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'Commodities of finite supply' might get position limits

Section: Daily Dispatches

Are gold and silver 'commodities of finite supply'? From the Comex, you wouldn't think so.

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Oil, Gas Market Speculation May Face Restrictions

By Tina Seely
Bloomberg News
Tuesday, July 7, 2009

WASHINGTON -- U.S. regulators say they may clamp down on oil and gas price speculators by limiting the holdings of energy futures traders, including index and exchange-traded funds.

The Commodity Futures Trading Commission will hold hearings this month and next to explore the need for government-imposed restrictions on speculative trading in oil, gas, and other energy markets, Chairman Gary Gensler said today in a statement.

The hearings come amid increased scrutiny of the impact of speculators on oil prices. Sen. Bernie Sanders, a Vermont independent, and Rep. Bart Stupak, a Michigan Democrat, blame speculators for last year's surge in crude-oil prices to a record $147.27 a barrel and called for CFTC action to avert a repeat. Oil has climbed 41 percent this year in New York trading, while demand has dropped and inventories climbed.

"Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline, and other energy products," Gensler said in the statement. "This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants."

Among the questions the agency will ask is whether it needs additional authority from Congress to apply the limits across all markets, Gensler said. The agency didn't specify dates when the hearings would take place or who would be asked to speak.

In an interview last week, the chairman said he had called on the agency's staff to review all available options for ensuring fair markets.

Billionaire investor George Soros testified to a Senate hearing in June 2008 that the oil price increase that year was caused partly by index funds that buy only oil contracts. Index funds and exchange-traded funds, which mimic an index, can hold oil contracts in excess of available supply.

Regulation and oversight of deliverable futures contracts have always been necessary, said Michael Cosgrove, head of North American energy operations for broker GFI Group Inc. in New York.

"Oversight of contracts that do not affect supply and demand, such as Nymex cash-settled futures and ICE cash-settled swaps, is a misguided waste of taxpayer dollars," Cosgrove said today in an e-mailed statement. "These contracts affect supply and demand no more than the betting at a race track affects the speed of the horses."

Crude oil futures prices for August delivery fell $1.23, or 1.9 percent, to $62.82 a barrel at 10:34 a.m. on the New York Mercantile Exchange.

"The proposed regulations aren't going to matter materially for 90 percent of the floor and firms in Chicago," said John Brady, senior vice president at MF Global Inc., the world's largest broker of exchange-traded funds, in an interview today. "Only the largest macro-funds would be affected."

"Revoking or limiting exemptions for speculators and strong federal position limits for speculation are the kind of actions we are all waiting for," Senator Byron Dorgan, a North Dakota Democrat who voted against Gensler's nomination, said in a statement today.

Dorgan and Sanders had questioned President Barack Obama's choice of Gensler to lead the CFTC because of his involvement in legislation in 2000 that exempted certain derivatives trading from oversight.

Sanders has introduced legislation that would force the CFTC to invoke emergency authority to stop oil speculation. Stupak's proposal, which was included as part of climate-change legislation approved by the House last month, would impose position limits on energy speculators across all markets.

The agency is seeking input on whether it should impose such aggregate position limits, Gensler said.

Gensler said in a letter to lawmakers earlier this year that speculators contributed to an asset bubble in commodities in 2008. His statement broke from former CFTC Acting Chairman Walter Lukken, who testified to Congress on Sept. 11 that there wasn't "strong evidence" index traders were driving up prices.

Gensler wouldn't say in the interview last week if he thought the same thing was happening this year.

"The CFTC currently sets and ensures adherence to position limits with respect to certain agriculture products," Gensler said in the statement. "For energy commodities, futures exchanges set position limits and accountability levels to protect against manipulation and congestion. The exchanges are not required to set and enforce position limits to prevent the burdens of excessive speculation."

Amaranth Advisors LLC, a hedge fund that was accused by the agency of attempted market manipulation, controlled more than half of the open Nymex futures contracts for natural gas before its collapse in 2006, according to a Senate report.

The amount of money being managed by exchange-traded funds in commodity markets has "increased significantly over the past few years," Michael Lewis, head of commodities research for Deutsche Bank AG, said in a note issued yesterday.

"Most startling is how assets under management today are higher than when commodity prices were at their all-time highs some 12 months ago," Lewis wrote.

Gensler said the CFTC is reviewing exemptions from position limits for "bona-fide hedging," after seeking public comment on whether the exemption should continue to apply to traders who are in the market for financial reasons, rather than those that actually use the commodity.

The chairman, who took office in May, also said the agency was going to improve its weekly commitment of traders' reports by separating out swaps dealers and hedge funds from the larger category of "commercial" traders. The agency will continue to collect and report data from swaps dealers and index investors, extending a "special call" from last year, Gensler said.

"Enhancing the quality of information in these weekly reports will better inform market participants and the public about the positions of the various types of traders," he said.

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