CFTC hears out critics of metals trade limit idea

By Frank Tang and Tom Doggett

WASHINGTON (BestGrowthStock) – The top U.S. futures regulator heard objections on Thursday from exchanges and traders who said limiting metals speculation could irreparably harm markets, while some questioned whether the agency has the authority to impose such restrictions.

The day-long hearing came as Washington moves to crack down on Wall Street excesses blamed for the 2008 run-up in commodity prices and the recent financial crisis. The Commodity Futures Trading Commission has been criticized for not doing enough to prevent excessive speculation.

Soaring energy bills prompted political pressure for tougher energy speculative limits. But calls for curbs on gold and silver speculation have been limited, making it less certain the commission will propose a cap on holdings.

After the hearing, CFTC Chairman Gary Gensler declined to indicate whether the agency would work on a formal rule.

“We’ll continue to consider this,” Gensler told reporters. “I’m not predicting any time frames.”

Gensler, who took the lead last summer in pushing for position limits in energy markets, was notably restrained in questioning witnesses on the metals issue, and offered little insight into his views.

“What I found most telling was (Commissioner Bart) Chilton was basically out there alone doing the rah, rah on position limits, and Gensler was uncharacteristically reticent,” said Craig Pirrong, finance professor at the University of Houston’s Global Energy Management Institute.

Before the hearing, Chilton told Reuters Insider he hoped the CFTC would fast-track a proposal for metals, with limits for both energy and metals in place by year-end. Chilton is the agency’s most outspoken advocate for position limits for commodities of limited supply.

After oil prices spiked to new records in 2008, the CFTC was pressured to crack down on speculators. It rolled out a proposal for position limits in January, leaving it open for comment until April 26.

The CFTC has not described how or whether it will move forward with the rule. Three of the five CFTC commissioners have expressed concern the energy plan could push trades to markets outside their oversight.

Two of the commissioners repeated those reservations on Thursday when discussing the metals idea.

“As with potential position limits in the energy markets, I am concerned that position limits in regulated (metals) futures markets without corresponding limits in the (over-the-counter) markets may result in less transparency in our markets,” said Commissioner Michael Dunn.

Regulatory reform is a top priority for U.S. lawmakers and the Obama administration, but many roadblocks remain to completing a new law to regulate swaps.

Commissioner Scott O’Malia noted the United States is “not the market’s epicenter” for metals and that the CFTC must ensure it avoids “opportunities for regulatory arbitrage.”

Traders also said it could be hard to make metals limits work even if the CFTC did impose them. Unlike oil and gas where the U.S. markets dominate, the U.S. futures markets are not the primary global venues for London-based gold and silver trade.

At the hearing, traders and exchanges argued limits would prompt metals trade to flee to markets outside CFTC oversight, stifling liquidity and price discovery for U.S. futures.

Tom LaSala, chief regulatory officer with the CME Group Inc (CME.O: ), which offers metals futures contracts at its exchanges, said the CFTC lacks legal grounds to set limits because there’s no evidence of excessive speculation.

Gensler has maintained his commission has the right to impose limits to prevent trades that could harm markets.


Most speakers at the hearing argued exchange-set “accountability levels” were a strong enough check against excessive speculation.

The CME Group sets the limits for all months except the spot month to help it monitor the market. In the spot or expiration contract month, both the exchange and the CFTC monitor position limits.

During a nearly year-long period, the CME asked traders to maintain or reduce positions 28 times, but there was only one enforcement action, LaSala said. He told the CFTC that accountability levels are working.

Chilton disagreed: “To argue that position limits are working I don’t think the statistics are on your side.”

A separate review of more than two years of data at the COMEX and the NYSE Liffe found 56 traders exceeded position accountability levels for gold at least once, the CFTC’s surveillance chief told the hearing.

Steve Sherrod said the CFTC is made aware when traders exceed those limits, but does not take action.

The CFTC heard from a group of precious-metals “bugs” who believe governments and banks artificially depress prices.

Some panelists said limits are needed for copper. Investment funds have driven prices for the industrial metal to record highs at a time of surplus supplies, said Jeff Burghardt, who spoke on behalf of manufacturers.

But Tom Callahan, head of NYSE Liffe U.S., noted agricultural position limits failed to prevent a 2008 run-up in prices, and questioned how effective they would be for metals.

Stock Investing

(Writing by Christopher Doering; editing by Roberta Rampton, Gary Hill, Lisa Shumaker and David Gregorio)

CFTC hears out critics of metals trade limit idea