UPDATE 1-U.S. regulator revives plan to limit excessive commodity bets

Douwe Miedema
Tuesday, 5 Nov 2013 | 11:15 AM ET

WASHINGTON, Nov 5 (Reuters) - The U.S. derivatives regulator on Tuesday reintroduced a plan to curb commodity market speculation, reviving a crucial Wall Street reform after a judge knocked down an earlier version of its rule on position limits.

The redrafted rule by the Commodity Futures Trading Commission appears to ease one major irritant for big banks by lowering the threshold for aggregating trading positions held by part-owned affiliates. But it threatens to create a new rift with commodity merchants looking to hedge certain transactions, such as rent on grain storage facilities.

The rule has been one of the most hotly debated aspects of an overhaul of Wall Street after the financial crisis. It is re-emerging as some of the largest global banks face political pressure to reduce their control over commodities markets.

The Dodd-Frank reforms that followed the 2008 financial crisis gave the CFTC greater powers to limit swap and futures positions held by large traders to prevent them from cornering the market, while exempting farmers and others who use derivatives to protect against price swings.

But a U.S. district court vacated the CFTC's first rule in September 2012, saying the law had called for imposing such limits only if the agency determined that they were necessary. The court found they were not.

The new rule eases the so-called aggregation hurdles, above which a firm needs to count positions its affiliates hold in addition to its own positions. To exempt these affiliate holdings, big banks like Goldman Sachs Group Inc and Barclays Plc will need to prove they do not control the affiliate.

Above the aggregation hurdle, only nonconsolidated units can be exempted.

But the text of the rule will also change certain details of what constitutes hedging, an activity that is exempted from position limits under the Dodd-Frank law. This may rile big commodity merchants, experts have said.

The CFTC's public vote on the proposed rule is normally a sign that a majority of commissioners is in favor. The rule will then be put up for comment.


The financial industry's fight to fend off new limits may be losing some of its vigor as the large pension funds and institutional investors, the so-called massive passives that plowed more than $400 billion into raw material markets over the past decade, show signs of cooling interest.

The limits were partly a response to the 2008 surge in oil and grain prices, which some blamed on the influx of new capital. But with growing signs that the commodity supercycle is winding down, many investors are shifting away from passive, long-only indexes in favor of more active long/short strategies that are less likely to risk breaching the new limits.

The redrafted rule would allow exemptions for positions held by firms in which banks own stakes of up to 50 percent, the CFTC said in documents prepared ahead of a public vote. An earlier version of the rule had set the hurdle at 10 percent, a level that the industry deemed draconian.

Reuters had first reported the main changes in the CFTC's newly drafted rule.

The CFTC's rules would limit a trader's maximum size in derivatives to 25 percent of the estimated deliverable supply of the underlying commodity, for a range of agricultural, energy and metal contracts.

The new rule also reintroduced so-called conditional limits, which allow traders to hold five times as much as that limit in cash-settled contracts, provided that they do not hold a single position physical-settled contracts.


It was not immediately clear to what extent the new proposal would limit "anticipatory hedging," or trading in advance of a planned transaction, which had been one of the biggest concerns for merchants like Cargill.

The rule will no longer allow an exemption for derivative contracts entered into by traders to make good rent they pay on empty storage facilities, CFTC staff said.

The agency had found no sufficient link between market prices and storage facility rents to allow the practice, a form of anticipatory hedging, the staff said.

The CFTC staff also said that futures exchange CME Group Inc had provided new estimates of deliverable supply that were higher than the agency had initially used, so that the percentage position limits were also higher.