The CFTC okays plan to rein in oil trading speculators

The US CFTC has endorsed a plan to rein in oil trading speculators by setting new limits on trading in energy futures by Wall Street investors and hedge funds.

Analysts warn, however, that sophisticated investors will merely shift some of their efforts away from the NYMEX to overseas and over the counter trading, leaving the regulators monitoring an increasingly smaller segment of the overall energy futures markets.

The CFTC also served notice yesterday that it will soon turn its attention to the precious metals markets, including gold and silver futures. The CTFC turned the spotlight on speculative trading in crude and other energy futures contracts after oil prices spiked to $147 in 2008. Some analysts are again blaming Wall Street and speculators for the runup in oil prices to $82 this month, which came despite weakness in rich-country demand and bulging inventories.

In a public hearing in Washington yesterday, the commission endorsed a proposal to limit the number of speculative trades in futures contracts that individual investors can make at any one time. The panel set a 90-day period for public comment, after which it is expected to adopt the new rule. However, critics say it won’t provide adequate regulatory oversight unless the murky over-the-counter market is included.

In a speech earlier this week, commission chair Gary Gensler argued for sweeping regulation of unregulated derivatives markets, where major financial institutions avoid regulatory scrutiny by trading financial and commodity futures and options.

“It is time to change the way the over-the-counter derivatives markets function and move from a dealer-denominated market to a transparent central marketplace that benefits the public and protects the Americans taxpayers,” Mr. Gensler said.

The CFTC’s move to curb speculative positions in regulated market represents “a step in the right direction,” said Peter Beutel, a veteran commodity analyst with the financial risk firm Cameron Hanover.

“I applauded the CFTC for giving it a shot. But I would have preferred to see something stricter … The overseas and over-the-counter markets can effectively outflank the best intentions of the CFTC.”

The regulations that the commission endorsed yesterday would prevent only the most dramatic surge in speculative trading by a bank or institutional investor.

If those rules had been in place over the past two years, only three individual traders would have ever exceeded the proposed limits for oil contracts, while 19 would have surpassed the ceiling for gasoline futures contracts, Steve Sherrold, the commission’s acting director of surveillance, said in an opening statement.

“Those have had a huge impact on the price of commodities (including crude oil) that has nothing to do with underlying supply and demand,” Mr. Beutel said. “And I don’t think the new rules fully address that factor.”

Tags:  CFTC, futures, markets, NYMEX, oil trading, speculators