US revives plan on derivatives controls

PUBLISHED : Wednesday, 06 November, 2013, 12:31pm
UPDATED : Thursday, 07 November, 2013, 1:50am

The US derivatives regulator reintroduced a plan on Tuesday to curb commodity market speculation, reviving a crucial Wall Street reform after a judge knocked down an earlier version of its rules on position limits.

The Commodity Futures Trading Commission proposal will set caps on the number of contracts that a single trader can hold in energy, metal and agricultural markets, a measure aimed at capping speculation that some blamed for the spike in raw material and food prices prior to the 2008 financial crisis.

The redrafted rules sought to answer some of the deficits that a judge pointed out last year. The agency cited two of the biggest cases of market manipulation in history – the Hunt Brothers’ silver corner in 1979 and hedge fund Amaranth’s bet on natural gas in the 2000s – as evidence of why curbs were necessary.

The new rules will also make it easier for big banks such as Goldman Sachs and Barclays to remain in the market by allowing them to exclude positions held by entities in which the banks own minority stakes – a key trigger for the banks to sue the agency.

They may now ignore positions held by affiliates in which they own up to 50 per cent of the shares but do not control – far above the 10 per cent in an earlier rule – or in affiliates in which they own more than 50 per cent but that are not consolidated.

“The … restriction that was in before was very excessive, and that was a sensible adjustment,” said Craig Pirrong, a finance professor at the University of Houston who has been critical of efforts to set limits on positions.

The rules have been one of the most hotly debated aspects of the 2010 Dodd-Frank law and are re-emerging as some of the largest global banks face political pressure to reduce their control over commodities markets.

Still, the plan could prove to be far less rigorous than feared by markets, data provided by the world’s largest futures exchange, the CME, showed.

The maximum position traders would be allowed to hold could in some cases dramatically rise rather than become tighter, the numbers showed, in one specific contract almost 10 times as much as is currently the case.

Position limits have long been used in agricultural markets to curb speculation, but the US Congress gave the CFTC far greater powers to impose them after the crisis. The agency will now extend the practice to oil, gas and metals markets.

The calculation method the CFTC uses remains similar: traders may hold futures and swaps amounting to 25 per cent of the estimated deliverable supply of the underlying commodity in the spot-month contract.

The estimates will be provided by CME and revised regularly, the CFTC said.