Global bank group slams new commodity oversight

WASHINGTON (Reuters) - A global financial industry group on Monday blasted attempts by European and U.S. regulatory authorities to rein in speculation in commodity markets, saying tighter rules would hurt market liquidity.

The Institute of International Finance, as part of a concerted lobbying effort by the industry against more regulation, said there was no evidence speculators were roiling commodity markets and sparking price runs.

The institute, or IIF, opposed a plan to limit positions big players can hold in oil and other commodity markets.

The report, delivered to the Group of 20 leading economies, comes as regulators in Washington are scrambling to put the finishing touches on its position limit plan.

The Commodity Futures Trading Commission, or CFTC, has been writing regulations to limit speculation under the Dodd-Frank law enacted in response to the financial crisis of 2008.

Position limits have been supported by lawmakers and some industry groups, including transportation and farm groups, who say big players are driving up energy and food prices.

The IIF, representing more than 440 banks worldwide, is the latest industry group to argue the regulations could do more harm than good. It said there was no evidence position limits are needed, and regulators have failed to make the case for curbing excessive speculation.

“Officials or people that want to argue for possible regulation of commodities should do more analysis, more homework to really prove the case that financial investments do have an impact on price,” said Hung Tran, a deputy managing director at the IIF.

Regulators around the world have wrestled with the role of speculators as institutional investors, hedge funds and exchange-traded funds flocked to commodity markets.

French President Nicolas Sarkozy has blamed speculation for high food prices, and has made tougher regulations a key plank for his G20 presidency. The IIF noted G-20 leaders do not agree whether tougher regulations are needed.

Some CFTC commissioners also are skeptical the limits would prevent a run-up in prices. The agency’s economists have not been able to find a causal link between speculation and price volatility. One study concluded commodity index traders are not causing price volatility and may actually help reduce it.

“The impact of position limits will be complex -- I can anticipate impact from both sides,” said Wei Xiong, a professor of economics at Princeton University, who noted limits could make price changes less smooth in normal times and reduce volatility during periods of market stress. “The net effect requires a thorough quantitative assessment,” he said.

For its report, an IIF task force reviewed academic literature and “studies by official sector bodies.”

The task force included representatives from companies that have lobbied against CFTC position limits, including Bank of America, Morgan Stanley, Barclays Capital, Deutsche Bank, Goldman Sachs, and the International Energy Agency.

Tran said if regulators chose to implement position limits they should take into account the unique trading conditions and characteristics of each commodity rather than implementing a one-size-fits-all approach across all commodities. He also encouraged regulators around the world to work together.

“If you need to do something then please do it on an internationally coordinated and internationally consistent way rather than each country doing their own things,” he said.

Additional reporting by Roberta Rampton and David Sheppard; Editing by Russell Blinch and Alden Bentley and David Gregorio