CFTC anti-speculation plan may not be so tough, data shows

CHICAGO/WASHINGTON Tue Nov 5, 2013 6:13pm EST

CME Group Inc.'s CEO Phupinder Gill speaks at the Sandler O'Neill + Partners, L.P. Global Exchange and Brokerage Conference in New York June 7, 2013. REUTERS/Brendan McDermid

CME Group Inc.'s CEO Phupinder Gill speaks at the Sandler O'Neill + Partners, L.P. Global Exchange and Brokerage Conference in New York June 7, 2013.

Credit: Reuters/Brendan McDermid

CHICAGO/WASHINGTON (Reuters) - A new plan to curb commodity speculation could prove to be far less rigorous than feared by markets, data provided by the world's largest futures exchange the CME Group Inc showed.

Under a proposal by the Commodity Futures Trading Commission, the maximum position traders would be allowed to hold in derivatives could dramatically rise rather than tighten sharply, the numbers showed.

In the case of soybean oil contracts, the position limit for traders would be 10 times higher than under the present rules used by the CME, according to the numbers the CME provided to the regulatory agency. A copy of the document was viewed by Reuters.

The CFTC plans to set a maximum of 25 percent of the deliverable supply of the underlying commodity. By comparison, the CME currently uses a 2.59 percent limit in one contract the CFTC plans to cover, that of soybean oil.

In other contracts the CME also sets caps below the 25 percent, and often far below it.

"I don't know how you close the gap between 2.6 percent and 25 percent. I mean I just don't understand it," said a source close to the futures exchange.

The CFTC on Tuesday reintroduced its plan for position limits after a judge knocked down a version of the rule in a ruling last year.

The proposal will put CFTC-imposed caps on positions in four energy contracts, five metal contracts and 10 agricultural contracts for the first time.

At the moment, the CME imposes and certifies the limits itself, and it might still have some role to play once the new rules are in place, the source said. Only in nine agricultural contracts does the CFTC already impose limits.

Though the CME's caps are much tighter than those the CFTC plans to use, the exchange's limits work slightly differently than those of the CFTC, and set hard caps in the last three days of trading before a contract expires.

Outside of that period, they are called accountability levels, which are voluntary limits that help alert the exchange in case traders are amassing large positions.

The CME, which has been lobbying against the rules for position limits, said in a statement that it did not believe the proposed rules were needed, and that exchanges should run the limits rather than regulators.

The rules have been one of the most hotly debated aspects of the 2010 Dodd-Frank law and were fought by banks, who feared high costs, though users of raw materials such as airline companies and farmers are often in favor.

The CME's findings are relevant because the CFTC will use the exchange's estimates as the basis for setting its own position limits, the rules for which still need to be finalized by the commission's members.

A spokesman for the CFTC said that the agency would need more time to react to the CME's detailed findings.

The CME's position limits on gasoline futures at 3.45 percent and for gold futures at 2.75 percent also stand far below the CFTC's planned 25 percent cap.

The CME is also opposed to so-called conditional limits which put a 125 percent cap on cash-settled contracts for traders without a single physically settled contract.

"We are especially concerned about this 5 times higher limit for cash-settled contracts given the updated deliverable supply information that we recently provided to the CFTC," the CME said in a press release.

(Reporting by Douwe Miedema; editing by Matthew Lewis)

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