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CFTC faces naysayers on metals trade limits

Section: Daily Dispatches

By Frank Tang and Tom Doggett
Thursday, March 25, 2010

WASHINGTON -- The top U.S. futures regulator heard objections on Thursday from exchanges and traders who said limiting metals speculation could irreparably harm markets, while some questioned whether the agency has the authority to impose such restrictions.

The day-long hearing came as Washington moves to crack down on Wall Street excesses blamed for the 2008 run-up in commodity prices and the recent financial crisis. The Commodity Futures Trading Commission has been criticized for not doing enough to prevent excessive speculation. Soaring energy bills prompted political pressure for tougher energy speculative limits. But calls for curbs on gold and silver speculation have been limited, making it less certain the commission will propose a cap on holdings.

Dispatch continues below.


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After the hearing, CFTC Chairman Gary Gensler declined to indicate whether the agency would work on a formal rule.

"We'll continue to consider this," Gensler told reporters. "I'm not predicting any time frames."

Three of the five CFTC commissioners have expressed concern that proposed limits for the energy sector would push trades to markets outside their oversight, defeating their aim to improve transparency and market integrity.

"As with potential position limits in the energy markets, I am concerned that position limits in regulated (metals) futures markets without corresponding limits in the over-the-counter markets may result in less transparency in our markets," said CFTC Commissioner Michael Dunn. Regulatory reform is a top priority for U.S. lawmakers and the Obama administration, but many roadblocks remain to completing a new law to regulate swaps.

Commissioner Bart Chilton told Reuters Insider he hoped the CFTC would introduce a proposal for metals next month, with limits for energy and metals in place by year-end. Chilton has been the agency's most outspoken proponent of position limits for commodities of limited supply.

Tom LaSala, chief regulatory officer with the CME Group Inc., which offers metals futures contracts at its exchanges, said the CFTC lacks legal grounds to set limits because there's no evidence of excessive speculation. Gensler has maintained that his commission has the right to impose limits to prevent trades that could harm markets. The energy plan is out for comment until April 26, and the CFTC has not described how it will move forward on the rule.

Traders and exchanges argued that limits would prompt metals trade to flee to markets outside of the CFTC's oversight, stifling liquidity and price discovery for U.S. futures. Traders also said it could be hard to make metals limits work even if the CFTC did impose them.

Unlike oil and gas where the U.S. markets dominate, the U.S. futures markets are not the primary global venues for London-based gold and silver trade. The CME Group sets "accountability levels" for all months except the spot month to help it monitor the market. In the spot or expiration contract month, both the exchange and the CFTC monitor position limits.

During a nearly year-long period, the CME asked traders to maintain or reduce positions 28 times, with only one resulting in an enforcement action, LaSala said. He told the CFTC that accountability levels are helping to monitor trades.

Chilton disagreed: "To argue that position limits are working ... I don't think the statistics are on your side."

A separate review of more than two years of large trader data at the COMEX and the NYSE Liffe found 56 traders exceeded the position accountability levels for gold one or more times, the CFTC's surveillance chief told the hearing.

Steve Sherrod said the CFTC is made aware when traders exceed those limits, but does not take action. Tom Callahan, head of NYSE Liffe U.S., noted that agricultural position limits failed to prevent a 2008 run-up in prices, and questioned how effective limits would be for metals. The CFTC also must be careful not to create competitive advantages for existing exchanges, Callahan warned. "For start-up exchanges ... it would be difficult -- if not impossible -- to gain market share against an existing exchange if position limits were administered in a manner that capped our growth potential," he said.

Some said limits are needed for copper. Investment funds have driven prices for the industrial metal to record highs at a time of surplus supplies, said Jeff Burghardt, who spoke on behalf of manufacturers.

A group of precious-metals "bugs" who believe that governments and banks artificially depress prices brandished a "whistle-blower" account of market manipulation.

"The gold cartel ... thumb their noses at you because in over a period of complaints in 18 months of the (CFTC's) silver market manipulation investigation, nothing has been done to stop them," said Bill Murphy, chairman of the Gold Anti-Trust Action Committee, referring to an ongoing CFTC probe.

Gensler warned at the outset of the hearing that the CFTC would not address investigations and requested witnesses to refrain from discussing specific allegations.

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