CFTC Considers Position Limits for Energy Commodities

The U.S. Commodity Futures Trading Commission is holding hearings to help it evaluate whether it should impose position limits for oil, natural gas and other commodities.

Doing so would represent a significant change in policy. While the CFTC limits the number of futures contracts that can be held by each market participant in the agricultural futures markets, for energy commodities it has always allowed the exchanges themselves to set position limits.

The agency is considering the change in response to widespread concern that last year’s energy price spikes were caused in large part by speculative trading.

The purpose of futures contracts is to reduce price volatility, but when speculators use them to bet on market prices, the result can be the amplification of price swings.

The Chairman of the CFTC, Gary Gensler, told Dow Jones the agency is also going to incorporate data about swap dealers, foreign contracts tied to U.S. futures contracts, and professionally managed market positions in its weekly public trader report.

Executives from financial firms that are deeply involved in energy futures markets argued against the new limits, saying that position limits should apply to participants—such as pension funds—whose investments are brokered by the banks, rather than to the banks themselves.

Gensler worked at Goldman Sachs for nearly two decades before joining the federal government in the 1990s. He said that the agency’s responsibility was to help prevent the concentration of market power among a small number of players.

Some large derivative dealers might try to declare themselves as hedgers, even if their trading strategies combine price risk management and speculation. The agency will also be considering tightening the rules governing how swap dealers can receive hedge exemptions.

Return to August 2009 Western Energy News

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