CFTC gives Congress ammo to act on speculation

WASHINGTON (Reuters) - Does the world's leading commodity regulator know the difference between a speculator and a commercial entity?

It's a question increasingly being asked of the Commodity Futures Trading Commission as it comes under fire for a massive reclassification of a market position just as oil was surging to nearly $150 a barrel.

The new data shows market speculators hold a more commanding position than previously thought. This will spark the ire of Congress when lawmakers return in September and the push to rein in trading will now be hard to hold back.

When gasoline was surging to about $4 a gallon, some lawmakers called for action against the speculators in oil markets. But there was resistance, especially among Republicans, saying fundamentals were responsible for high prices and that speculators played a minority role.

But the landscape changed abruptly on July 18 when the CFTC quietly reclassified data on its website, transforming enormous commercial positions to that of speculator.

The CFTC said the change was made after receiving new data from a special call to select market participants. But officials did not publicly disclose what groups were involved.

Some news reports identified Vitol Group as the energy trading company affected. Vitol, which describes itself as a "major force in world energy trading," said it had not been notified of any change.

Nevertheless, the revision means that speculators controlled 48 percent of the NYMEX crude oil market as of July 15, compared with just over 38 percent previously.

"That's huge when you look at the numbers," said Phil Flynn, of Alaron Trading, shortly after the revision. "It changes the whole way you look at the recent moves in this market."

Shortly after the revision, the CFTC released its now-controversial Interim Report on Crude Oil. Despite the new data, CFTC concluded that it does not believe "speculative activity has driven changes in oil prices."

But a growing number of lawmakers think otherwise.

"I think the CFTC is losing credibility by the day," Ron Wyden, Democratic Senator from Oregon, told Reuters. "The agency's lack of oversight has hurt a lot of businesses."

Democratic Senator Byron Dorgan of North Dakota said the way the CFTC handled the reclassification "destroyed what little credibility existed. They buried that on their website, the announcement of the largest reclassification, I think, in the history of the CFTC."

At issue is not whether there are speculators in the market, as they are recognized in helping the market function as a place where commercial interests such as an oil refiners can hedge positions. The concern is whether the market was controlled by a few high rollers who distorted the daily gains in oil this year.

"The whole purpose of commodities regulation going back to the passage of the Commodity Exchange Act of 1936 was a recognition that excessive speculation in these markets can distort them and make them unusable for effective commercial hedging," said Michael Greenberger, a professor at the University of Maryland.

He said the rule of thumb in commodity markets is that speculators should not exceed about 30 percent of the market. Now speculation is nearly 50 percent by CFTC's count and even higher by a number of other calculations.

"But even if it is just 50 percent, that is still a figure that is way too high for a market that is essentially designed for hedging purposes by commercial interests," Greenberger said.

While commodity futures trading dates back to the 1800s, the CFTC was created in 1974, and one of its mandates was to protect investors from manipulation. Today the agency oversees more than 1 billion contracts a year with a notional value of $1.5 trillion a day, according to the CFTC.

A lot of critics blame the Commodity Futures Modernization Act of 2000 for the current woes. Dubbed the Enron Loophole, the act exempted most over-the-counter energy trade on electronic energy commodity markets.

Attempts to repeal this legislation has been blocked by the White House, but now the mood could be changing.

Senator Wyden and Republican Senator Chuck Grassley are working on draft legislation to introduce after the congressional recess that would raise taxes on profits earned by speculators in the oil markets.

Wyden's draft proposal is among the flood of bills that have been floated in Congress to address excess speculation in futures markets. The stalled anti-speculation bill could be revisited in September, would limit the number of oil contracts speculators could hold and require institutions to give regulators more details on over-the-counter transactions.

Separately, some lawmakers have also proposed drastic measures such as imposing margins to buy and sell oil and banning institutional investors from futures markets.

Democratic presidential candidate Barack Obama said if he is elected he would close the Enron loophole by requiring that U.S. energy futures trade on regulated exchanges. The Republican candidate, John McCain, also calls for regulatory reform to address speculation.

(Editing by Jim Marshall)