WASHINGTON: The U.S. futures regulator hopes to fully implement its biggest crackdown on commodity market speculators by early 2012, a year after the deadline set by lawmakers, it said in a filing that gave the most detailed legal argument and timeline yet for the controversial plan.
In the full text of its 100-page proposal, which must overcome significant internal skepticism before it can be finalized, the Commodity Futures Trading Commission also clarified an interim plan demanding much more information about the positions held by big traders in energy and metals markets, saying it would affect some 140 entities on a monthly basis.
The trading limits, designed to prevent price distortion from "excessive speculation," will be open for public comment for 60 days once the filing, now on the CFTC's website, is published in the government's Federal Register.
In the draft rule, the CFTC said it does not need to find that price-distorting speculation is happening -- an important comment given the large volume of both analyst research and academic work questioning the popular assumption that financial speculators caused the surge in commodity prices in 2008.
"The Commission may impose position limits prophylactically, based on its reasonable judgment that such limits are necessary," the agency said in its filing.
Although the limits were written into the Dodd-Frank financial overhaul mandated by Congress last summer, a majority of the CFTC's five commissioners must still vote to finalize the rule sometime after the comment period ends.
That vote appeared less than certain last week after Michael Dunn, a Democratic commissioner whose support will be key to the plan moving ahead, said he wanted to see hard evidence that speculation was causing problems that can be fixed by position limits.
Consumers and some lawmakers have urged the CFTC to move fast on the limits to prevent another run-up in commodity prices, many of which are again rising to their highest since the record rally of 2008.
The CFTC said it hoped to quickly implement the first stage for its limits, which apply to the spot month of 28 exchange-traded futures markets.
During the third quarter of 2011, the CFTC said it hoped to begin collecting data from large swaps traders, which will help it police limits in futures beyond the spot month, as well as in correlated swaps markets.
The CFTC said it planned to issue an order by the first quarter of next year to fix the broader range of limits based on a percentage of open interest in markets.
Those limits would be based on a formula of 10 percent of the first 25,000 contracts of open interest and 2.5 percent thereafter. CFTC staff have said previously that the formula is very similar to that already used by exchanges to set less formal "accountability limits" that are loosely enforced.
"The resultant limits are purposely designed to be high in order to ensure sufficient liquidity," it said.
The CFTC said it was seeking comments on whether energy and metals markets should have even higher limits using a formula of 10 percent of the first 25,000 contracts of open interest and 5 percent thereafter to avoid hurting liquidity.
It proposes to keep "legacy limits" for certain agricultural markets which have long had position limits. But in its filing, the CFTC asked for comments on whether to adopt an April request from the CME Group (CME.O) to raise limits for corn, soybeans, wheat and soybean oil, or whether to use the same position limit formula as in energy and metals markets.
The CFTC has the ability to impose limits in swaps that play a "significant price discovery" function, but said it planned to look at those at a later date.
"The Commission intends to propose in a subsequent notice of rulemaking a process by which swaps that perform or affect a significant price discovery function ... can be identified," it said.
NEW "POSITION VISIBILITY" LEVELS
The CFTC has estimated about 80 traders in agricultural markets will be affected once the broader limits are in place, along with 25 in base metals markets, 20 in precious metals markets, and 10 in energy markets.
It proposes to gather more information on the books held by other big futures traders through new position visibility reports for energy and metals markets, which would affect about 140 entities, according to its regulatory filing.
The monthly reports will require disclosure of cash, swaps and uncleared swaps positions to ensure the CFTC sees the 30 largest "unique owners" in crude and natural gas markets and 20 largest in other energy and metals markets.
The CFTC said the reports would help it evaluate whether its limits are working, analyze the impact of speculation on price, and "more readily identify instances where a trader's large positions create an ability to manipulate the market and cause sudden price changes or distortions".
The reports are similar to current reporting obligations for large hedgers, the CFTC said.
The visibility reports would be required when positions in all months or any single month in NYMEX futures reach the following levels: light sweet crude-22,500 contracts, Henry Hub natural gas 21,000, New York harbor gasoline blendstock-7,800, heating oil-9,990, gold-10,700, silver-4,500, copper-4,200, platinum-1,400, palladium-900.
(Editing by Clarence Fernandez)
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