By Christopher Doering
WASHINGTON (Reuters) - The regulator of U.S. futures markets risks increasing volatility and distorting pricing functions unless measures to curb excessive speculation are thoroughly vetted, top commodity exchange executives said Tuesday.
"While well intentioned, these measures often fail to achieve their desired objectives or, worse yet, lead to unintended consequences ... that would otherwise be discovered in properly operating markets," said Jeffrey Sprecher, chief executive of IntercontinentalExchange Inc
Officials from ICE and the Chicago Mercantile Exchange
The CFTC is reviewing the way it regulates energy markets amid volatile swings in oil prices, blamed on hot money from index, pension and hedge funds looking for new investments. The agency also will hold meetings on July 29 and August 5.
"I believe we must seriously consider setting strict position limits in the energy markets," CFTC Chairman Gary Gensler said in remarks prepared for the opening of the hearing. "Every option must be on the table."
He believes the CFTC should work "urgently" with Congress to secure additional authorities to prevent market players from moving to the over-the-counter market or to foreign exchanges.
Gensler said several questions remain that the CFTC must still answer, including what the position limits should be; who should set them, the CFTC or the exchange; and if exemptions should be allowed for traders to manage purely financial risk, rather than accepting the delivery of the actual commodity.
Several commissioners warned that the CFTC must be cautious and not push traders to less regulated offshore markets. But, at the same time, Commissioner Bart Chilton said the "unprecedented volatility" over the past year had increased the urgency for the CFTC to make changes. "Whatever manner the agency proceeds, 'going slow' is not an option," he said.
U.S. futures markets said fundamental supply-and-demand factors, not speculation, were responsible for the increased volatility hitting everything from oil to wheat.
Sprecher said CFTC should set limits and levels for traders across all trading venues and should not set positions as a percentage of an exchange's open interest.
Craig Donohue, CEO of CME, doubted tackling excessive speculation would do much good in taming oil prices.
"The debate regarding controlling excessive speculation in the energy markets by means of position limits, or otherwise, needs to be informed by two facts," Donohue said.
"First, it is rare for speculators, index traders and/or swap dealers to have control of a large share of the open interest in any futures contract, and, second, efforts to control price or volatility by position limits is a failed strategy."
To protect against market manipulation, the CFTC sets limits on the amount of contracts each investor can hold in some agricultural commodities. But, for energy products such as oil, the limits are set by the futures exchanges.
The move to toughen up oversight marks a sharp turnaround for the CFTC, which has drawn criticism for its hands-off approach toward market regulation, especially last year, when commodities rocketed to record highs.
"We and our consumers cannot continue down the same path," said Sean Cota, testifying on behalf of the Petroleum Marketers Association of America. "It is time for a concerted effort toward meaningful reform to restore stability and confidence in these markets."
Ben Hirst, senior vice president and general counsel for Delta Air Lines Inc
Delta, the world's biggest carrier, estimated that each $1 rise in the price of a barrel of oil costs $100 million on its bottom line. Hirst said the sharp rise of oil prices between mid-2007 and mid-2008 cost the airline $8.4 billion.
With a number of anti-speculation bills pending in Congress, the CFTC's actions have been praised by some lawmakers, especially Democrats.
Senator Bernie Sanders, who has introduced legislation calling for the CFTC to use its authority to curb excessive speculation in energy markets, praised the CFTC for not waiting for Congress to act.
"But, I am here today to tell you that as important as these steps are, they will all be for naught, unless they are followed up by aggressive action on the part of the CFTC to prohibit excessive speculation in oil and gas trading,".
(Additional reporting by Tom Doggett, Tim Gardner and Ayesha Rascoe;; Editing by Walter Bagley)
