Regulators weigh limits on energy, metal futures trading

By Marcy Gordon
Associated Press
via Minneapolis Star-Tribune
Monday, July 27, 2009

http://www.startribune.com/business/51808602.html

WASHINGTON -- Federal regulators are hearing from from consumers, businesses, traders, and financial firms as they consider imposing limits on speculative trading of energy futures contracts -- a move that would mark a major shift for the government.

The futures contracts are supposed to lessen price volatility. But speculators use them to bet on market prices, and critics say this magnifies price swings. Regulators, they maintain, have long let speculation in energy markets inflict financial pain, triggering wild price swings, hurting gasoline wholesalers, damaging airlines and squeezing consumers.

The Commodity Futures Trading Commission was holding the first in a series of hearings on the subject on Tuesday.

"I believe we're going to do something," Bart Chilton, one of the four CFTC commissioners, said in a recent interview. "I would be extremely surprised if we don't take some action to set hard limits" on energy futures contracts held by speculators, as well as those in metals.

CFTC Chairman Gary Gensler sounded less certain about the outcome. "My firm belief is that we must aggressively use all existing authorities to ensure market integrity and efficiency," he said.

Agency spokesman Scott Schneider that if the CFTC adopted new restrictions, it likely would happen in late summer or early fall. Specifically, the agency is weighing whether to restrict the amount of trading in energy futures by those who are solely financial investors.

The free-market sentiment that held sway in Washington for years helps explain why regulators kept their hands off the volatile oil futures markets. The Bush administration generally opposed tighter regulation in the financial industry.

Though the CFTC is supposed to be independent and insulated from politics, "there were people appointed to the CFTC who were part and parcel of the philosophy of the Bush administration," said Sen. Byron Dorgan, D-N.D.

Another reason why the agency's hands-off approach prevailed for so long, critics say, was the deep-pocketed financial industry and its lobbying muscle. The industry opposes new limits on speculative trading, arguing they would crimp the cash flowing through the market and drive business overseas.

The industry has spent millions of dollars in recent years lobbying Congress and the federal government. For example, Wall Street's biggest trade group, the Securities Industry and Financial Markets Association, spent about $1.4 million lobbying on all issues in the third quarter of last year -- when public anger over spiking oil prices escalated and Congress seemed poised to act.

"Wall Street has had a profound influence on" agencies such as the CFTC, Dorgan said in an interview.

Companies and groups don't have to itemize how much they spent for lobbying on specific issues. The SIFMA filing for that quarter mentions oil speculation and related legislation and the CFTC. Lobbying reports for the quarter by JPMorgan Chase & Co. and Goldman Sachs Group Inc., two big players in the oil futures market, make similar listings.

"I think we weren't inquisitive enough, and we weren't diligent enough in our oversight," said Chilton, a CFTC commissioner since mid-2007.

And among hedge funds and Wall Street banks that invest in and manage billions in commodities trading, the shift to a Democratic White House has raised fears of tighter regulation.

Scott DeFife, senior managing director at the securities industry group, argues that trading by speculative investors helps inject liquidity into markets and establish accurate pricing.

"Instituting arbitrary position limits and other curbs to market participants could be counterproductive and force a larger share of the market into a smaller number of hands," DeFife said in a statement.

Experts and economists are divided on whether speculative trading in the futures markets fans price volatility. Part of the confusion is that "hot" speculative money flows into energy commodities in numerous ways. The CFTC doesn't track all of them. So it's hard to quantify the impact of speculation.

The agency doesn't, for example, keep records of the speculative side bets that traders make. Nor does it monitor markets that include over-the-counter swaps -- those that aren't traded on exchanges -- by pension funds and other investors.

"Reducing speculation won't make (oil) prices higher or lower," said Robert Weiner, a professor of international business and international affairs at George Washington University.

On the other hand, some traders and brokers gripe that funds traded on exchanges, such as the United States Oil Fund, have pumped billions into energy commodities -- enough to artificially boost prices.

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