In a sweeping new crack down on the number of futures contracts held by speculative traders in oil and other energy markets, the U.S. Commodity Futures Trading Commission (CFTC) has proposed trading limits on oil, natural gas and possibly further commodities.
If the CFTC ultimately decides to go ahead with such measures, it would me a massive centralisation of power within the market. Under the present structure trading limits are handed off to the authority of the respective exchanges, upon which the trading takes place.
The Federal regulators already imposes limits on agricultural products but leaves the prerogative for other commodities such as energy and metals, to the exchanges – in order to protect against any manipulation. However, they are not required to protect against excessive speculation.
CFTC Chairman, Gary Gensler, said on Tuesday that the agency will hold hearings this summer to consider imposing position limits for “all commodities of finite supply”. The hearings will gather views from across the board, from consumers, businesses and market participants on the idea of limiting the number of energy futures contracts being held.
A review is also set to be conducted into whether swap dealers, index traders and exchange-traded fund managers should be allowed to get around these possible limits through special hedge exemptions.
Gensler added: “It is incumbent upon the CFTC to ensure a fair and transparent price discovery process for all commodities.”
The move comes against the larger backdrop of concern in Congress and complaints by traders themselves over speculation in the oil futures market. Just last fall the House of Representatives approved measures aimed at curbing excessive speculation, despite the threat of veto from the then incumbent President, George W. Bush.
Analysts at Merrill Lynch estimate that investors are at current ploughing $125 billion into commodity indices, such as the S&P GSCI Commodity Index. That figure stood over a third lower at $80 billion back in February. Although, the same analysts added that a proportion of the increase was due to the spike in commodity prices during the period.
The currently published format of reports from the CFTC would also be under review. A potentially larger trader report would incorporate data about swap dealers, foreign contracts tied to U.S. futures contracts, professionally managed market positions such as hedge funds, and contracts that help set market prices.