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CFTC acknowledges possible off-market commodity price manipulation
CFTC Moves to Curb Commodity Speculation
By Javier Blas
Financial Times, London
Thursday, September 11, 2008
New steps to curb speculation in commodity markets have been launched by US regulators in response to growing pressure from Washington lawmakers.
The Commodity Futures Trading Commission, the main regulator of commodity markets, told the US Congress on Thursday it was imposing "enhanced control" on dealing by Wall Street banks and forcing them to publish new data on their positions.
The CFTC's measures will focus on swaps -- private contracts between investment banks and clients such as hedge funds or airlines that provide an exposure to commodity prices without investing directly in futures.
The swap market is mostly unregulated, which some lawmakers in Washington have described as a loophole for speculators and blamed for high oil prices. Swap dealers also receive exemptions for speculative positions limits that apply to other speculators in the commodities markets.
The CFTC admitted in a report that there was a "a need for greater transparency in the manner and amount of trading that occurs trough swap dealers."
The move signals a growing concern among regulators about the activities of financial investors into the commodities. But in a rare dissident vote, Bart Chilton, one of the four CFTC commissioners, said the actions were insufficient. "I do not believe the commission's recommendations go far enough," he said.
"We need to have a sheriff in the saddle, to make sure these markets are honest," he said.
Mr Chilton, who has been vocal about the role of speculators in the recent rise in oil and other commodities prices, raised concerns that speculative traders may be causing oil-pricing aberrations by using over-the-counter markets to avoid the strict limits placed on traders in the regulated markets.
The CFTC said that it would review whether Wall Street swap dealers would maintain their exemptions in exchange for them to report when their clients reach certain positions levels and provide "certification" that none of their speculative clients exceed position limits.
This "is a practicable way of ensuring that non-commercial counterparties are not purposefully evading the oversight and limits of the CFTC and exchanges, and that manipulation is not occurring outside of regulatory view," it said.
However, the CFTC report released on Thursday insisted that financial investors did not appear to be behind the rise in commodity prices in the past year, noting that while oil prices had risen, investors in the $200 bilion commodities indices industry lowered their exposure.
Speculators cannot hold more than a certain amount of commodities futures in regulated markets, such as the Nymex where oil is traded but by entering into swap agreements they could circumnavigate those limits.
The CFTC said that of the 550 clients of swap dealers it has identified through an unprecedented special survey, at least 18 were above the exchange limits thanks to the use of on-exchange and swap trading.
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