Exclusive: CFTC has votes to pass position limits

10/11/2011 08:15 pm ET | Updated Dec 11, 2011

By Christopher Doering

CHICAGO (Reuters) - The head of the U.S. futures regulator has the support he needs to pass a long-awaited rule that would curb excessive speculation in commodity markets, a source with knowledge of the agency's rule-making told Reuters on Tuesday.

The U.S. Commodity Futures Trading Commission announced on Tuesday that it would vote on October 18 on a rule limiting the number of contracts any one speculative trader could hold in commodity markets.

The source said the agency was still making changes to the position limits rule and there was a chance changes could upset the balance of support among the five commissioners before next Tuesday.

"I think he does have the votes," the source who closely follows the rule-making process told Reuters, referring to Gary Gensler, the CFTC's chairman.

The CFTC has postponed two scheduled meetings on the position limits plan, with the most recent canceled due to a lack of the three votes needed for its approval.

Curbing excessive speculation is part of the CFTC's efforts to enact sweeping reforms in the Dodd-Frank financial reform overhaul of 2010 that required the agency to regulate the $600 trillion over-the-counter derivatives market.

Gensler told reporters on the sidelines of a Futures Industry Association conference in Chicago on Tuesday that position limits were next on the agency's to-do list, but he declined to say whether he had the support needed to pass it.

The CFTC has estimated it will cost the industry more than $100 million to comply with the position limits rule, Scott O'Malia, a Republican commissioner, told reporters after speaking on a panel in Chicago.

Most of the cost for the industry is expected to be soon after the rule goes into effect.

"You have to look beyond the implementation costs and look at the larger costs," Craig Donohue, chief executive of CME Group Inc, told Reuters Insider.

"If we create an environment where people fundamentally can't manage within the constraints of the new position limit requirements ... that will result in much more fundamental costs to the industry in terms of their commercial activities."

O'Malia expressed concern the cost to comply with the rule could be too expensive, especially for bona fide hedgers, or companies that use physical commodities themselves and seek to lower risk by entering into contracts in order to guard against price increases.

"That would be expensive for them and I'm a little bit concerned about the burden that we're placing on commercial hedgers to justify why they shouldn't have limits," said O'Malia. "They have to have the compliance and reporting mechanism to show why they're not," he said.

The commission has never presented a unified front on position limits, one of the most contentious pieces of the financial overhaul for big commodity traders.

In January, Republican Commissioner Jill Sommers opposed releasing the draft rule for public comment, while Democrat Michael Dunn and O'Malia expressed skepticism on how effective the rules would be. Gensler and Bart Chilton have been staunch supporters throughout.

Some CFTC commissioners also are skeptical that the limits would prevent a run-up in prices. The agency's economists have not been able to find a causal link between speculation and price volatility. One study concluded commodity index traders are not causing price volatility and may actually help reduce it.

The Dodd-Frank legislation gave the CFTC the power to set position limits to curb excessive speculation in 28 commodities, including energy, metals and agricultural markets, "as appropriate."

The law required the CFTC to have position limits in place by mid-January.

Last month, Reuters obtained a draft final rule on position limits that showed the CFTC was yielding to banks and other major traders on several key provisions.

The version also would have eliminated the proposed conditional limit--which would have allowed for a higher limit in the spot month in a cash-settled contract than in a physically deliverable contract.

The CFTC also cited comments that urged it to gain further experience with swaps to ensure adequate liquidity for bona fide hedging transactions and positions before imposing restrictive conditions on people holding both cash-settled and physical delivery referenced contracts.

(Additional reporting by Jonathan Spicer and Ann Saphir in Chicago; editing by Russell Blinch, Bob Burgdorfer and Carol Bishopric)

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