Rare position limit fine demonstrates CFTC resolve

WASHINGTON Tue Mar 2, 2010 11:16am EST

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WASHINGTON (Reuters) - The top U.S. futures regulator will no longer turn a blind eye to companies that defy investment limits imposed on their positions, as evidenced by a rare fine slapped on a firm last week.

The position limit fine levied by the Commodity Futures Trading Commission comes as its chairman, Gary Gensler, moves to prevent market concentration through new position limits on energy futures -- and examines whether to do the same for metals.

"I see this as a harbinger of things to come," said Craig Pirrong, finance professor at the University of Houston's Global Energy Management Institute.

"Chairman Gensler has made position limits a centerpiece of his more aggressive regulatory approach. As a result, it is almost inevitable that the Commission will take a hard line on any violations of existing limits," Pirrong said.

The CFTC's proposed energy position limits, set high enough to affect only a handful of the largest traders, have raised concerns about rules for exemptions and other provisions. They are up for public comment until April 26.

The CFTC last week fined Swiss firm UBS AG (UBSN.VX) $130,000 for exceeding spot-month position limits in natural gas, heating oil and platinum futures contracts between 2006 and 2008.

"I think that the announcement sort of speaks for itself," Gensler told reporters shortly after the fine was revealed. "All market participants need to comply with the rules."

The New York Mercantile Exchange, part of the CME Group (CME.O), also fined UBS $50,000 for violating heating oil spot-month position limits on January 28, 2008, which NYMEX said was the fourth such violation in a 12-month period for UBS.

The CFTC could not provide precise statistics for how many times in the past its enforcement division had levied position limit fines, but cited two previous cases in the past decade.

"I think it's fair to say it's rare for the commission to bring position limit cases," said Geoffrey Aronow, who was the CFTC's enforcement director from 1995 to 1999.

Traditionally, the CFTC has left it up to exchanges to police position limit violations, which are often caused by record-keeping issues, said Aronow, now a partner at Washington law firm Bingham McCutchen LLP.

In most cases, traders don't consciously seek to violate position limits, Aronow said, noting more infractions are related to losing track of positions or being "unable to trade out of a position in a way that they're comfortable with in time," he said.

"Historically, it's not often that you would look at one of these situations and say, 'This is of sufficient seriousness that it's necessary for the commission to take this case.'"

While the exact circumstances of the UBS fine are unknown, the timing of the penalty sends a message that the CFTC is prepared to enforce violations in the future, Aronow said.

"I do think it's fair to read into it as this was something that was viewed as an opportunity to do something on the public record at a time when position limits are an issue," he said.

While the size of the fine was relatively small, the signal it sends could put a damper on some trade, said Jason Schenker, president of Prestige Economics in Austin, Texas.

"The bigger question is, 'Is there more to come?'" he said. "It could be a price bearish specter haunting the market."

The fine could please some members of the U.S. Congress who view speculation as having caused the 2008 run-up in energy prices, and who have been critical of the CFTC for failing to clamp down on speculators.

"What will be interesting to see is how this aggressive stance will affect attitudes toward the commission's proposed limits," Pirrong said.

(Additional reporting by Christopher Doering and Ayesha Rascoe in Washington and Joe Silha and Robert Gibbons in New York; Editing by Lisa Shumaker)

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