Big commodity traders mount last stand on U.S. curbs

By Kevin Drawbaugh and Christopher Doering

WASHINGTON (Reuters) – A global push to temper wild swings in oil and other commodity prices reached a pivotal point on Monday as big traders mounted their last attack on a U.S. plan to limit the role of speculators.

Many of the world’s biggest commodity market participants such as U.S. agribusiness giant Cargill Inc and Delta Air Lines are resisting new rules that would cap how many futures and related swaps contracts any one company can control.

The plan to impose “position limits”, which has been under debate since prices first surged to records in 2007 and 2008, is now reaching its culmination, with companies rushing to submit their views to the U.S. Commodity Futures Trading Commission by Monday’s deadline.

Most are reframing familiar complaints: Banks, traders and exchanges say the rules would make it harder to hedge risk, and that it would reduce liquidity and increase consumer costs.

If the proposed rules are adopted with no change, “there is a substantial risk that they would undermine the efficiency of the markets for hedgers, by reducing liquidity and disrupting markets which currently function well”, Linda Cutler, a Cargill vice president, said in a letter to the agency.

But at a time when oil, grain and metal prices have again shot up, some reaching new heights, consumers too are looking for some regulatory relief. Politicians are stepping up pressure for action.

“The banks think this rule is too strong. Commercial end users, consumers, unions … think it’s far too weak,” Michael Greenberger, a University of Maryland law professor and former senior CFTC staffer, told Reuters Insider.

“As the American public starts suffering from $4 a gallon gasoline … the issue becomes more visible, the debate between the consumer and the big banks is more highlighted,” he said.

Wall Street firms, including Morgan Stanley and Barclays Capital, want the CFTC to hold back on position limits until the agency can gather more data to assess the size of the swaps market.

“Only after it receives and reviews relevant market data should the Commission consider whether position limits are necessary and, if so, set appropriate and commercially practicable limits that preserver market liquidity and promote efficient price discovery,” said Simon Greenshields, global co-head of Morgan Stanley’s commodities business.

Roger Jones, a managing director at Barclays, warned the CFTC proposal was too vague and “oversimplifies the legitimate complexity of risk management.”


From Chicago and New York to London and Paris, the commodities markets influence prices for energy, metals, food and other products that hit consumers in areas such as the gas pump and the kitchen table, and so are politically volatile.

The CFTC polices the markets and is under orders from Congress to address perceptions that speculators drive sharp swings in commodity prices that hurt consumers and producers.

The CFTC plan would apply to exchange-traded futures and related over-the-counter swaps in 28 energy, metals and agricultural markets.

A 60-day period for public comment on it ends on Monday. The CFTC must next read the comments and decide whether to change the proposal. Its five commissioners must then vote.

But the agency’s chairman, Gary Gensler, may have trouble mustering the three votes needed to finalize it. A final vote may not come for some time.

The “position limits” fight comes as regulators worldwide are working to draw up and implement hundreds of new rules for banks and markets following the 2007-2009 financial crisis.

Delta said while it supported the proposal it didn’t go far enough. “The open interest formula that was proposed in 2010 and again in this proposal results in levels that are so high that they will have no effect on the volume of speculation or oil price volatility,” the airline said.


Although it is meant primarily to limit holdings by the funds and investors who have diversified into commodities over the past decade, the CFTC’s plan threatens business models for some of the financial world’s biggest players.

The U.S. banks, such as firms Goldman Sachs and JP Morgan Chase & Co., took in $5.5 billion in revenues from trading in commodity markets last year, versus a record $11 billion in 2009, according to U.S. government data.

The 2010 figures represented just under 10 percent of the industry’s trading revenues. The decline from 2009 was due largely to decreased volatility and reduced hedging, officials have said, but also reflected less risk-taking by the banks.

Traders argue there is no evidence that speculators inflate prices, and say curbs could make prices more volatile.

The CFTC’s economists have not found a causal link between speculation and price volatility, with one study showing commodity index traders are not causing price volatility, but may actually be helping to reduce it.

The agency’s effort was mandated by Congress in the Dodd-Frank financial regulation reforms made law in July 2010. But as in many other parts of that sprawling legislation, Congress left it up to regulators to hammer out the details.

“We challenge the fundamental premise upon which the CFTC argues that it has authority to impose position limits under Dodd-Frank,” said the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association, both industry groups, in a letter to the CFTC.

Earlier this month, Democratic Senator Maria Cantwell urged the CFTC to crack down on oil speculation that she said was likely contributing to recent gas price spikes. In a letter to Gensler, Cantwell and 11 other senators urged him to use his Dodd-Frank authority against “excessive speculation”.

(Additional reporting by Ayesha Rascoe and Emily Stephenson; Editing by Dale Hudson, Russell Blinch and Sofina Mirza-Reid)

Big commodity traders mount last stand on U.S. curbs