October 7, 2009 / 10:09 AM / 10 years ago

Excessive CFTC regulation could backfire - CME chief

* Excessive trading curbs could boost unregulated platforms

* CFTC mulls CME’s proposal for position limits

* CME lobbies against mandating clearing in OTC market

By Jennifer Tan

SINGAPORE, Oct 7 (Reuters) - The U.S. Commodity Futures Trading Commission (CFTC) risks driving trades out of regulated markets into unregulated platforms if it clamps down excessively on speculation, the CME Group chief said on Wednesday.

The regulator of futures markets in the United States aims to rein in speculation in energy and commodity markets, particularly oil. Excessive speculation has been blamed for sending food and oil prices to record highs last year.

The CFTC is reviewing rules on how many futures contracts that hedge funds, investment banks and other speculators can control — so-called position limits — which could be put in place later this month or next month.

Large investors are bracing for the new regulations by rebalancing their portfolios, often sharply reducing positions in commodities that fall under U.S. regulation.

Terry Duffy, Executive Chairman of the world’s largest derivatives exchange CME Group Inc (CME.O), warned that the CFTC’s attempts to curb participation in a regulated marketplace could backfire.

“What they are going to do is to drive business out to an unregulated OTC platform, whether it’s in the U.S. through an ETF (Exchange Traded Fund) or a European or Asian entity,” Duffy told reporters in Singapore, where the group opened its Asian headquarters on Wednesday.

“It’s kind of counter-intuitive to what they are trying to achieve, which is to bring more transparency to the marketplace, and you do not do that by driving business off a regulated platform.”

Asia’s oil trading hub Singapore, for example, has asserted it saw little use in following the U.S. in imposing stricter rules to curb speculation and volatility. [ID:nSP213486]

The attraction of a more lightly regulated physical market, plus newly planned oil futures contracts and more OTC swaps clearing mechanisms, could boost the city-state’s draw for investment banks, traders and oil firms who remain confident in commodity and oil trading.


Duffy said the CFTC historically did not have the expertise to set position limits on energy markets.

“Instead, we have proposed hard position limits on our energy complex, and they are taking a good, hard look at it. The legislators will be watching closely what the regulators do, to make certain they do not limit participation.”

On the issue of clearing houses, Duffy said CME was lobbying against mandating clearing in over-the-counter (OTC) market.

“Wouldn’t we be the beneficiary of all these products coming on to our exchange? Potentially, yes, and potentially, no. The risk is too great that the OTC market would pick up and go somewhere else because some of these products are not clearable transactions.”

Central clearing is a key point in the Obama administration plan to bring OTC derivatives under federal regulation. It would mandate standardised OTC derivatives to undergo clearing and trade on regulated exchanges.

Duffy said one measure was to offer capital incentives for parties that want to do central clearing for their OTC deals.

“We are there to provide clearing for the OTC market, but we need to do it the smart way, so we don’t throw the baby out with the bathwater,” he added. (Editing by Ramthan Hussain)

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