A global push to damp down wild swings in oil and other commodity prices reached a pivotal point Monday as big traders mounted their last attack on a U.S. plan to limit the role of speculators.
Many of the world's biggest commodity market participants such as U.S. agribusiness giant Cargill Inc are resisting new rules that would cap how many futures and related swaps contracts any one company can control.
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The plan to impose "position limits", which has been under debate since prices first surged to records in 2007 and 2008, is now reaching its culmination, with companies rushing to submit their views to the U.S. Commodity Futures Trading Commission by Monday's deadline.
So far, most are reframing familiar complaints: Banks, traders and exchanges opposing the CFTC plan say it would make it harder for them to hedge risk, and that it would reduce liquidity and increase costs for consumers.
If the proposed rules are adopted with no change, "there is a substantial risk that they would undermine the efficiency of the markets for hedgers, by reducing liquidity and disrupting markets which currently function well", Linda Cutler, a Cargill vice president, said in a letter to the agency.
But at a time when oil, grain and metal prices have again shot up, some reaching new heights, consumers too are looking for some regulatory relief. Politicians are stepping up pressure for action.
"The banks think this rule is too strong. Commercial end users, consumers, unions ... think it's far too weak," Michael Greenberger, a University of Maryland law professor and former senior CFTC staffer, told Reuters Insider.
"As the American public starts suffering from $4 a gallon gasoline ... the issue becomes more visible, the debate between the consumer and the big banks is more highlighted," he said.
From Chicago and New York to London and Paris, the commodities markets influence prices for energy, metals, food and other products that hit consumers in areas such as the gas pump and the kitchen table, and so are politically volatile.
The CFTC polices the markets and is under orders from Congress to address perceptions that speculators periodically drive sharp swings in commodity prices that hurt consumers and producers.
The CFTC plan would apply to exchange-traded futures and related over-the-counter swaps in 28 energy, metals and agricultural markets.
A 60-day period for public comment on it ends Monday. The CFTC must next read the comments and decide whether to change the proposal. Its five commissioners must then vote.
Support for the plan is uncertain within the CFTC. The agency's chairman, Gary Gensler, may have trouble mustering the three votes needed to finalize it. A final vote may not come for some time.
The "position limits" fight comes as regulators worldwide are working to draw up and implement hundreds of new rules for banks and markets following the 2007-2009 financial crisis, which unleashed a wave of reform efforts.
FRANCE TARGETS SPECULATORS
France favors a crackdown on commodity market speculation in its role as 2011 chair of the Group of 20 major economies. French officials blame speculation for worsening a surge in food prices last year amid fears that such swings fuel political unrest, particularly in the developing world.
"While the Europeans, and particularly the French, share CFTC Chairman Gensler's concern about commodity prices, there is some skepticism among EU regulators that hard position limits are the right answer," said Joseph Engelhard, a policy analyst at advisory firm Capital Alpha Partners.
"The U.S. hard position limit approach leaves open the possibility that the regulators might overshoot their target levels and actually increase volatility," he said.
Although it is meant primarily to limit holdings by the funds and investors who have diversified into commodities over the past decade, the CFTC's plan threatens business models that have generated profits for years for some of the financial world's biggest players.
U.S. BANKS' $5.5 BLN BUSINESS
The market leaders include firms such as Goldman Sachs and JPMorgan Chase & Co. U.S. banks took in $5.5 billion in revenues trading in commodity markets last year, versus a record $11 billion in 2009, the U.S. Office of the Comptroller of the Currency said.
The 2010 figures represented just under 10 percent of the industry's trading revenues. The decline from 2009 was due largely to decreased volatility and reduced hedging, officials have said, but also reflected less risk-taking by the banks.
Traders argue there is no evidence that speculators inflate prices, and say curbs could make prices more volatile.
The CFTC's economists have not found a causal link between speculation and price volatility, with one study showing commodity index traders are not causing price volatility, but may actually be helping to reduce it.
The agency's effort was mandated by Congress in the Dodd-Frank financial regulation reforms made law in July 2010. But as in many other parts of that sprawling legislation, Congress left it up to regulators to hammer out the details.
"I'm very hopeful that the CFTC will listen to the average American, the American consumer, and do what Congress asked it to do: put tough limits on speculative activity, casino-like activity, in these markets," Greenberger said.