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Metal-trading limits weighed by U.S. regulator

Section: Daily Dispatches

By Millie Munshi and Alan Bjerga
Bloomberg News
Thursday, March 25, 2010

WASHINGTON -- U.S. regulators are considering limits on how much of the market for metals including gold and copper that speculators can control after last year’s financial crisis spurred record swings in futures prices.

The U.S. should be on the "fast track" to expand regulation because "excessive speculation" by hedge funds and other large traders are "contorting" the market, Bart Chilton, one of five members of the U.S. Commodity Futures Trading Commission, said today during a public meeting in Washington.

The agency, which oversees more than $5 trillion in daily trading, in January proposed adding limits to the energy markets as part of a government campaign to prevent individuals or companies from gaining too much control of a commodity market. Investors including Michael Pento at Delta Global Advisors have said increased regulation will sap liquidity.

Dispatch continues below.


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Position limits "will force speculators to exit these markets, thereby reducing their dominance and eliminating the possibility of speculative price bubbles," said Michael Masters, the founder of Masters Capital Management. He was scheduled to speak at today’s commission meeting.

Fluctuations in commodity prices have fueled debate on whether speculators contribute to excess volatility. Copper futures in New York more than doubled in 2009, the biggest annual gain ever, after plunging a record 54 percent the previous year. Masters estimated last year that a speculative run-up in commodity prices in 2008 led to more than $110 billion in excess food and energy costs for U.S. consumers.

Agency commissioners expressed concern that more rules might make trading less transparent if investors moved to offshore exchanges or less-regulated over-the-counter markets.

"The U.S., and more pointedly, the exchanges registered with the commission, are not the market's epicenter," agency Commissioner Scott O'Malia said. Any regulatory changes "must take into account the global nature of these markets."

Likening current regulations to "speed limits on a dark highway," Chilton said the rules are ineffective.

"Letting the free markets roll has actually rolled us all," Chilton said on a March 23 conference call with investors. "It hasn't worked out so well. We need a little bit of regulation to ensure we have rational free markets and to control and ensure that there's no excess speculation."

New limits may curtail metal-market investment by large banks and swaps dealers, said analysts including Donald Selkin, National Securities Corp.'s chief market strategist in New York.

"We are lurching toward an environment of more and more regulations that will drive money away," Delta Global's Pento said yesterday in an interview from Holmdel, New Jersey. "Money is going to go where it's treated best, to other exchanges overseas" or to over-the-counter markets, he said.

Imposing position limits may drive investors to overseas markets, Kevin Norrish, Barclays Capital analyst, said during the meeting. In prepared remarks, he said new position limits would increase prices and market volatility as well.

The Comex in New York, where gold, silver, and copper futures trade, has position limits on contracts for immediate delivery, according to rules on the exchange's Web site.

Increased trading by investors has led to "high prices that are not warranted" for copper, Jeffery Burghardt, a vice president at Luvata, a producer of brass and copper products.

"There is a disconnect between fundamentals and prices," Burghardt, who spoke on behalf of the Copper and Brass Fabricators Council, said during the meeting. "We completely support the CFTC acting to reduce investment activity" in the metals markets.

The regulator should consider raising margin requirements for metals speculators, Burghardt said.

Position limits on futures are neither "necessary nor useful," according to the CME Group Inc., which owns the Comex, the New York Mercantile Exchange, the Chicago Board of Trade and the Chicago Mercantile Exchange.

"Any effort to constrain trading on a U.S. exchange by the major firms that are large enough to hold positions near limits will simply push those firms from the regulated and transparent market into the cash market or to a market beyond" the agency's reach, Tom LaSala, the CME's managing director, said yesterday in a release sent by e-mail. He also spoke at today’s meeting.

The commission should examine the role of passive speculators, or investors who hold commodities through long-only index funds, Masters said in a statement prepared for the CFTC.

"Passive speculators are an invasive species that will continue to damage the markets until they are eradicated," said Masters, whose fund is based in St. Croix, U.S. Virgin Islands. "When passive speculators are eliminated from the markets, then most consumable-commodity derivatives markets will no longer be excessively speculative, and their intended functions will be restored."

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