Regulator wants high energy trading limits, but with a catch

A commodity futures regulator wants to set high limits for energy traders that don’t hinder their current operations but leave the door open to future tweaks and refinements.
Commodity Futures Trading Commission member Bart Chilton told an audience at an Argus Media market regulation conference in Houston this morning that the new regulations the agency is considering should set limits on how large a position traders can hold in certain futures contracts, and provide only “targeted and verifiable” exemptions to those limits.
Currently trading limits are set by markets that facilitate the trades, such as the New York Mercantile Exchange, but those limits are regularly violated by traders with little intervention by those markets and broad exemptions are granted to many traders.
CFTC hearings on the topic earlier this year made it clear the commission plans to impose limits, but Chilton’s proposal is aimed at creating a middle ground between industry — which is generally worried about new rules — and some members of Congress who want very tough rules to rein in what some say was rampant speculation that led to huge oil and natural gas price spikes in 2008.
“My view is let us err on the high side at first,” Chilton said when it comes to the position limits.
He said he knows there’s a “very real” concern traders could migrate to less-transparent trading realms in reaction or move more of their trading to less strict overseas markets.
“I’m concerned about that too,” Chilton said. “But we need to find a balance.”
Other things Chilton said he hopes come out of the current Senate efforts to address concerns over energy markets: criminal enforcement authority for the CFTC and application of the limits to metals markets.
“For me it would be pretty cool” to have better data on over-the-counter markets and “if we could put people in jail for their crimes,” Chilton said.
The push for new powers may seem threatening to the energy industry, but Chilton notes the CFTC’s charter is to “guard against potential manipulation.” While recent CFTC-gathered trading data shows “there’s no smoking gun” proving large hedge funds, index traded funds and institutional investors like pensions and university endowments, Chilton said he personally believes these large, typically passive investors have the potential to impact the markets.
“When these ‘massive passives’ roll their positions at the end of the month people are trading around that. It’s not supply and demand there,” Chilton said.
As for the argument those large investors are crucial for market liquidity: they are typically taking long positions for long periods of time making them “dead liquidity” that “puts a thumb on the scales.”
Chilton said he’s not sure how the other CFTC commissioners stand on his proposal (although Chairman Gary Glenser may hint at it during a talk he’s making today), but he hopes new proposed rules will out for public comment by the end of November.
Here are Gensler’s prepared remarks from Chicago.