Industry worries haste could hurt CFTC reform
WASHINGTON (Reuters) - The Commodity Futures Trading Commission looks eager to move quickly to implement trading limits on commodity and energy futures, leaving opponents little time to argue that the agency is going too far, too fast.
In response to gyrating oil and commodity prices, the CFTC announced this week it was planning to clamp down on big market players by implementing position limits on all commodity futures contracts of limited supply, focusing especially on energy.
The CFTC said it would hold hearings in the next few weeks to get broad public input before embarking on the reforms. Some analysts had suggested the process could be slow and it would be months before anything new was implemented.
But Bart Chilton, a CFTC commissioner, signaled otherwise.
"We're looking at a pretty fast timeline," Chilton told Reuters in an interview.
"We're going to use our authority to the fullest extent possible. That doesn't mean we're going to be draconian or go too far," he vowed.
Chilton is only one of five commissioners and cannot predict what the agency will ultimately do. But he would like new proposals for reform to be issued in September and then implemented by late October or November after a period of public comment.
Some industry groups are worried the CFTC won't be able to fully study the impact position limits could have on the market. They fear limits could actually increase volatility by choking liquidity, while also driving traders overseas.
"I think they feel pretty strongly that they've already got this thing sort of teed up and they ... know the direction they want to go," Craig Pirrong, a finance professor at the University of Houston, said of the CFTC.
William Black, an economics and law professor at the University of Missouri-Kansas City, said the agency should adopt "a period of experimentation precisely because they haven't tried" this in the past.
Black noted that while the CFTC appears eager to roll-out some type of reform on position limits, the agency should consider "a number of smaller steps" that begin by collecting data and launching investigations as to whether there is manipulation going on in the marketplace.
Chilton said the CFTC was not overreacting. He said open, public meeting was the right thing to do. He said the CFTC has tentatively scheduled hearings during the last week of July and first week of August.
"As long as we strike a reasonable balance with whatever sort of position that we end up instituting I don't think we'll drive folks from the market," he said.
Trading firms fearful of losing revenue could mount a fierce opposition to the CFTC's proposal, which comes on the heels of an Obama administration proposal to Congress to tighten U.S. financial regulation.
Some experts say CFTC Chairman Gary Gensler, dogged by his prior opposition to regulate financial instruments, could use position limits to show Congress he is serious about getting tough on oversight.
"This initiative is an important one for him to keep Congress on his side," said Pirrong.
Greg Mocek, a former chief of law enforcement at the CFTC and now a partner at Washington law firm McDermott Will and Emery, said Gensler's comments indicate the agency is poised to do as much reform using its current power in hopes of avoiding the legislative process.
"I'm sure they've done the research," said Mocek. "Position limits could be implemented without the legislative process. Will they do that remains to be seen."
Currently, the CFTC does not set position limits on oil and other energy contracts, although futures exchanges do. CFTC has position limits on some agricultural contracts.
During the interview, Chilton said he strongly supported looking into position limits for metals, particularly gold and silver.
While some in industry balk at reforms, the CFTC should find broad support in Congress and among farm groups and food companies who complained their traditional hedging practices were upset by big players tossing so much money into futures.
A raft of anti-speculation bills are pending in Congress and the CFTC's actions have been praised by some lawmakers, especially among Democrats.
"You might see them move before legislation gets done, which I would be for," said Rep. Collin Peterson, House Agriculture Committee chairman. "I think they have the jurisdiction."
But Chilton and others cautioned that position limits are just one piece of the puzzle. Unless over-the-counter trading can be made more transparent, which has been proposed in Congress, those seeking to participate in excessive speculation could flock to these markets.