London, 11 November 2010

With two months to go, it now appears practically impossible for the U.S. futures regulator to meet its January deadline for setting new speculative limits in energy and metals markets, one of the most contentious elements of its overhaul.

Commissioners have consistently pledged to meet the goal, but the logistics of the rule-making process -- including publication of a draft, a 30-day commentary period, a review of those comments and a final public hearing -- will likely put that goal beyond reach, five industry sources said.

While missing the deadline would only delay the rules rather than alter the outcome, the timing is critical for traders, banks and companies which need to know whether they are in danger of breaching new limits.

"It's mathematically still possible ... but it's very difficult," said an industry source -- one of five contacted by Reuters who agreed the deadline would be missed, but did not want to be identified as saying so.

As mandated in a broad financial regulatory reform bill passed in July, the Commodity Futures Trading Commission must impose limits on concentration in commodity futures and swaps markets, aiming to prevent manipulation by big players.

But it is struggling to figure out how it will police those limits during the next year or two while it gains more oversight of the $615 trillion over-the-counter derivatives market -- which will also be subject to the restrictions.

Hammering out the details -- including how to exempt banks that hedge for their customers, and how to aggregate positions -- has left it little time to clear mandatory procedural hurdles to meet the mid-January deadline set in the Dodd-Frank Wall Street reform law.

The CFTC must first unveil its proposal at a public hearing, something observers believe could happen on Dec. 1, although they said that too could slip. Commissioners are expected to agree to release the proposal for comment at the hearing, and the agency would then need about a week to have the rule published in the government's daily Federal Register.

Then, the CFTC is expected to be deluged with industry complaints during a comment period open for at least 30 days. Some of those criticisms may be familiar from the agency's previous, narrower proposal for limits on oil and gas markets, which are expected to form the foundation for the new rule.

Still, staff must read and consider the comments, many of which are typically submitted at the end of the period, and schedule another hearing for commissioners to vote to approve the rule.

The rule must pass muster with a majority of the five commissioners, several of whom have expressed reservations or even opposition to elements of the broad plan. Despite the hurdles, Commissioner Bart Chilton -- a vocal proponent of hard limits -- said the CFTC still intended to try to meet the Dodd-Frank deadline for the curbs, which has been a priority for Chairman Gary Gensler. "It can be done logistically," Chilton, a Democrat, told Reuters.

HOW TO POLICE LIMITS WITHOUT DATA?

The CFTC is faced with the dilemma of setting limits across futures and swaps markets before it has detailed data about the size of swaps markets, and players' positions in them.

"How can you monitor positions if you're not getting the data?" an industry observer said. Commissioner Jill Sommers, a Republican, has said she does not think the CFTC should set the limits until it has the data.

Gensler last month floated the option of proposing a formula for the limits by the January deadline -- but waiting to put them into effect until the agency gets detailed data. Industry players believe the CFTC will pursue that avenue in its draft plan, which is likely to be conceptual in nature.

Chilton said the agency should not wait to implement limits, but rather set curbs that "err on the high side" and can be recalibrated once data is available. Energy consumers continue to push the CFTC to set limits by the deadline, noting that the agency had held multiple hearings and received thousands of comments on an earlier proposal.

"Of all of the various new authorities ... in the new legislation, this one has been the most thoroughly vetted leading up to the passage of the bill," said Jim Collura, vice president for government affairs at New England Fuel Institute, part of a 58-member coalition urging the agency to move quickly.

While the lack of swaps data is less than ideal, the CFTC is not starting from scratch, said Paul Cicio, president of the Industrial Energy Consumers of America. "Position limits are too important to wait until we have the data. I'm fearful that the data is going to take a long time to develop," Cicio said.

MORE IMPORTANT TO GET IT RIGHT

The CFTC risks a public chiding from lawmakers who have pushed it to set the limits, but there is no "legal hammer" to punish the agency if it misses the deadline. Lawmakers may recognize the agency is working hard through complex issues, said Dan Waldman, a partner with law firm Arnold & Porter.

"I think people realize they're making a tremendous effort to comply with Congress' will here," said Waldman, a former chief counsel at the CFTC.

"But at some point, it's more important to get it right than to meet an artificial deadline, even if it's one set by Congress," Waldman said.

Ends --