Regulator may tighten commodities speculation rules

The Commodity Futures Trading Commission will consider new measures to curb speculation in the markets for energy and other commodities, the agency is expected to announce today.

Such a move, designed to reduce the volatility of prices, faces resistance from top Wall Street firms, which fear the effort could cut into their earnings. Regulators and lawmakers have expressed concern that these firms have used their size and power to inflate commodity prices, booking profits in the process.

Those worries reached a fever pitch last summer, when the price of oil soared to almost $150 a barrel, pushing gasoline prices to record levels.

A significant amount of oil trading at that time was conducted by a relatively small number of investors, according to data released by the CFTC.

A report last month by a Senate investigative committee warned that firms manipulated the price of wheat, causing farmers and consumers to pay much higher prices.

Concerns about such deal-making have waned since then, as commodity prices have moderated from last year’s highs, though a recent run-up may prompt new questions.

The CFTC’s initiatives are among the most significant steps taken by commission Chairman Gary Gensler since he started there in May.

Gensler and the CFTC are also key players in the Obama administration’s plan to regulate derivatives, exotic financial contracts that are often exempt from government oversight. The CFTC, along with the Securities and Exchange Commission, would regulate the derivatives market under the plan.

Financial firms can affect the price of commodities such as oil and wheat by buying and selling futures, which are financial instruments traded on exchanges. A future is a contract between two parties that agree to buy and sell a commodity at a certain price. For example, an airline worried about being hurt by rising fuel prices might try to lock in costs by buying oil futures. If the price of oil rises, the futures the airline owns would also rise in value, offsetting the increased cost for fuel.

Although such transactions were the original purpose of futures, the marketplace has grown far larger and more complex in recent years. Firms have introduced new ways to speculate on rising or falling values of commodities by betting on batches of futures known as indexes. The CFTC says it has the power to limit this speculation, but for many commodities, including energy products, it has not done so.

The commission is planning to announce today that it will consider limiting the size of an investment any single firm could make in a particular commodity. The agency is planning a series of hearings to examine whether such limits would reduce harmful speculation, what the limits should be and whether the agency would need new legal powers to do this.

Adopting new curbs would require a vote by the CFTC’s commissioners.

The agency already has established position limits for some commodities, such as wheat. But it has also granted exemptions to these limits, which congressional investigators have blamed for fueling speculation. The CFTC plans to review its policy on exemptions.

The CFTC also plans to require more public disclosure about the holdings of commodity traders. For many years, the agency has issued weekly reports about these holdings. The new reports would provide more detailed information about the types of firms, such as banks and hedge funds, that hold significant positions. In addition, the reports would provide more information about trading in derivatives linked to commodities.

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Goldfarb writes for the Washington Post.