thursday, as
they have through much of the rule-making process.
Republican Commissioner Jill Sommers has already said she
opposes setting a formula without swaps data; others like
Democrat Bart Chilton have urged the agency to move faster.
But Gensler's tough position was buttressed last week by a
European Commission proposal that also would open the door to
position limits on Europe's large commodities exchanges,
despite opposition from the UK Financial Services Authority; a
crack-down in Europe could help prevent traders from fleeing
stricter U.S. regulations in search of laxer venues.
CFTC officials were subjected to a tight deadline by
Congress, which gave them 180 days to have the new rule in
place for energy and metals markets, and 270 days for limits
for agricultural markets.
Even if the CFTC publishes the plans in the government's
Federal Register this week, it must open them to a 30-day
comment period before determining if any changes need to be
made. That puts the agency close to the mid-January deadline
for energy and metals.
Whatever the CFTC proposes on Thursday, it is expected to
be released for public comment. The final vote, however, could
be close with Democrat Michael Dunn, the longest serving
commissioner, expected to be the deciding factor.
(Editing by Marguerita Choy)
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Keywords: FINANCIAL REGULATION/LIMITS
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