By Ayesha Rascoe and Christopher Doering
WASHINGTON (Reuters) - Commodity Futures Trading Commission Chairman Gary Gensler said on Wednesday he supported exemptions from tough new investor limits for bona fide hedgers, despite signs they could tarnish the usefulness of position limits.
"While I believe that we should maintain exemptions for bona fide hedgers, I am concerned that granting exemptions for financial risk management can defeat the effectiveness of position limits," Gensler said at the opening of a second day of hearings into tightening regulatory oversight of U.S. futures markets.
The CFTC is conducting a series of hearings to explore whether to set investor position limits in the energy markets, to help prevent market manipulation by dominant players. It will also examine whether some traders should be able to exceed those limits.
Gensler appeared even more convinced the CFTC was moving closer to limiting how many futures contracts can he held, so-called position limits, to curb excessive speculation.
"No longer must we debate the issue of whether or not to set position limits," he said.
But top Wall Street firms expressed concern on Wednesday that a crackdown by the U.S. futures market regulator would shrink trading volumes and impair market efficiency if certain traders were not allowed to surpass position limits.
"We believe that eliminating or limiting swap dealer hedge exemptions not only will not address the 'swap loophole' but actually will have several negative consequences," said Donald Casturo, managing director of Goldman Sachs Group Inc
Swaps are private and usually one-on-one transactions tailored to the need of the buyer and seller. They have grown in popularity as a way of avoiding big margin calls on futures exchanges while still obtaining a hedge for bank financing.
"Those transactions are vital to the counterparties entering into them for risk-management or investment purposes, both of which are legitimate and important objectives," said Blythe Masters, managing director and head of the global commodities group at JPMorgan Chase & Co
Goldman Sachs and J.P. Morgan Chase told the CFTC they supported imposing aggregate position limits, but added they should apply to end users, such as pension funds, and not banks.
Gensler, a former partner at Goldman Sachs, questioned their proposal, but the financial firms maintained they were not asking for any special treatment.
The CFTC has targeted excessive speculation in energy and commodity trading, especially in oil, which soared to $147 a barrel a year ago. Oil and other commodity prices, while volatile, have largely fallen from last year's highs.
The hearing "seems to me to be a euphemism for what we can do to make sure that crude doesn't trade over $140 again," said Henry Jarecki, chairman of Gresham Investment Management. "Oil prices were indeed remarkably high last year. But such high prices were also found in steel, coal, and cobalt, and they don't trade on the futures markets at all."
Gensler defended the agency and stressed that the CFTC's review of position limits was not politically motivated.
"We are not price setters ... but we are about making sure markets are fair and orderly and work for the American public," he said.
Eliminating exemptions for swap dealers could drive more traders to outside futures exchanges and cause the market to splinter, spreading exposure among more swap dealers and other financial intermediaries, Casturo of Goldman Sachs said.
Instead the CFTC should be careful to impose position limits that are "low enough to prevent excessive speculation while still being high enough so as not to restrict the level of speculation that is necessary to ensure a balance between commercial and speculative interests," he said.
To protect against market manipulation, the CFTC sets limits on the amount of contracts each investor can hold in some agricultural commodities. But the futures exchanges set limits for energy products, such as oil futures.
The move to toughen oversight marks a turnaround for the CFTC, whose hands-off approach toward regulation drew criticism last year when commodity and energy prices rocketed. With a number of anti-speculation bills pending in Congress, the CFTC's actions have been praised by some lawmakers, especially Democrats.
(Editing by Russell Blinch and Walter Bagley)
