WASHINGTON (Reuters) - Speculators could face curbs on wheeling and dealing in commodity markets after the U.S. futures regulator on Thursday advanced a plan to prevent the biggest traders from taking market-distorting bets.
The proposal passed 4-1 and the Commodity Futures Trading Commission will now open up the proposal for public comment, reigniting a long-simmering debate about the role banks and funds play in energy, metals and agricultural markets as prices again soar to lofty heights.
The plan would attempt to curb positions investors can hold in commodity markets, with the aim of preventing large players from controlling the market. Consumers and some lawmakers say it would prevent a run-up in prices, which hit record highs in 2008 in oil and many food staples. Prices are rising once again, which could lead to riots and food shortages in developing nations.
But the future of the plan was thrown into question after Democratic Commissioner Michael Dunn, whose support is vital for the plan to be finalized, said he wasn’t convinced the plan was needed.
“With such a lack of concrete evidence, my fear is that, at best, position limits are a cure for a disease that does not exist or at worst, a placebo for one that does,” Dunn said.
Dunn, a circumspect senior commissioner who rarely airs his personal views in public, made his first significant statements on position limits since the Dodd-Frank bank reform law was enacted in July.
Dunn voted for the plan to move forward so the agency could gather more evidence on speculation and its role in markets.
Republican Commissioner Jill Sommers voted against the plan, which she called flawed, and her fellow Republican Scott O‘Malia also raised questions about it, but voted for the plan to move forward.
Asked if the CFTC has any leeway in whether it needs to adopt limits, Chairman Gary Gensler said he believes Congress wants the agency to move forward.
“I support position limits to help markets best function and that there be a diversity of market participants, and I believe it was the intent of Congress that we take this up,” Gensler told reporters.
After 60 days of comment -- expected to produce a flood of responses that will need to be analyzed -- the five CFTC commissioners will need to vote again to finalize it. It would impose investor limits in contracts in first month and phase in broader caps over other forward months as the agency gets more data on the over-the-counter swaps market.
The CFTC is to introduce its next slate of rules at a meeting on January 20 but no details were available.
Major companies from BlackRock, which operates the iShares ETFs, to Morgan Stanley to Royal Dutch Shell are lobbying hard to prevent overly restrictive rules, which they say could backfire and make markets more volatile.
But lawmakers pushed the CFTC to move ahead on the measure, included in the Dodd-Frank financial reform law.
“It has become increasingly clear that Wall Street seeks to use the rule-making process to eviscerate the new position limits,” said a letter from Democrats including Maria Cantwell, Bill Nelson and Carl Levin to the CFTC on Wednesday.
When an outline of the plan was unveiled last month, it offered some relief to many trading houses and big banks by eliminating some measures from a previous proposal a year ago, including a “crowding out” clause that could have prevented them from speculating at all.
The Dodd-Frank law required the CFTC to have limits for energy and metals markets in place by January, a deadline the agency conceded it had to miss because it lacked data.
That angered Commissioner Bart Chilton, a Democrat who wanted the agency to move faster on the plan. To win his support, Gensler agreed to step up surveillance of large entities until the limits are in place.
The added monitoring, known as “position points,” has been dismissed by many as lacking the teeth of hard limits.
The limits plan, now running months behind schedule, is part of broader efforts to boost oversight of the $600 trillion global over-the-counter swaps market.
The hiccup in rolling out position limits was the latest in a series of delays that has plagued the agency, and evidence of mounting pressures internally as the agency implements dozens of rules meant to make markets safer and more transparent.
The CFTC had also planned to vote on implementing a final rule designed to limit banks’ voting power in derivatives clearing and trading venues on Thursday, but the rule was yanked from the agenda a day earlier because some commissioners felt it went too far, and others worried it lacked teeth.
The rule was also supposed to be finalized in mid-January. Gensler declined on Thursday to provide a date on when the rule would be considered.
Additional reporting by Christopher Doering; Editing by Russell Blinch and Lisa Shumaker