Commodity-Speculation Limits Approved in 3-2 Vote by U.S. Regulator CFTC

The top U.S. derivatives regulators voted 3 to 2 today to curb trading in oil, wheat, gold and other commodities after a boom in raw-materials speculation, record- high prices and years of debate and delay. The rule has been among the most controversial provisions of the Dodd-Frank financial overhaul, enacted last year, which gave the Commodity Futures Trading Commission the authority to limit trading in over-the-counter commodity swaps as well as exchange-traded futures. The rule will limit the number of contracts a single firm can hold. “Our duty is to protect both market participants and the American public from fraud, manipulation and other abuses,” Chairman Gary Gensler said at the commission’s meeting in Washington in support of the rule. “Position limits have served since the Commodity Exchange Act passed in 1936 as a tool to curb or prevent excessive speculation that may burden interstate commerce.” The rule limits traders to 25 percent of deliverable supply in the month nearest to delivery. The spot-month limits apply separately to physically settled and cash-settled contracts. Deliverable supply will be determined by the CFTC in conjunction with the exchanges.

The limits will apply to 28 physical commodity futures and their financially equivalent swaps including contracts for corn, wheat, soybeans, oats, cotton, oil, heating oil, gasoline, cocoa, milk, sugar, silver, palladium and platinum. “Today is no doubt the single most significant vote I have taken since becoming a commissioner,” said Commissioner Jill Sommers, who voted against the rule. “Not because imposing position limits will fundamentally change the way the U.S. markets operate, but because I believe this agency is setting itself up for an enormous failure.” “I am concerned the rule will unnecessarily restrict hedging by our agricultural and energy producers, the very hedging that helps them stabilize the costs of food, fuel and power, and may very well exacerbate price volatility rather than reduce it,” said Congressman Frank Lucas, an Oklahoma representative who is chairman of the House Agriculture Committee. Derivatives made the boom possible. Unlike futures contracts, which trade on regulated exchanges and fall under CFTC jurisdiction, swaps trade on the over-the-counter market where the commission had no authority before Dodd-Frank, allowing traders to amass large unregulated positions. “The fund participants have been able to grow too big and trade the markets without regard to the underlying fundamental supply and demand factors,” said Roy Huckabay, an executive vice president for the Linn Group, a research and brokerage firm in Chicago. “The market’s job of price discovery had been forgotten or ignored.”

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