CFTC floats limits on speculative oil market trading

The Commodity Futures Trading Commission plans to propose new limits on speculative trading in energy futures markets by hedge funds and other traders that some Capitol Hill lawmakers and other critics say have caused price volatility in recent years.

CFTC officials say the proposed ceilings on the number of futures contracts that market players may hold, called position limits, are high enough that the plan would likely curtail the activities of only a small number of traders.

But the move by the regulators nonetheless represents a major shift from the Bush administration, which maintained that speculation in the markets was not a significant factor in the oil price swings in recent years that saw oil peak at $147 pr barrel in July of 2008.

The limits would apply to the four commonly-traded contracts for natural gas, crude oil, heating oil and gasoline. If implemented now they would affect 10 large traders, according to CFTC, although some might qualify for exemptions.

Bart Chilton, a Democratic member of the CFTC, said Thursday that the limits “err on the high side” but could be lowered if regulators believe they are not protective.

“Furthermore, while the proposed limits err on the high side, such levels would still ensure that the very largest traders’ positions, those with the greatest potential for causing market-contortions, would be limited,” he said in remarks prepared for a CFTC meeting today in which the body is expected to approve issuing the draft rules.

“Moreover, if limits were set too low, there would be a possibility that trading migration could take place, transferring traders to over-the-counter markets or overseas exchanges,” he added.

A CFTC official told reporters today that the restrictions would have limited the holdings of Amaranth Advisors, a hedge fund that collapsed in 2006 that had amassed huge positions in natural gas markets but bet the wrong way.

The proposal would limit the aggregate number of contracts that a trader could hold on the New York Mercantile Exchange and the Georgia-based Intercontinental Exchange.

The proposal does not address largely unregulated over-the-counter markets, but Wall Street reform legislation the House approved in late 2009 would give the CFTC new authority to police these markets as well.