Q+A-How tough will US CFTC be on speculators?

By Roberta Rampton

WASHINGTON, Dec 3 (BestGrowthStock) – Companies that trade energy,
metals and agricultural futures and swaps are closely watching
how tough a stance the U.S. futures regulator takes against
speculators in new position limits for commodities.

Position limits determine the maximum number of contracts
an investor can hold in a specific instrument or market.

Many traditional hedgers that use markets to manage
physical risk want the Commodity Futures Trading Commission to
write rules that would curb the flow of “hot money” from
investment funds they believe have overwhelmed their markets
since 2008, when prices spiked to record levels.

But other market players — including funds and banks —
say there is no evidence of excessive market-harming
speculation, and argue draconian rules would push trade
offshore, crimping liquidity that ultimately helps hedgers.

Here are some questions about what happens next:

HOW IS THE CFTC DEVELOPING ITS RULES?

The work is led by a team of about a dozen CFTC staffers,
some of whom helped develop proposed limits for energy futures
markets in January.

That plan was withdrawn after the CFTC received additional
authority over the $600 trillion over-the-counter derivatives
market in the Dodd-Frank Wall Street reform law — but it is
expected to form the basis for the new, broader scheme.

The team is also considering input from hedgers, banks and
funds that have requested meetings, as well as comments
submitted to the CFTC’s website.

For a factbox on the meetings, click on: [ID:nN1521703]

Five commissioners, including Chairman Gary Gensler, will
have the final word on whether the rules go ahead. They have
also been meeting with industry.

WHEN WILL THE CFTC UNVEIL THE LIMITS?

The agency aims to unveil the proposed regulations at a
hearing slated for Dec. 16, but the timing is not firm and some
have said it could slip to January. [ID:nN01165326] The draft
will remain open for comment for at least 30 days.

The CFTC’s initial proposal could be tweaked but will have
a lot of momentum to move forward because of the agency’s heavy
regulatory workload. [ID:nN03127731]

The Dodd-Frank law specified that rules for energy and
metals must be finalized by mid-January, but observers say that
deadline is most likely impossible to meet. [ID:nN10190301]

The final deadline for agricultural limits is in April.

HOW WILL THE CFTC KNOW WHERE TO SET LIMITS?

For futures, limits will probably be based on open
interest, and are expected to be high in the beginning. That
was the approach used in the now-withdrawn proposal.
[ID:nN19258225]

Limits for swaps — and aggregate limits across futures and
swaps — are trickier. The CFTC will not know the size of swaps
markets and who is trading them until it sets rules for the
trading, clearing and reporting of swaps, and gives players
time to implement them.

Commissioners have acknowledged it will be hard to set
limits until they have more data, but it could take years for
new swap data repositories (SDRs) to be up and running.

Gensler has floated the idea of establishing a formula in
the upcoming rule — but waiting to put the limits into force
until the data is available. [ID:nN19334663]

But Republican Commissioner Jill Sommers has already said
she opposes setting a formula without the data.
[ID:nN03280029]

HOW WILL THE LIMITS BE MONITORED?

The CFTC plans to begin gathering data on large swaps
positions from about five clearinghouses and 180 swap dealers
and clearing members through a new report, starting in about
six to 10 months. [ID:nN19108084]

The report may be retired once the SDRs are running.

To see industry comments on the reports, click on:
http://r.reuters.com/qyb58q

WHEN WILL THE CFTC START ENFORCING THE LIMITS?

It is unclear. The CFTC has the legal flexibility to wait
to phase in the deadlines, top officials have confirmed.

The Futures Industry Association is encouraging a go-slow
approach using an “interim final rule” that would allow the
CFTC to make changes as it gets more market data.

For the FIA’s position, click: http://r.reuters.com/peq58p

WILL THE CFTC SET LIMITS FOR ALL COMMODITIES AT ONCE?

Also unclear. At the very least, most observers expect
limits for crude oil, natural gas, gasoline, and heating oil
futures, and “significant price discovery contracts” traded on
IntercontinentalExchange (ICE.N: ) — as well as for gold and
silver futures owned by the CME Group (CME.O: ).

Some believe the CFTC will spell out in its rules how it
plans in the future to evaluate other contracts and swaps to
establish limits, or ask questions about how best to do it.

WHO WILL GET AN EXEMPTION FROM THE LIMITS?

“Bona fide hedgers” using futures or swaps to manage the
risk of buying or selling the physical commodity can be exempt.
The CFTC can also exempt other players as it sees fit.

Dealers are watching closely to see how the CFTC will treat
their positions related to swaps done with hedgers. The CFTC
could provide a broad “risk management exemption,” or may
instead “look through” dealers’ positions and exempt only those
directly related to a bona fide hedge.

HOW WILL FUNDS BE AFFECTED?

It is unlikely funds will receive a hedge exemption. That
could affect dealers’ ability to take on their business, unless
the CFTC grants a special exemption for such trading.

Traditional hedgers such as airlines and grain handlers
have urged the CFTC to limit fund participation in markets and
limit their ability to receive exemptions. [ID:nN14117852]

WILL HEDGERS BE ALLOWED ALSO TO SPECULATE?

The CFTC’s initial proposal for energy markets restricted
traders with a hedge exemption, or dealers with a risk
management exemption, from also speculating.

That “crowding out” concept is expected to be abandoned
after it was roundly criticized as unworkable. [ID:nN05262367]

WHAT ABOUT FIRMS THAT HEDGE, DEAL AND SPECULATE?

Many large commodities players have ownership stakes in
entities that hedge, deal and speculate. The CFTC’s January
proposal for energy futures suggested adding or aggregating
positions for entities that share common ownership, regardless
of whether the entities share trading strategies and control.

Many industry players have pointed out the legal and
logistical hurdles of sharing position data across different
desks and entities, and are worried the CFTC will take an
aggressive stance.
(Reporting by Roberta Rampton; Editing by Lisa Shumaker and
David Gregorio)

Q+A-How tough will US CFTC be on speculators?