Raising margins on oil trading "dangerous": U.S. CFTC

WASHINGTON (Reuters) - Raising margin requirements for crude oil trading to quell speculation could set a "dangerous precedent" and drive trading activity away from U.S. exchanges, the head of the U.S. Commodity Futures Trading Commission said on Friday.

Raising crude oil margin requirements as some Democrats in the U.S. Congress have suggested "would be dangerous and may send a lot of this business offshore or to unregulated markets and I think that is dangerous precedent," CFTC Acting Chairman Walt Lukken told CNBC television.

The CFTC, the top U.S. futures market regulator, on Thursday said it will step up surveillance of energy trading by tracking index funds and overseas trading of West Texas Intermediate contracts on a key U.K. exchange.

Lukken said there was no "smoking gun" link between index trading and higher commodity prices, noting that some agricultural commodities heavily traded by index funds have seen prices fall over the year.

Democrats in Congress have been looking for ways to rein in speculation in crude oil trading, which they see as the prime mover behind the surge in U.S. oil futures to record highs above $135 a barrel this month.

Senate Majority Leader Harry Reid this month proposed legislation that requires the CFTC to boost margin requirements for all oil futures trades, in an attempt to put a lid on what Democratic Sen. Byron Dorgan has called "an orgy of speculation in the energy markets."

The CFTC would oppose such action, Lukken said.

"If we become too draconian we will send all this either overseas or into darker markets and we don't want that. We want to keep this in the sunshine," he said.

(Reporting by Chris Baltimore; Editing by Christian Wiessner)