WASHINGTON (Reuters) - The futures regulator on Thursday unexpectedly delayed its most aggressive measures yet to prevent speculators from distorting commodity markets after it failed to find enough support for a procedural vote.
A draft proposal to apply position limits across commodity futures and swaps markets ran into objections both from commissioners who want the agency to act quicker to crack down and those who fear moving too fast will damage the market.
The surprise set-back for the Commodity Futures Trading Commission’s most contentious reform is the latest sign of slowing progress in implementing the sweeping Dodd-Frank bill, the biggest regulatory overhaul since the Great Depression. Republicans have stepped up calls to tap the brakes.
CFTC Chairman Gary Gensler, who initially said he supported the proposal, told a hearing he would delay a vote on putting the package out for a 60-day public comment period. A separate vote would still be required to approve the rules.
“I think it’s just appropriate to let this one ripen a bit more,” Gensler said.
The delay is unlikely to please Wall Street or big traders, who had been eager for clarity on the rules. The industry had appeared to win key concessions since January, when the CFTC first proposed capping the influx of investor capital that some blamed for driving oil and grain prices to records in 2008.
One source at the hearing said it was clear Gensler did not have majority support from the five-person commission.
Gensler told reporters the commission would take it up again when it was “ready,” but he offered no timeline on when it will complete the complex plan. The agency’s next scheduled rule-making session is January 13.
Bart Chilton, the most vocal proponent of cracking down on speculators, told Reuters he would have voted against the plan, which included a two-step approach to allow more time for the agency to gather information on the opaque swaps market.
“It appeared not enough of my colleagues are concerned about the delay,” Chilton said in an interview. “I wanted an interim step that would allow us to address potentially excessive concentrations in January. My proposal did that.”
Chilton said Gensler agreed to instruct CFTC staff to implement his plan to set so-called position “points”, which would trigger a CFTC review and allow commissioners to vote whether to force traders to reduce positions.
Other commissioners voiced concerns about the speed of reforms and a lack of information about the proposals.
“I think it’s bad policy to promulgate regulations that are not enforceable,” said Jill Sommers, a former official with the industry-backed International Swaps and Derivatives Association who has voted several times against releasing new CFTC rules.
The proposal was part of efforts to boost oversight of the $600 trillion global over-the-counter derivatives market required under the Dodd-Frank bill.
The bill gave the CFTC oversight of the swaps market, but assessing the size of the vast size has slowed the rule-making process. The proposal unveiled on Thursday set out general formulas for calculating limits and applying those to the spot month contract. But it suggested waiting until the agency has more swaps data before expanding that to all months.
The incoming Republican chairmen of the two House committees that oversee U.S. financial markets warned regulators on Thursday that hasty reforms “could damage America’s economic engine” and encouraged them to take time and get the rules right the first time.
“We stand ready to work with you even if that means we all consider delaying statutory deadlines or moving forward with legislation to preserve a viable American derivatives marketplace,” wrote Spencer Bachus, who will chair the Financial Services Committee, and Frank Lucas, who will become Agriculture Committee chairman.
In a package of documents released ahead of the hearing, the CFTC said the plan to restrict the number of swaps and futures contracts that speculators can hold in energy, metals and agricultural derivative markets could affect nearly 80 agricultural traders and dozens of metals and energy players.
But the rules would likely have offered some relief for companies such as Goldman Sachs and Royal Dutch Shell that argued overly strict rules could reduce market liquidity, elevate volatility and make the markets more risky.
Compared to the previous proposal in January, which applied only to energy markets, the new rules attempted to draw a clearer line between financial players who have flooded commodity markets with over $350 billion over the past decade, and the traditional traders who often take large positions to hedge their own -- or customers’ -- physical trading.
“The truly inane aspects of the previous proposal, e.g. crowding out and the limited risk management exemption, have been jettisoned,” said Craig Pirrong, a finance professor at the University of Houston.
“So the main sticking point now is the narrow bona fide hedge exemption.”
Under the proposed rules, the big banks would have claimed an “unlimited bona fide hedge exemption” -- allowing them to engage in hedging on behalf of big producers or raw material customers without counting against their own limits.
This replaced a more limited risk management exemption proposed in January.
But trades to offset swap deals with speculators or investors would still be subject to the limits, and the CFTC narrowed the bona fide hedger definition, seeking to limit it only to those who have a legitimate physical business.
The biggest change was the removal of a “crowding out” provision that would have made it hard for any company to run both speculative and hedging books. This had drawn widespread criticism and was generally expected to be removed.
The CFTC also appeared to relax a provision on aggregation, which requires companies to combine positions across any firms in which they own more than 10 percent. It said a firm may be allowed to exclude those positions if the investment is passive and the stakeholder does not participate in management.
Writing by Russell Blinch; Editing by Jonathan Leff