UPDATE 2-NYMEX sets position limits on some natgas contracts

(Adds possible impact on UNG, a huge natural gas fund, paragraphs 17-21)

NEW YORK, July 28 (Reuters) - The New York Mercantile Exchange will impose what it calls "hard expiration position limits" on seven of its natural gas financially settled contracts effective with the October contract expiration.

In a notice to members issued in June, the exchange said the amendments were being implemented in response to a Commodity Futures Trading Commission (CFTC) rule making, anticipated to be in force by September, that will require exempt commercial markets to establish hard position limits.

NYMEX officials could not immediately be reached for comment.

The CFTC began hearings Tuesday in Washington in response to increased volatility in U.S. commodity futures prices. Officials from the Intercontinental Exchange (ICE.N) and the Chicago Mercantile Exchange, the world's largest exchange, were among those testifying. [ID:nCFTCREG]

In testimony on position limits, CME Group chief executive Craig Donohue said, "Position limits are not a costless palliative to appease angry farmers or gasoline or heating oil buyers."

He said position limits "when improperly calibrated and administered, can easily distort markets, increase the costs to hedgers and effectively increase costs to consumers."

The CME Group Inc (CME.O) owns NYMEX and the Chicago Mercantile Exchange.

The CFTC is set to review whether to set position limits for all finite commodities.

Tim Evans, energy analyst at Citi Futures Perspective in New York, does not expect the changes to have a big impact on activity.

"I don't see this adjustment as suppressing total volume. It shifts volume out of the nearby contract into the second or third month sooner rather than later. That seems like a fairly minor change," he said.

He did not rule out the possibility that other regulatory changes could affect volume, turnover or growth in trading.

On Monday, the CFTC said it would subject ICE's natural gas contract to more oversight, allowing the agency to better track trading in the contract and prevent market manipulation.

The CFTC for the first time used new authority that gives it more oversight over futures contracts listed on exempt electronic trading facilities, which play an important role in setting the price for the underlying commodity.

ICE said it would immediately begin submitting to the CFTC enhanced market data on its cash-settled Henry Hub natural gas contract.

Clearing firms will also give the CFTC data on large traders at ICE, which will be included in the agency's weekly market report on large contract positions held by traders.

ICE's natural gas contract will also be subject to position limits and accountability levels, which restrict the number of contracts certain traders can control at any one time.

Oliver Jakob at Petromatrix, an independent Swiss-based research group, said new rules on position limits could force a few market participants like the United States Natural Gas Fund (UNG.P), to readjust positions.

UNG, a huge exchange-traded fund that tracks the price of natural gas, is waiting for word from the U.S. Securities and Exchange Commission on its request to issue up to 1 billion new units after it effectively ran out of shares in early July.

Jakob said the fund may have to sharply cut natural gas swaps positions on ICE and move into riskier over-the-counter bilateral swaps.

Houston-based brokers Raymond James estimate that more than 60 percent of total UNG holdings were in ICE swaps.

Huge growth in UNG this year raised concerns it was moving natural gas prices higher and increasing price volatility.

Regulators have sought to curb commodity speculation, particularly in energy markets where oil and gas prices spiked to all-time highs last year amid accusations of manipulation.

Some in the industry fear added restrictions will only force market players to less regulated markets overseas.

Donohue said any new rules must enhance market transparency and prevent participants from moving away from regulated markets to less regulated or even unregulated markets.

"The market for energy products is global and there is nothing to prevent market activity from migrating to those platforms that are beyond the Commission's and Congress' reach, including foreign markets," he said. (Reporting by Eileen Moustakis and Joe Silha; Editing by David Gregorio)