07/29/2009 / The Wall Street Journal
Sarah N. Lynch
(Copyright (c) 2009, Dow Jones & Company, Inc.)
CFTC Chief Seeks Curbs on Oil Trade
Data Rift?
WASHINGTON -- The chairman of the Commodity Futures Trading Commission said he believes the agency must "seriously consider" setting strict limits on traders who place bets on energy contracts, the latest example of how the once sidelined agency has been flexing its regulatory muscles.
In opening remarks Tuesday at the agency's first hearing....
07/29/2009 / The Wall Street Journal
Sarah N. Lynch
(Copyright (c) 2009, Dow Jones & Company, Inc.)
CFTC Chief Seeks Curbs on Oil Trade
Data Rift?
WASHINGTON -- The chairman of the Commodity Futures Trading Commission said he believes the agency must "seriously consider" setting strict limits on traders who place bets on energy contracts, the latest example of how the once sidelined agency has been flexing its regulatory muscles.
In opening remarks Tuesday at the agency's first hearing studying the issue, Gary Gensler made clear he believes the CFTC needs to exert its powers to rein in excessive speculation.
"The CFTC is in the best position to apply limits across different exchanges, and we are most able to strike a balance between competing interests and the responsibility to protect the American public," Mr. Gensler said.
The change in tone is part of a broader shift for the CFTC, which was heavily criticized last year for lax regulation after oil prices rose to $145 a barrel. Critics blamed traders such as pension funds and hedge funds for driving up prices, while others cited the fundamentals of supply and demand.
At the hearing, executives at two major exchanges said they are willing to accept tougher regulations, suggesting the CFTC's ambitions in this area might become reality. The exchanges heavily rely on such trading as a source of revenue.
"We are prepared to respond to those concerns by adopting a hard-limit regime for those products," said CME Group Chief Executive Craig Donohue.
IntercontinentalExchange CEO Jeffrey Sprecher also expressed support for new limits.
The two men differed on who should set the new rules. Mr. Donohue said the exchanges should create limits; Mr. Sprecher said regulators should do the job.
The question of speculators' role in the commodities markets appears to have caused a rift within the CFTC. Mr. Gensler said the CFTC is updating -- but not necessarily reversing -- a 2008 report that blamed supply and demand, rather than speculators, for last year's exchange-record oil prices.
The Wall Street Journal reported Tuesday that the CFTC plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices.
Last year, the CFTC pinned oil-price swings primarily on supply and demand. Bart Chilton, one of four CFTC commissioners, told the Journal that the analysis of last year's study were based on "deeply flawed data."
Mr. Gensler said the agency will begin releasing a quarterly report describing the activities of index investors, but he said it would be "premature and even inaccurate to report as to what those numbers might say."
Mr. Gensler has said he believes speculation by index investors contributed to the price run-up last year, although CFTC economists have said their research shows that supply-and-demand fundamentals, not speculation, were to blame.
Currently, the CFTC sets hard limits on speculative trading only in certain agricultural markets and leaves the exchanges to set limits on all other products.
Exchanges impose hard limits on energy products only in the last three days of trading before a contract's expiration. The rest of the time, they impose accountability levels, which trigger additional oversight if exceeded.
While tentatively supporting Mr. Gensler's approach, the exchanges Tuesday also defended index traders, saying they bring needed liquidity to the market, and they reiterated they haven't seen one study proving excessive speculation caused record price spikes last summer.
In histestimony, CME's Mr. Donohue argued that speculators have been wrongly targeted in the debate over energy prices, which reached a fever pitch last summer. Any effort to control prices or market volatility by position limits, he said, is a "failed strategy."
He also said his company recognizes concerns many people have about the role nontraditional hedgers, such as swap dealers and index traders, are playing in the energy markets. CME is "prepared to lead" on the issue, he said.
The CFTC's general counsel, Dan Berkovitz, told commissioners Tuesday he believes the CFTC has legal authority to be able to apply position limits to all commodities, even if limits on those products are currently set by exchanges.
Mr. Gensler disclosed that in the past 12 months, 70 parties exceeded those accountability levels in the four major energy contracts.
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