CFTC Floats Rules Aimed at Speculation

CFTC Chairman Gary Gensler aims to reduce price volatility.
CFTC Chairman Gary Gensler aims to reduce price volatility. (Joshua Roberts - Bloomberg News)
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By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, July 7, 2009

The Commodity Futures Trading Commission will consider new measures to curb speculation in the markets for energy and other commodities, the agency is set to announce today.

The move aims to reduce the volatility of prices but faces resistance from top Wall Street firms, which fear the efforts could cut into profits. Regulators and lawmakers increasingly worry that these firms have used their size and power to inflate the prices of commodities, booking profits in the process.

Concern over such deal-making reached a fever pitch last summer, when oil prices were sky high and people were feeling pain at the gas pump. CFTC data showed last year that a significant amount of trading in oil was concentrated in the hands of just a few speculators. These worries have waned since then, as gas prices have moderated from last year's highs, though a recent run-up in fuel prices may prompt new questions.

But a report last month by a Senate investigative committee warned that firms manipulated the price of wheat, causing farmers and consumers to pay much higher prices.

The initiatives are among the most significant steps taken by CFTC Chairman Gary Gensler since he started in May. The CFTC often operates in the arcane world of agricultural policy and finance, but the spillover effects of its policies can affect how much consumers pay for fuel and food.

Gensler and the CFTC are also key players in the Obama administration's plan to regulate derivatives, a multitrillion-dollar market that is exempt from government oversight. The CFTC, along with the Securities and Exchange Commission, would regulate the derivatives market under the Obama plan. Derivatives are financial products that derive their value from other assets.

Financial firms can affect the price of commodities such as oil and wheat by buying and selling futures, which are financial instruments traded on exchanges. A future is a contract between two parties which agree to buy and sell a commodity at a certain price. For example, an airline that is worried about being hurt by rising fuel prices might try to lock in costs by buying oil futures. If the price of oil does rise, the futures the airline owns would also rise in value, offsetting the increased cost for fuel.

While such transactions were the original purpose of futures, the marketplace has grown far larger and more complex in recent years. Firms have introduced new ways to speculate on rising or falling values of commodities by betting on batches of futures known as indexes. The CFTC says it has the power to limit this speculation, but for many commodities, including energy products, it has not done so.

The CFTC is planning to announce today that it will consider new curbs, according to an agency statement scheduled to be released today. It would do so by limiting the size of an investment any single firm could make in a particular commodity. The agency is planning a series of hearings on the issue to examine whether such limits would reduce harmful speculation, what the limits should be and whether the agency needs new legal powers to do this.

Adopting new curbs would require a vote by the CFTC's commissioners.

The CFTC already has established position limits for some commodities, such as wheat. But it has also granted exemptions to these limits, which congressional investigators have in part blamed for fueling speculation. The CFTC plans to review its policy on exemptions.

The CFTC is also planning to require more public disclosure about the holdings of commodities traders. For many years, the agency has issued weekly reports about these holdings. The new reports will provide more detailed information about the types of firms, such as banks and hedge funds, that hold significant positions. In addition, the reports will provide more information about trading in derivatives linked to commodities.


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