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CFTC's position limit plan gains needed support
By Christopher Doering and Roberta Rampton
Tuesday, January 4, 2010
WASHINGTON -- A top official at the U.S. futures regulator said on Tuesday he was now in favor of a stalled position limit plan, a key turnaround that would allow the controversial rules to advance to the public comment stage.
On December 16 the Commodity Futures Trading Commission introduced its plan to curb speculation in metals, agriculture, and energy markets. But at the meeting, Chairman Gary Gensler abruptly postponed a vote on the proposal.
Commissioner Bart Chilton, the most vocal proponent of cracking down on speculators, was key to the postponement as he told Reuters he would have voted against the plan. It would have included a two-step approach to allow more time for the agency to gather information on the opaque swaps market.
"While I will now support publishing a position limit proposal for public comment, I will continue to make the case that we need to address excessive speculation in these markets immediately," Chilton said in a statement on Tuesday.
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The proposal unveiled in December set out general formulas for calculating limits and applied them to the spot month contract. It suggested waiting until the agency has more swaps data before expanding the limits to all months.
At least three of the five CFTC commissioners must vote in favor of issuing the plan for a 60-day comment period. A separate vote will be needed to finalize the measure.
Gensler has expressed his support for the plan. Fellow Democrat Michael Dunn has consistently voted to release CFTC rules for comment to help him assess the merits of proposals.
Commissioner Jill Sommers and Scott O'Malia, both Republicans, have voiced concerns about the speed of reforms and a lack of information about the proposals.
Industry analysts have expected commissioners to sign off on the position limit plan in private once Chilton agreed to the terms.
It was not immediately clear whether commissioners would act immediately or wait until the CFTC's next scheduled rule-making meeting, slated for January 13.
A spokesman for the agency declined specific comment.
The CFTC has conceded it will miss a mid-January deadline to implement position limits that was stipulated in the Dodd-Frank bank reform law, which gives the agency oversight of the over-the-counter derivatives market, valued at $600 trillion globally.
The CFTC is working on rules to implement the law, but it could take months to acquire the swaps data it needs to enforce position limits. In the meantime, Chilton, a proponent of hard limits, has argued the CFTC should do what it can.
At the December 16 meeting Gensler agreed to instruct CFTC staff to implement Chilton's suggested "position points" system until the CFTC puts its position limit plan in place.
Under the "points" system, if traders' holdings in a commodity reaches a certain threshold, it triggers heightened regulatory scrutiny by the CFTC where commissioners could vote to require the traders to reduce their holdings.
"It certainly seems to be an incentive to trade where the CFTC can't see you," said an industry source closely monitoring the proposal, noting the scrutiny could be triggered only by trades in the visible futures market.
A coalition of businesses dependent on buying commodities said it supports Chilton's plan as an interim measure.
"In light of the existence of large speculative positions in today's energy and agricultural markets, it is imperative that the commission to do something now," said Jim Collura, spokesman for the Commodity Market Oversight Coalition.
Commodity traders and investors have been fighting back against the limits, arguing they will not rein in surging energy, metals, and agricultural prices and could instead trim volumes, making prices more volatile.
The CFTC said its proposal could affect nearly 80 agricultural traders and dozens of metals and energy players. It removed some provisions that had drawn the ire of Wall Street, and also included an exemption for hedgers.
But the plan is expected to continue to draw fire during the upcoming public comment period.
The "position points" system for added review of positions is far preferable to the actual position limits plan, said Michael Cosgrove, a managing director with GFI Group, a major brokerage.
"Position limits are a dangerous cure for an imagined disease which even its proponents admit has never been diagnosed or detected," Cosgrove said. "Like trepanning, leaching, and frontal lobotomies, I fear that this cure too will do lasting damage that we cannot begin to comprehend."
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