Analysis: CFTC "position points" lack bite of hard limits

WASHINGTON Fri Jan 7, 2011 12:46pm EST

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WASHINGTON (Reuters) - The largest speculators in U.S. commodity markets have little to fear from a new plan by their regulator for heightened surveillance -- a precursor to position limits that won't likely force anyone to exit trades.

Traders such as Goldman Sachs, JPMorgan and Morgan Stanley will likely get extra questions about their over-the-counter swaps from the Commodity Futures Trading Commission when they exceed certain complex thresholds in 28 energy, metals and agricultural futures markets.

The added surveillance, known as the recently proposed "position points", is an attempt to appease Bart Chilton, a CFTC commissioner who says the agency should act faster to make sure speculators cannot help drive up prices at a time when food and copper have hit records and oil nears $100 a barrel.

It is an interim measure until the CFTC has the data needed to put in place speculative curbs required by a new Wall Street reform law.

But barring an extreme price spike or market emergency, lawyers and analysts say the CFTC probably will not force speculators exceeding the "position point" thresholds to liquidate positions.

Emergency powers are reserved for times when markets are threatened by manipulation or during major disturbances, said Jill Sommers, a Republican commissioner.

"It's my opinion that our emergency authority does not extend to us being able to tell a market participant to get down just because a position is large. There are other people who feel differently," Sommers told Reuters.

CHILTON'S STOP-GAP

Consumers and lawmakers have pushed the CFTC to clamp down as commodities became a hot new asset class, attracting investors in funds run by players such as Deutsche Bank, U.S. Commodity Funds and Centaurus Energy.

Traders argue there is no evidence speculators inflate prices, and say curbs could make prices more volatile.

The Dodd-Frank bank reform law instructed the CFTC to have limits in place by next week -- a deadline it will miss.

It could take months for the CFTC to gather data on traders' positions in over-the-counter swaps, and plug that into limit formulas unveiled last month.

Chilton, a Democratic commissioner and advocate for limits, was dismayed the CFTC failed to act more quickly, and initially withheld his support for the limit proposal.

Until limits are in place, Chilton has pushed for "position points" so commissioners can determine whether to urge traders to reduce holdings -- or even vote to require that traders not exceed the "points" levels.

"I have been convinced that the interim position point system is, unfortunately, the best the agency can do at this time," Chilton said in a statement this week.

Chairman Gary Gensler last month directed his staff to ask the largest traders in futures markets about the size of their swaps holdings, and report monthly to a closed meeting of the CFTC's five commissioners.

Staff would target those who exceed 10 percent of open interest in the first 25,000 contracts of a futures market, plus 2.5 percent of open interest above that level -- which corresponds with the position limit the agency has proposed.

The insight would "help us identify potential concerns", Gensler said -- but he stopped short of addressing what the CFTC could or would do if it found any issues.

"Position points" will likely be a focus at the CFTC's January 13 discussion on the long-term hard limits to get more clarity about what action the regulator could take before the new limits become effective.

"There are questions as to what has been agreed to do in order to get Bart to vote for it," an industry source said.

CAN LARGE POSITIONS TRIGGER EMERGENCY POWERS?

The CFTC has the power to limit positions or require traders to liquidate positions in a market emergency.

But it would be "extreme" for the agency to declare an emergency simply because it found traders over the "position point" threshold, said Philip McBride Johnson, a retired derivatives lawyer and former CFTC chairman.

If the plan results in ad hoc market intervention, the CFTC risks hurting liquidity and distorting prices, said Sharon Brown-Hruska, a vice president of NERA Economic Consulting and former CFTC commissioner.

"While I have high regard for the commissioners, I do not know how they know the 'right' number or points," she said.

GAS AT $4/GALLON COULD PUSH CFTC

A spike in oil prices could push the CFTC to take quicker action on speculators if energy costs began to threaten the fragile U.S. economy, said Michael Greenberger, a law professor at the University of Maryland and former CFTC official.

"What happens when gasoline gets up to around $4 is the American public starts complaining and pointing the complaints to Congress and the president," Greenberger said.

The extra data acquired through the "position points" plan would help the CFTC be ready to move, he said.

"I don't think it's reached the point of providing the pain to the American consumer where the political tsunami would dictate action," he said.

(Editing by Dale Hudson)

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