Washington, 16 December 2010

The U.S. futures regulator will tap the brakes on a plan to prevent speculators or investors from distorting commodity markets, a move likely to be welcomed by Wall Street and Republicans who worry the agency is moving too fast on one of its most contentious reforms.

Chairman Gary Gensler of the Commodity Futures Trading Commission acknowledged on Wednesday that the agency would miss its January target to issue a final rule on limiting the positions any one investor can hold in commodity markets.

As well, he said the agency will propose phasing in position limits on agricultural, energy and metals trading, putting them first on the spot months, while later adding restrictions on later months. He also said the agency will extend the comment period to 60 days from 30.

It was his first acknowledgment of a delay that has been widely expected heading into Thursday's meeting to unveil the new proposal, which has been fiercely criticized by banks and energy companies who say it could make markets less liquid and more volatile by driving away investors.

The hearing also underscored the growing challenge that regulators may face in quickly implementing the Dodd-Frank overhaul from the incoming Republican Congress, members of which urged Gensler to slow down to avoid damaging the market. Frank Lucas, who will become Agriculture Committee chairman in January, said he was "willing to consider an easing of statutory deadlines," referring to the mid-January target. The committee has jurisdiction over CFTC.

The CFTC is at the fore of the biggest financial reforms since the Great Depression, but is already falling behind on its position limits rule that was to be the culmination of a near three-year crusade to prevent a repeat of the 2008 surge that sent oil and grain prices to records.

"We'll not finalize it by the statutory date," said CFTC Chairman Gary Gensler at a House Agriculture subcommittee hearing The final rule would be issued "as soon as we can sort out" the public comments on the proposal, said Gensler. Even if it takes a softer approach out of concern it may reduce trading volumes, the limits would be the most aggressive measures yet by the CFTC to temper the impact of financial speculators in volatile commodities derivatives markets.

Major companies such as BlackRock, which operates the shares ETFs, Goldman Sachs and Royal Dutch Shell are lobbying against overly restrictive rules. Gensler did not suggest how position limits would be set but said a formula could be used at first, with modifications made later.

Gensler and CFTC Commissioner Bart Chilton said spot month limits would be easier to implement than the limits that cover multiple months. He said they could base it on a percentage of deliverable supply, similar to its approach when it looked solely at energy limits back in January. "The commission could consider proposing single-month and all-months-combined position limits based on the open interest for futures, options and economically equivalent swaps," Gensler said.

Chilton, a vocal proponent of the limits, said he had concerns about the chairman's timeline.

REPUBLICANS URGE CAUTION

Other Republicans also said the CFTC should move more slowly, often echoing arguments also heard from Wall Street. Jerry Moran, who will become a Kansas senator in January, said CFTC was rushing to issue a rule before it has adequate information on market size or appropriate limits.

Randy Neugebauer of Texas said the new law requires position limits only if needed to prevent manipulation or excessive speculation. "You don't have the data" to act, he said. In an interview last week, Lucas said he expected to hold hearings next year to review CFTC rule-making for derivatives, which are being brought under federal oversight for the first time.

Chilton said in prepared remarks that futures prices should be based on the fundamentals of supply and demand. "We saw delinked commodity prices in 2008 and some of us are concerned that we see that taking place this year," he said.

CME Group Inc Executive Chairman Terrence Duffy took aim at the CFTC's push to control speculation in commodities trading, saying position limits on investors' holdings are not a "costless palliative." Unless CFTC apprises the size of the over-the-counter swaps markets, where vast numbers of contracts change hands, it "runs the risk of inappropriately setting position limits," he said.

Duffy said he was skeptical European regulators, and British officials in particular, will match tough U.S. rules, although the European Commission last week put forward a proposal that would open the door to position limits -- something UK regulators have routinely said is unnecessary.

Ends --