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Federal regulators vote to curb financial speculation in commodities

WASHINGTON — Big financial speculators will be limited in their ability to manipulate the price of oil and 27 other commodities under a set of new rules adopted Tuesday by the Commodity Futures Trading Commission.

Yet even as the CFTC approved the new rules to rein in excessive speculation on a 3-2 party-line vote — with Democratic commissioners in the majority — some financial-market analysts and lawmakers in Congress complained that the new rules fall short of what's needed to curb speculation effectively.

"This rule begins the process of doing that, but much more needs to be done," Dennis Kelleher, president of the advocacy group Better Markets, said in a statement. "Speculators' casino mentality brings them big profits but hurts everyone else from the kitchen table to the gas pump."

In a series of investigative reports over the past three years, the Washington Bureau has shown that financial speculation is driving up the prices of commodities, including oil, coffee and cotton — and that price volatility in those goods is not resulting simply from the ordinary market forces of supply and demand among producers and consumers.

The CFTC regulates the trading of contracts for future delivery of oil, wheat, corn and a host of other commodities. In those markets, financial speculators far outnumber both the producers and actual users of the products, who are looking to those markets to hedge against price shifts.

Congressional Democrats and the Obama administration sought to rein in speculation in futures markets, which originally were designed to help buyers and sellers of a commodity such as oil to discover a mutually acceptable price for future delivery of the product.

The already long-delayed rules, which were due in January, are unlikely to take full effect before spring. They aim to impose a market-wide ceiling on speculative trading. They were mandated under the broad revamp of financial regulation in July 2010, known as the Dodd-Frank Act. They were a response to oil prices that surged to a record $147 a barrel in July 2008. A speculative oil-price spike earlier this year proved to be a major headwind restraining U.S. economic growth and reignited debate on the role of Wall Street money in oil markets.

The rules set trading limits, or caps, on individual traders or companies in both the physical market, where a buyer actually takes possession of oil or other products, and the futures markets, where contracts for future delivery of oil or other commodities are traded. The new rules also apply to contracts on foreign commodity exchanges that link back to U.S. exchanges.

These limits will be imposed on contracts traded for both next-month and future delivery years out. The limits will be adjusted once a year for energy and metals commodities, and every two years for farm products, as the commission reviews market data.

Sen. Carl Levin, D-Mich., whose investigative subcommittee held hearings spotlighting speculation in commodities markets, praised the CFTC's action:

"The position limits rule approved today by the CFTC represents significant progress for middle-class families facing rollercoaster gasoline, electricity and food prices," Levin said in a statement.

But another critic of oil speculation, Sen. Maria Cantwell, D-Wash., saw little to cheer.

"I think it's more like saying you want to have speed limits in general, but then setting it at 125 mph. The fact that you are allowing someone to have so much of the market is the issue," she told McClatchy.

Sen. Bernie Sanders, a Vermont Independent, made public an angry letter he sent Monday to CFTC Chairman Gary Gensler_ whose nomination Sanders held up for months in 2009 — suggesting that tougher rules are needed.

"The bottom line is we have a responsibility to ensure that the price of oil is no longer allowed to be driven up by the same Wall Street speculators who caused the devastating recession that working families are now experiencing," Sanders wrote. "That means the CFTC must finally do what the law mandates and end excessive oil speculation once and for all."

CFTC Commissioner Bart Chilton was a wild card going into Tuesday's vote. The Democratic commissioner supported the new rule even though he feared it isn't strong enough, because it gives regulators the ability to toughen limits over time.

"While all of the limit levels will initially be identical, the rule provides that we reassess those levels to ensure recalibration to more appropriate levels if necessary," he told McClatchy. "Congress told us to implement these limits and belatedly we are doing so."

Another important change, he said, was that exchanges no longer determine who is exempt from the rules. Previously, Wall Street banks were granted what was called a hedge exemption that freed them from speculative limits, treating them as if they were the end user of oil or any other commodity.

"The Wild West of exempting traders from any trading levels whatsoever now ends. Any exemptions to limits will henceforth only be approved by the agency, not the exchanges, and under more strict guidelines than ever before," Chilton said. "A bona fide hedge will truly be a bona fide hedge, and traders will have to continually prove their business need to this agency."

"Though it's not clear yet what impact these limits will have," said Kelleher of Better Markets, "the rule will establish better transparency in commodities markets, as well as providing a beachhead for more reform."

Under the new rules, speculative limits for next-month contracts would be set at 25 percent of the deliverable supply. This is in line with historical practices. It now also would apply to the futures market.

For all products except natural gas, the CFTC has opted for a 1-to-1 ratio, where traders are subject to the same limits in the futures market as in the physical markets. This is a narrowing of past rules.

For natural gas, speculative contracts could exceed ones in the physical markets by a 5-to-1 ratio, something that didn't sit well with consumer groups who fear it will lead to higher home-heating costs.

The new rules cannot take effect until 60 days after the CFTC defines what qualifies as a "swap," a definition that may take until December or January. That's a contract that locks in a bet between two private parties in the vast so-called dark markets that until last year were completely unregulated.

The CFTC also adopted limits on the trading of commodities contracts for months or years beyond next-month delivery. These position limits apply to any given month and the sum of all future-month contracts. They involve a formula that prevents a trader or firm from having a position greater than 10 percent of the first 25,000 contracts trading in a given commodity such as oil or corn, and 2.5 percent of whatever amount exceeds that 25,000 threshold.


Sen. Sanders' letter


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