Traders Win as U.S. Issues Softer Plan to Curb Oil Speculation

(Bloomberg) -- U.S. regulators proposed placing new limits on hedge funds’ ability to speculate on oil and metals derivatives Thursday, a less-stringent version of rules that stalled during the Obama administration.

The regulations would add more federal oversight to trading in 16 new contracts: five highly-traded metals futures, four in energy and seven based on agricultural products. However, Commodity Futures Trading Commission officials estimate the plan would impact more than 400 contracts which reference those futures and nine agricultural derivatives for which the agency already restricts speculation.

Read More: U.S. About 10 Years Too Late in Its Bid to Rein in Oil Traders

The new plan is being driven by Heath Tarbert, a former Treasury Department official who took over as President Donald Trump’s second CFTC chairman in July. Tarbert has said the proposal aims to eliminate market manipulation, while ensuring that energy and agricultural companies can still engage in the commodity price hedging that’s necessary to manage their business risks.

The regulations differ from tougher iterations put forth during Barack Obama’s presidency because they would only impose limits on the soonest-expiring contracts for energy and metals futures, which are known as spot contracts.

Bigger Positions

In theory, the plan could actually allow traders to take bigger maximum positions than they do now for several contracts. That’s because the CFTC’s proposed limits will be based on new data on the commodities that would be available for physical delivery.

Exchanges wouldn’t have to increase their limits to match the new federal constraints. But if trading platforms maintain some of their current levels they would be less permissive than what’s permitted in the new rules.

The CFTC’s latest regulations come at a time when prices for oil and raw materials are relatively stable. That wasn’t the case in 2010 when lawmakers included a provision on position limits in the sweeping Dodd-Frank Act.

For financial, energy and agricultural firms that opposed earlier CFTC proposals, it’s arguably better that such rules come from a CFTC chairman picked by Trump than someone appointed by a possible Democratic administration.

Key Points:

• CFTC commissioners voted 3-2 to propose the rule, with the agency’s three Republicans in favor.
• The plan would allow for additional pre-approved exemptions for firms using derivatives to hedge business risk.
• Exchanges would get leeway to grant exemptions for legitimate business needs without prior CFTC approval
• The proposal focuses on 25 reference future contracts, including 16 new ones in energy, metals and agricultural products.
• Traders in those 16 contracts would only face limits on spot month speculation; nine agricultural contracts already with federal restrictions would also have limits on aggregate positions.
• Spot month limits will be tied to calculations that are based on 25% of the estimated physically-deliverable supply for various commodities.
• Some swaps considered equivalent to the covered futures would also be impacted.
• The CFTC will seek public comment on the plan before holding a second commissioner vote on whether the finalize the rules.

Divided Vote:

The CFTC’s three Republicans backed the regulations at a Thursday public meeting in Washington, while the the agency’s two Democrats opposed them. Here’s some of the comments they made on the proposal:

• “Position limits are like medicine; they can help cure a symptom but can have undesirable side effects,“ said Tarbert, a Republican. “And like medicine, position limits should be prescribed only when necessary.”
• “Today’s proposed rule promotes flexibility, certainty and market integrity for end-users -- farmers, ranchers, energy producers, transporters, processors, manufacturers, merchandisers,” Republican Commissioner Brian Quintenz said. “The CFTC is not a price-setting agency and we should not impede the market from reflecting long-term supply and demand fundamentals.”
• “Today’s proposal is reasonable in design, balanced in approach and workable for both market participants and the commission,” Republican Commisioner Dawn Stump said. “I am particularly pleased that, at my request, the propsal recognizes anticipatory merchandising as an enumerated bond fide hedge.”
• “It seems the commission will be left with insufficient strength to accomplish its mandated role of exercising appropriate surveillance, monitoring and enforcement authorities,” Democratic Commissioner Rostin Behnam said. “This will be to the detriment of the derivatives markets and the public we serve.”
• “The proposal would create an uncertain and unwieldy process with the commission demoted from head coach over the hedge-exception process to Monday-morning quarterback for exchange determinations,” Democratic Commissioner Dan Berkovitz said.

To contact the reporter on this story: Ben Bain in Washington at bbain2@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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