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October 19, 2011

Feds tighten trading rules

WASHINGTON – The ability of big financial speculators to manipulate the price of oil and 27 other commodities will be limited under 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 members of Congress complained that the new rules fall short of what’s needed to effectively curb speculation.

“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 McClatchy 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 a result simply of supply and demand among producers and consumers.

The CFTC regulates the trading of contracts for future delivery of oil, wheat, corn and other commodities. In those markets, financial speculators far outnumber both producers and actual users of the products looking to the 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 its future delivery.

The rules, which were due last January, are unlikely to take full effect before spring. Aiming to impose a marketwide ceiling on speculative trading, they were mandated under the July 2010 revamp of financial regulation known as the Dodd-Frank Act, in 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 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. They 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 in a statement: “The position limits rule approved today … represents significant progress for middle-class families facing roller coaster gasoline, electricity and food prices.”

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.

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.”

Chilton said another important change is that exchanges will no longer determine who is exempt from the rules.

Wall Street banks were previously 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,” Chilton said. “Any exemptions to limits will henceforth only be approved by the agency, not the exchanges, and under more strict guidelines than ever before.

“A bona fide hedge will truly be a bona fide hedge, and traders will have to continually prove their business need to this agency.”

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