Wednesday, December 19, 2018
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some wary as cftc takes a step toward curbs

by kara scannell

the commodity futures trading commission took a first step toward imposing limits on positions energy traders can hold, but three commissioners expressed reservations that could make it harder for the rule to be made final.

cftc chairman gary gensler has made position limits a top priority, and the proposal is the first major initiative under his leadership. commissioners voted 4-1 to issue the proposed rule for 90 days of public comment.

the measure responds to criticism from many lawmakers in congress blaming financial traders for the run-up in energy prices in the summer of 2008—and blaming the cftc for failing to do something about it. the proposal is designed to tamp down volatility and keep prices in line with real demand.

some commissioners questioned that notion at thursday's meeting. republican commissioner scott o'malia, who is new to the agency, asked why the cftc would move to impose limits on energy traders when existing limits on agricultural commodities didn't prevent swings in prices in recent years.

"how can we find they are necessary if we know they have not worked in agriculture commodities?" asked mr. o'malia, who nonetheless voted for issuing the proposal. commisioners must vote again before the rule becomes final.

the futures industry and academics have said they haven't found a correlation between financial traders and price movements. mr. gensler said he believes the limits are necessary to prevent any one trader from having too much concentration that could distort prices. he also said the agency would hold a hearing in march to discuss imposing position limits on metals.

the proposed rule would apply to four energy commodities that trade on cme group's nymex and intercontinentalexchange—crude oil, natural gas and two other types of fuel.

the limit is calculated by taking 10% of the first 25,000 contracts for all months and 2.5% thereafter. the cftc estimated that if the limit were adopted today a trader could hold no more than 98,200 contracts of crude oil. each contract consists of a promise to buy or sell a set number of barrels of oil at a given price and date.

the proposal would grant exemptions for airlines or others that are hedging for business purposes. it would also grant exemptions to qualifying dealers, if they are hedging to offset risk they assume through their customers' positions. however, the names of the exempted dealers would be made public after a six-month delay.

commissioners said they were concerned that the limits would drive business into unregulated markets or overseas where no limits exist. congress is considering granting the cftc oversight of over-the-counter markets and the authority to impose limits there.

"i am concerned the adoption of this proposed regulation without the corresponding over-the-counter regulatory authority and similar undertakings by other nations' regulators may result in less transparency in the futures markets," said commissioner michael dunn, a democrat. he voted in favor but said he had "serious reservations" and added his vote "should in no way be viewed as agreement with the proposal."

republican commissioner jill sommers voted against issuing the proposal. democratic commissioner bart chilton said the proposal "strikes the right balance. he said if there's the possibility that noneconomic forces are affecting energy prices, "we need to figure out a way to deal with it."

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