Firewalls could dampen commods futures - analysts

* CFTC wants SEC-style firewalls, insider trading rules

* Rules could threaten price discovery function of market

* Unclear how proposals would treat commercials, brokers

* Could push volume to overseas exchanges to avoid issues

By Roberta Rampton

PALM BEACH, Fla., Feb 5 (Reuters) - Commodity traders say they are nervous about a proposed clamp-down on information flow in their markets, part of broad reforms proposed by regulators and lawmakers eager to try to curb risky trading practices blamed for the 2008 financial meltdown.

The Commodity Futures Trading Commission has said it wants trading firms to erect securities-style firewalls between analysts and traders, and also wants to expand rules to prevent insider trading. [ID:nN25204328]

Traders are concerned about the move's potential impact, given that information is "the grease that lubricates the wheels in price discovery" -- a primary function of futures markets -- said Rich Feltes, director of research for MF Global MF.N.

The move comes at the behest of the Obama administration, which wants the CFTC to harmonize rules with the Securities and Exchange Commission as both regulators seek to improve oversight of derivatives. [ID:nN16351149]

CFTC Chairman Gary Gensler has said he wants a ban on trades using nonpublic information from government sources. The ban has been dubbed the "Eddie Murphy" rule after the actor's role in the movie "Trading Places," in which traders stole an Agriculture Department report on the U.S. orange crop.

Not all securities-style insider trading regulations will work for commodities, Feltes said.

"What worries the trade is they see this as the camel's nose under the tent," Feltes said in an interview on the sidelines of a meeting of the Commodity Markets Council, a trade group for commodity exchanges and those who use them.

MANY STRANDS TO REGULATORY REFORMS

For example, he said, commercial players in commodities markets naturally have insider information about fundamentals in underlying physical markets because they buy and sell the cash products.

"Are you going to be prosecuting commercials for the information they use in cash markets?" Feltes said.

Large speculators could move their business to markets outside the U.S. regulatory net, if the new rules would expose them to insider trading allegations and lawsuits from disgruntled participants who find themselves on the losing end of trades, Feltes said.

That would leave U.S. markets with less liquidity, defeating the purpose of regulatory reforms, he said.

It's unclear what the requirements would mean for futures brokers, whose job it is to gather information about markets, present it to clients, and make recommendations about ways to use the market to manage risk, said Pete Anderson, chief executive of FCStone, a U.S. trading house owned by International Assets Holding Corp IAAC.O.

"What kind of Chinese wall does there have to be?" Anderson said in an interview.

For the new insider trading measures, the CFTC will need authority from Congress, which is currently working on a broad package of financial regulatory reforms. [ID:nN21221012] [ID:nN04208561]

Separately, the CFTC has proposed new position limits for energy traders, which some analysts worry could drive large players to overseas markets. It will make a decision sometime after a public comment period ends in late April.

Uncertainty about proposals to regulate the over-the-counter market for derivatives has pushed some traders to look at exchanges outside the United States, FCStone's Anderson said. (Editing by Walter Bagley)