Regulators impose limits on oil speculation

A divided Commodity Futures Trading Commission voted along party lines Tuesday to impose new restrictions on speculative trading in energy futures markets.

The rules, required under last year’s Dodd-Frank law, are aimed at reigning in speculative Wall Street trading that some allege has driven up oil prices and worsened market volatility in recent years.

The rules impose “position limits” on the amount of futures and swaps contracts for oil and other commodities that traders hold.

“While I'd have an even tougher rule in many respects if I were the only author, this is nonetheless a very strong, needed and imperative rule to ensure more efficient and effective markets devoid of fraud, abuse and importantly, manipulation,” Bart Chilton, a Democratic member of the five-person CFTC who has been the body’s most outspoken advocate of imposing the rules, said in a statement.

Chilton voted for the rule along with CFTC Chairman Gary Gensler and Democratic member Michael Dunn.

The rule sets limits on contracts for oil, natural gas and two other energy contracts, as well as a slew of agricultural and metals contracts.

Republican CFTC members Jill Sommers and Scott O’Malia opposed it. Sommers said she’s not opposed to limits per se and noted the regulators have set limits in some markets for years.

But she laid out several concerns with the rule, including fears that exemptions for “bona fide hedgers” — that is, companies such as utilities and manufacturers that use trading markets to manage price risks — are too narrow.

More broadly, she said the CFTC is “setting itself up for an enormous failure.”

“I do not believe position limits will control prices or market volatility, and I fear that this Commission will be blamed when this final rule does not lower food and energy costs,” she said.

But Sen. Bernie Sanders (I-Vt.), who has bashed delays in the rules, has long argued that speculation has an outsized effect on energy prices.

In a statement, the liberal senator called the rules a “positive development” but said they’re too weak.

“Under this rule, a single Wall Street speculator will still be allowed to hold positions equal to 25 percent of the physically deliverable supply of crude oil, gasoline, and heating oil. That’s not enough,” Sanders said.

He noted, however, that the rules enable tightening of the limits in the future.

“I will continue to urge the CFTC to use this provision to impose stricter speculation limits,” Sanders said.

The long-delayed rules have proven controversial among the CFTC members and prompted widespread interest among a range of industries that participate in energy and other commodity markets.

Chilton, while noting he wanted tougher rules, said the new limits are nonetheless significant.

“The rule sets federally enforced limits, for the first time ever, on the amount of concentration anyone may control in energies and metals,” Chilton’s prepared remarks state.

He noted that limits have been in place in some agricultural markets for decades.

“In these other markets, we have seen cases where one trader holds 30, 35 and even 40-plus percent of a market. That can be, and I believe has been at times, manipulative. This rule will put a stop to that,” Chilton said.

While the commission approved the limits 3-2, Dunn criticized the rulemaking and said he voted in favor only because the Dodd-Frank law mandated the restrictions.

He called the limits a “sideshow.”

“To be clear, no one has proven that the looming specter of excessive speculation in the futures markets we regulate even exists, let alone played any role whatsoever in the financial crisis of 2008,” Dunn said in his opening remarks. “After we implement position limits, in all likelihood, the prices of heating oil and gasoline will not drop precipitously as some have strongly suggested.”

—This post was updated at 3:38 p.m.