The Commodity Futures Trading Commission voted 4-1 to formally propose capping the number of futures contracts that traders can hold in natural gas, crude oil, heating oil and gasoline, with broad exemptions for some groups.
The rule, subject to a 90-day public comment period before it can take effect, would touch only the biggest energy traders. As many as 10 nationwide would have to scale back their positions if the caps were in place today, according to CFTC staff.
The proposal is less restrictive than many traders anticipated when CFTC Chairman Gary Gensler last July announced the panel would consider position limits in response to concerns that a small concentration of big traders had manipulated energy prices and caused wild swings in the cost of crude oil.
Commissioner Bart Chilton said the proposed limits "err on the high side" but "would still ensure that the very largest traders’ positions— those with the greatest potential for causing market contortions—would be limited."
If the limits were too restrictive, Chilton noted, they could spur traders to flee the regulated markets by moving activity off the exchanges and overseas, where they could evade the new caps.
The CFTC’s move represents just one prong of the Obama administration’s plan to revamp financial markets. It dovetails with legislation advancing in Congress to tighten regulation of the opaque market in over-the-counter derivatives blamed for contributing to the nation’s worst credit crisis in decades.
Some lawmakers and CFTC members blame "excessive speculation" for driving the 2008 roller coaster ride in oil prices that peaked at $147 per barrel.
In Houston, the new rules will be of particular interest to traders as well as energy producers and end-users—such as refiners and airlines—that rely on the futures market to protect against rising and falling prices.
Although the CFTC already imposes position limits on wheat and other agricultural commodities—and individual exchanges have put caps on some energy futures—today's proposal would apply to energy contracts across all exchanges.
The CFTC’s proposed rule targets speculative traders and other non-commercial investors who buy and sell futures contracts in the hopes of profiting from price changes rather than from taking delivery of the product and selling it.
It would exempt so-called "bona fide hedgers," such as refiners who enter contracts to buy a specified amount of crude months or even years in the future, as a guarantee against price spikes on the cash market.
Swap dealers that enter contracts on behalf of a range of clients also would be exempted from the proposed position limits.
The proposed limits will be felt more in financial centers such as New York and London, rather than in Houston, where most traders are dealing in physically settled contracts in which the commodity at stake actually changes hands. Many of the region’s traders, including those working directly for major oil and gas producers, are likely to be able to take advantage of the hedging exemptions.
The proposal received cautious praise from some banks, including those with trading operations in Houston, such as JPMorganChase, Citigroup, Credit Suisse and Deutsche Bank. Some of them had pushed the CFTC for broad exemptions.
The caps themselves are more liberal than limits already imposed by the major exchanges.
Michael Cosgrove, head of North American energy operations for brokerage giant GFI, said the limits "do not seem terribly onerous."
"This should accommodate most trading needs for those unable to qualify for a hedge exemption," Cosgrove said.
But it remains unclear how the CFTC would tailor and grant hedge exemptions.
"That’s the one area where the exchanges and the CFTC would have discretion as to who would be subject to the limits," said Craig Pirrong, a finance professor and energy markets expert at the University of Houston. "Interpreting a hedge exemption in a very narrow way could hurt some people."
Proponents of tight restrictions on futures markets said traders could evade the new caps by exploiting the exemptions or moving more of their activity off regulated exchanges or to overseas markets.
The proposal also is undermined by the CFTC’s reach, which now is limited to exchanges it regulates, including the New York Mercantile Exchange, the Chicago Mercantile Exchange and the futures exchange in Atlanta operated by Intercontinental Exchange Inc. The panel does not regulate over-the-counter trading in non-standardized futures contracts, such as those for jet fuel or with customized delivery points and other terms.
Commissioner Michael Dunn, who backs the proposal, said he fears "that the result of putting in position limits—without having over-the-counter authority and some kind of agreement internationally—(will be) less transparency in the marketplace than we currently have."
Commissioner Jill Sommers, who voted against proposing the limits, voiced concern that without international standards, new U.S. limits would just prompt trading to move elsewhere.
Pirrong said it was clear the commissioners were trying to strike a balance that would restrict big traders without driving them off the regulated exchanges.
The thinking for commissioners, Pirrong said, was: "We have to do something, but if we’re too draconian, this will just be a boon to the over-the-counter market."
The House last year passed a financial regulatory overhaul that would extend the CFTC’s position limits authority to over-the-counter trading—which would allow the commission to apply the proposed caps more broadly in the future. It is possible the Senate could pass similar legislation before the CFTC finalizes the limits proposed Thursday.
"While Congress continues to work on regulatory reform I believe it is important that the commission continue its work under current authority to set energy position limits," Gensler said. "But the CFTC is going to be working in parallel with a very important legislative process."
Tom Fowler and Brett Clanton in Houston contributed to this story.
jennifer.dlouhy@chron.com
