Q+A-How tough will US CFTC be on speculators?

WASHINGTON Nov 15 (Reuters) - Companies that trade energy, metals and agricultural futures and swaps are closely watching how tough a stance the U.S. futures regulator takes against speculators in new position limits for commodities.

Position limits determine the maximum number of contracts an investor can hold in a specific instrument or market.

Many traditional hedgers that use markets to manage their physical risk want the Commodity Futures Trading Commission to write rules that would curb the flow of "hot money" from investment funds they believe have overwhelmed their markets since 2008, when prices spiked to record levels.

But other players in the market -- including funds and banks -- say there is no evidence of excessive market-harming speculation, and argue draconian rules would push trade offshore, crimping liquidity that ultimately helps hedgers.

Here are some questions about what happens next:

HOW IS THE CFTC DEVELOPING ITS RULES?

The work is led by a team of about a dozen CFTC staffers, some of whom helped develop proposed limits for energy futures markets in January.

That plan was withdrawn after the CFTC received additional authority over the $615 trillion over-the-counter derivatives market in the Dodd-Frank Wall Street reform law -- but it is expected to form the basis for the new, broader scheme.

The team is also considering input from hedgers, banks and funds that have requested meetings, as well as comments submitted to the CFTC's website.

For a factbox on the meetings, click on: [ID:nN1521703]

Five commissioners, including Chairman Gary Gensler, will have the final word on whether the rules go ahead. They have also been meeting with industry.

WHEN WILL THE CFTC UNVEIL THE LIMITS?

The agency is aiming to unveil the proposed regulations at a hearing slated for Dec. 1, but the timing is not firm. [ID:nN11106021] The draft will remain open for comment for at least 30 days.

The CFTC's initial proposal could be tweaked but will have a lot of momentum to move forward because of the agency's heavy regulatory workload. [ID:nN10180211]

The Dodd-Frank law specified the rules for energy and metals must be finalized by mid-January, but observers say that deadline is most likely impossible to meet now. [ID:nN10190301]

The final deadline for agricultural limits is in April.

HOW WILL THE CFTC KNOW WHERE TO SET LIMITS?

For futures, limits will probably be based on open interest, and are expected to be high in the beginning. That was the approach used in the now-withdrawn proposal. [ID:nN19258225]

Limits for swaps -- and aggregate limits across futures and swaps -- are trickier. The CFTC will not know the size of swaps markets and who is trading them until it sets rules for the trading, clearing and reporting of swaps, and gives players time to implement them.

Commissioners have acknowledged it will be hard to set limits until they have more data, but it could take years for new swap data repositories (SDRs) to be up and running.

Gensler has floated the idea of establishing a formula in the upcoming rule -- but waiting to put the limits into force until the data is available. [ID:nN19334663]

But Republican Commissioner Jill Sommers has already said she opposes setting a formula without the data. [ID:nN03280029]

HOW WILL THE LIMITS BE MONITORED?

The CFTC plans to begin gathering data on large swaps positions from about five clearinghouses and 180 swap dealers and clearing members through a new report, starting in about six to 10 months. [ID:nN19108084]

The report may be retired once the SDRs are running.

WHEN WILL THE CFTC START ENFORCING THE LIMITS?

It is unclear. The CFTC has the legal flexibility to wait to phase in the deadlines, top officials have confirmed.

The Futures Industry Association is encouraging a go-slow approach using an "interim final rule" that would allow the CFTC to make changes as it gets more market data.

For the FIA's position, click: r.reuters.com/peq58p

WILL THE CFTC SET LIMITS FOR ALL COMMODITIES AT ONCE?

Also unclear. At the very least, most observers expect limits for crude oil, natural gas, gasoline, and heating oil futures, and "significant price discovery contracts" traded on IntercontinentalExchange (ICE.N) -- as well as for gold and silver futures owned by the CME Group (CME.O).

Some believe the CFTC will spell out in its rules how it plans in the future to evaluate other contracts and swaps to establish limits, or ask questions about how best to do it.

WHO WILL GET AN EXEMPTION FROM THE LIMITS?

"Bona fide hedgers" using futures or swaps to manage the risk of buying or selling the physical commodity can be exempt. The CFTC can also exempt other players as it sees fit.

Dealers are watching closely to see how the CFTC will treat their positions related to swaps done with hedgers. The CFTC could provide a broad "risk management exemption," or may instead "look through" dealers' positions and exempt only those directly related to a bona fide hedge.

HOW WILL FUNDS BE AFFECTED?

It is unlikely funds will receive a hedge exemption. That could affect dealers' ability to take on their business, unless the CFTC grants a special exemption for such trading.

Traditional hedgers such as airlines and grain handlers have urged the CFTC to limit fund participation in markets and limit their ability to receive exemptions. [ID:nN14117852]

WILL HEDGERS BE ALLOWED ALSO TO SPECULATE?

The CFTC's initial proposal for energy markets restricted traders with a hedge exemption, or dealers with a risk management exemption, from also speculating.

That "crowding out" concept is expected to be abandoned after it was roundly criticized as unworkable. [ID:nN05262367]

WHAT ABOUT FIRMS THAT HEDGE, DEAL AND SPECULATE?

Many large commodities players have ownership stakes in entities that hedge, deal and speculate. The CFTC's January proposal for energy futures suggested adding or aggregating positions for entities that share common ownership, regardless of whether the entities share trading strategies and control.

Many industry players have pointed out the legal and logistical hurdles of sharing position data across different desks and entities, and are worried the CFTC will take an aggressive stance. (Reporting by Roberta Rampton; Editing by Lisa Shumaker)