WASHINGTON (Reuters) – The United States is poised on Tuesday to push through the toughest measures yet to curtail speculation in commodity markets, likely shifting the focus of a fierce four-year debate from the regulators to the courts.
In a measure decried by Wall Street and trading companies as a misguided political attempt to cap soaring oil and grain prices, the Commodity Futures Trading Commission is set to vote in favor of “position limits” that will cap the number of futures, swaps and options contracts any trader can hold.
If the rule maintains several of the key measures from a draft seen last month by Reuters, there will be some cause for relief in the industry. Tough limits on whether separately controlled accounts must be aggregated and whether swaps and futures positions can be offset were relaxed in that draft.
But yielding on those details will do little to temper deep frustration over a contentious plan that could force banks such as Morgan Stanley and industry traders including Cargill to scale back business, stemming an influx of investor capital and hedge fund trading and upending age-old practices.
A lawsuit to stop the measure coming into force seems likely, say industry experts and lawyers, one more hurdle for CFTC Chairman Gary Gensler, who is struggling against emboldened Republicans and a hostile Wall Street to put in place the rules required by the Dodd-Frank financial reforms.
“I would be very surprised if there’s not some kind of lawsuit around these regulations,” said one executive with a major fund who declined to be identified. “It’s not clear whether the case has been made about the specific benefits.”
After an eight-month battle, the Securities and Exchange Commission in July had its first Dodd-Frank rule overturned when a federal appeals court found the SEC had conducted a flawed analysis to support a rule that would make it easier for shareholders to nominate directors to corporate boards.
The position-limits rule may be challenged on similar grounds — that the costs outweigh the benefits of a plan that many industry officials say will make markets riskier by driving trade to less-regulated overseas venues.
Dozens of academic, government and bank studies on the subject have differed on whether speculators influence prices long-term or whether prices simply respond to market conditions. The CFTC’s own economists have yet to produce any economic evidence to connect speculators to price spikes.
Some politicians, however, have clamored for the CFTC to clamp down since early 2008, as oil and grain prices were shooting toward historic peaks.
“The bottom line is that we have a responsibility to ensure that the price of oil is no longer allowed to be driven up by the same Wall Street speculators who caused the devastating recession that working families are now experiencing,” independent Senator Bernie Sanders said on Monday.
The rule will almost certainly seek to put some limits on the large long-only commodity index funds that have grown from nearly nil to over $300 billion in the past decade, nicknamed the “massive passives” for buying and holding futures contracts without regard to market fundamentals.
Gensler has worked tirelessly to win support from the commissioners, and as Reuters reported last week, he finally won over enough votes to push through the rule on Tuesday when the CFTC meets from 9:30 a.m. EDT (1330 GMT).
But his work is far from over. To prevent the “regulatory arbitrage” that many fear may ensue, he will need to ensure overseas regulators keep up with the CFTC.
Over the weekend, France lost its battle to force mandatory curbs on energy and food commodities, and Britain’s Financial Services Authority — which overseas most of the major non-U.S. commodity exchanges — has maintained its opposition to mandated limits.
(Additional reporting by Sarah N. Lynch; Editing by Dale Hudson)
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