* CFTC to vote on final position-limits plan on Oct. 18
* Rule unlikely to end debate whether market needs limits
* Vast disapproval shows CFTC on right track: O'Malia
* Sanders: CFTC must end excessive speculation for good
By Christopher Doering
WASHINGTON, Oct 17 U.S. regulators this week
will finalize their toughest crackdown yet on volatile oil and
metal markets, concluding nearly four years of fierce debate
over whether limits on speculative trade can tame prices.
As Wall Street bemoans the measure as a sop to politicians
who have vilified speculators for driving grain and oil prices
to painful peaks since 2008, the Commodity Futures Trading
Commission will push through a groundbreaking rule to restrict
the number of commodity contracts a trader can hold.
"I think both sides are going to be a little upset with
this rule," Scott O'Malia, a Republican commissioner at the
CFTC, told reporters at a Futures Industry Association
conference in Chicago last week.
"I guess the old hallmark of policy is if you've offended
everybody then you're in the right space."
For many big commodity traders, it will be a case of having
won some battles after losing the war: the use of rigid caps on
positions is one of the most contentious pieces of the
Dodd-Frank financial overhaul law for many, and may force big
players like Morgan Stanley to curb some customer business.
Yet a draft obtained by Reuters last month suggested banks
and traders had won big concessions after lobbying hard against
more oversight. Whether those measures are retained in the
final version will be one of the most important facts to emerge
from Tuesday's session, the latest in a rule-making marathon.
Assuming the rule is approved, the caps will mark the start
of a new era, one that should eventually help answer the
question of whether limits will cap prices by stemming the
surge of investment into commodity markets -- or whether they
will simply drive activity overseas, where rules are laxer.
While the limits are nominally intended to prevent market
manipulation and excessive concentration, CFTC Chairman Gary
Gensler has also been under intense political pressure to
impose the measures as a way of tempering prices.
He has worked tirelessly to win support from the
commissioners, and as Reuters reported last week, he finally
won over enough votes to push through the rule on Tuesday.
In August, Senator Bernie Sanders, a staunch critic of oil
speculators, intentionally released oil-trading data that
exposed the extensive positions speculators held in the run-up
to record prices in 2008. He has long criticized the CFTC for
missing a January 2011 congressional deadline to finalize rules
"The bottom line is that we have a responsibility to ensure
that the price of oil is no longer allowed to be driven up by
the same Wall Street speculators who caused the devastating
recession that working families are now experiencing," Sanders
said in a statement.
"That means that the CFTC must finally do what the law
mandates and end excessive oil speculation once and for all."
But will position limits stop $5-a-gallon gasoline or
prevent the cost of bread from skyrocketing?
Critics say no. Instead, they argue, it will will harm U.S.
markets by curtailing volume, increasing volatility and sending
traders to overseas markets.
"Position limits are like short sale bans: it's trying to
influence asset prices when they're not to your liking," said
Remco Lenterman, a managing director at Amsterdam-based IMC
Trading BV. "And the evidence is abundant that it's
"We have politicians trying to influence asset prices when
they think they don't like the fact that they're too high, or
the public doesn't like that they're too high," he added.
Critics say the CFTC has yet to produce economic analyses
to connect speculators to spikes in oil prices.
The rule does have supporters in the private sector.
Airlines and some farm groups have loudly complained that
hedging is now near impossible because of the huge influx of
money into commodity markets.
Just last week, more than 450 global economists pushed for
action on position limits in order to curb the effect of
excessive speculation on global food prices. In a letter to the
Group of 20 finance ministers, they said excessive financial
speculation is "contributing to increasing volatility and
record food prices, exacerbating global hunger and poverty."
Much will depend, however, on just how tight those caps are
set. A previous version of the rule published nearly two years
ago suggested that no more than a handful of companies would
have been affected by limits on oil and gas markets.
Dozens of academic, government and bank studies on the
subject have differed on whether speculators influence prices
long-term or whether they simply respond to market conditions.
That argument is likely to rage on for months if not years:
The limits may be phased in gradually as the CFTC gets a better
handle on the vast $600 trillion swaps market that is now under
"IT'S A LONG MARCH"
The draft final rule indicates the CFTC will still snag
large passive index funds, which critics have blamed for
causing a massive run-up in oil prices in 2008 by buying and
holding futures contracts without regard to market
fundamentals. Whether these changes remain in place in the
final version voted on this week remains to be seen.
"I suspect there are going to be a large number of positive
changes in the rule," said Paul Pantano, a partner at
Cadwalader, Wickersham & Taft, pointing to changes in account
control and easing of some reporting requirements.
"But until we see the final rule a lot of that could be
changing. It's a long march," he said.
A paper from the St. Louis Federal Reserve released this
month has said speculators were partially responsible for
influencing the price of crude from 2004 to 2008.
After scouring through a host of economic and oil data to
find the major factors, they found the surge was mainly driven
by growing global thirst for oil. But traders also were to
blame with 15 percent of the price increase due to so-called
"financial speculative demand shocks."
During this same time, they found a rise in investing by
hedge funds, large financial institutions, and other investors
into the oil futures market, with assets allocated to commodity
index trading strategies surging to $260 billion as of March
2008 from $13 billion four years earlier.
Exchanges and other traders have long argued that limits
are unnecessary and will curtail market volume, reduce
volatility and send traders fleeing to overseas markets. All
this, they argue, would create a ripple felt from Wall Street
down to main street.
"I want to see what is considered a hedge, and I want to
see who can be the counterparty to certain hedges because we
have a lot of farmers," said Tammy Botsford, vice president and
deputy general counsel at Penson Futures, in an interview in
ahead of the position limits release.
"Protecting their ability to participate in the (over the
counter) market and the futures market, and not have them
forced out of either, is important," she said.