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U.S. Considers Curbs on Speculative Trading of Oil

"My firm belief is that we must aggressively use all existing authorities to ensure market integrity," Gary Gensler, the chairman of the Commodity Futures Trading Commission,

said in a statement.

Published: July 7, 2009

WASHINGTON — Reacting to swings in oil prices in recent months, federal regulators announced on Tuesday that they were considering trading restrictions on hedge funds and other “speculative” traders in markets for oil, natural gas and other energy products.

In a big departure from the hands-off approach to market regulation of the last two decades, the chairman of the Commodity Futures Trading Commission, Gary Gensler, said his agency would consider new limits on the volume of energy futures contracts that purely financial investors would be allowed to hold.

The agency also announced that it would pull back part of the veil on the oil and gas markets, publishing more detailed information about the aggregate activity of hedge funds and traders who arbitrage between domestic and foreign energy prices.

“My firm belief is that we must aggressively use all existing authorities to ensure market integrity,” Mr. Gensler said in a written statement.

Mr. Gensler announced that his agency will hold several hearings in July and August, the first of which will examine whether to impose federal “speculative limits” on futures contracts for energy products.

Oil prices have swung wildly in the last year, hitting about $145 a barrel last summer, then plunging to $33 in December before rising to about $70.

Much of that gyration stemmed from chaos in the global financial system, as banks and much of Wall Street came perilously close to collapse last September and the global economy fell into the most severe recession in decades.

But a growing number of critics have blamed some of the extreme volatility on the role of purely financial investors — those who are simply betting on the direction of energy prices, as opposed to those who actually use such products, like airlines.

The Commodity Futures Trading Commission, an independent regulatory agency that regulates the trading of futures contracts for commodities ranging from wheat and corn to oil, precious metals and currencies, has for years followed a deregulatory path that rarely interfered with the burgeoning markets they regulated.

Federal officials said “speculative” traders were primarily those that the agency defines as “non-commercial,” which are essentially financial investors who are not users or producers of the commodities and are primarily interested in betting on the direction of prices. “Commercial users,” by contrast, include farmers, airlines and oil companies that want to hedge against the risk of rapid price changes.

Non-commercial traders accounted for almost a fifth of the activity in several major oil and gas products for the week that ended June 30, according to data compiled by the commodities agency.

Mr. Gensler, who was nominated by President Obama and took over the agency earlier this year, made it clear that he is pushing toward tighter regulation on several fronts. His efforts mirror actions taken by the Justice Department to strengthen antitrust enforcement and by financial regulators to police banks and investment firms much more closely.

Mr. Gensler noted that his agency already imposes volume limits on speculative trading in agricultural products like wheat and corn. But in the case of energy products, the agency allows the futures exchanges — primarily the New York Mercantile Exchange — to set limits.

A future is a contract to buy or to sell a particular volume of a commodity by a particular date. Futures contracts were originally created to help farmers shield themselves from price volatility between the time they planted their crops and the time of harvest. But futures are now used to hedge price swings in everything from oil and gas to electricity, Treasury bonds and foreign currencies.

In the case of energy products, Mr. Gensler said, the exchanges were not required to set or enforce position limits aimed at preventing “excessive speculation.” The contrast between approaches taken for agricultural and energy commodities, he said, “deserves thoughtful review.”

Mr. Gensler added that the agency would be reviewing the manner in which traders receive exemptions from trading limits by claiming the need to carry out “bona fide hedging transactions.


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