CFTC's Gensler seems determined to act

WASHINGTON (Reuters) - As head of the top U.S. futures regulatory authority, Gary Gensler has a tightrope to walk as he seeks to tighten oversight of U.S. commodity markets.

But no one should doubt his determination to bring to heel the markets that are now seen by many outside of Wall Street as unruly and far too risky for the well-being of the economy.

Gensler, the newly minted chairman of CFTC and not previously known for his regulatory zeal, wrapped up two days of hearings that are part of a months long process to tighten the lid on energy and commodity trading.

It also is very much part of the Obama Administration's efforts to quell the proliferation of exotic trading products such as credit default swaps that many believe helped touch off the global financial meltdown.

Predictably the big Wall Street firms and the exchanges expressed concern that ill conceived new oversight would hurt "liquidity," preventing funding from flowing into commodity markets as traders take their business to more loosely regulated markets overseas.

"We believe that eliminating or limiting swap dealer hedge exemptions not only will not address the 'swap loophole' but actually will have several negative consequences," said Donald Casturo, managing director of Goldman Sachs Group Inc.

Chimed Blythe Masters, managing director and head of the global commodities group at J.P. Morgan: "Those transactions are vital to the counterparties entering into them for risk-management or investment purposes, both of which are legitimate and important objectives."

But Gensler, the former Goldman Sachs' executive who almost didn't get the chairman's nomination this year because of his past role in shielding over-the-counter derivatives from regulation, adopted a tough tone throughout the hearing.

"No longer must we debate the issue of whether or not to set position limits," he said.

How far the CFTC will go is, however, open to question. Here are some likely actions.

* CFTC will wrest control from exchanges the power to set investor position limits, especially in energy. CFTC will also call the shots on granting exemptions to swap dealers and others.

* CFTC will demand a lot more data on over the counter positions and on other positions.

* CFTC will seek more information to back up claims that positions are for bona fide hedging.

* CFTC may revisit the classification of traders as commercial and noncommercial.

* CFTC will seek Congressional authority to set position limits in the over-the-counter markets in addition to the regulated markets.

But it is also unlikely Gensler will withdraw exemptions to the point where pension funds and other groups will exit commodity markets. Despite moving quickly to tighten position limits in the energy markets -- CFTC has vowed to have new rules in place by the fall -- it has acknowledged it must walk a fine line so as to not roil markets.

More likely the CFTC will try to fashion a compromise to keep trading interest high while also trying to ensure investors groups can't build dominating or manipulative positions.

But the CFTC can't tread too softly because if it does Congress will likely act. There are a slew of bills in Congress that could still be enacted that would prove to be far tougher on CFTC.

A number of lawmakers in Congress are convinced that excessive speculation was behind last year's rally in commodity markets, especially when gasoline topped $4 a gallon -- something that also raised the ire of constituents.

Gensler and others in Congress also don't buy the argument the worst has past now that prices have come down with the weak economy.

"Inaction is just not acceptable," Gensler said during an interview with Reuters Television.

"Just think about all the Americans that are out of work today because of the excesses of Wall Street. I just feel we have to do this, working with Congress."

(Additional reporting by Christopher Doering and Ayesha Rascoe; Editing by David Gregorio)