The top U.S. derivatives regulator is slated to vote today whether to curb trading in oil, wheat, gold and other commodities after a boom in raw-materials speculation, record-high prices and years of debate and delay. The rule has been among the most controversial provisions of the Dodd-Frank financial overhaul, enacted last year, which gave the Commodity Futures Trading Commission the authority to limit trading in over-the-counter commodity swaps as well as exchange-traded futures. The proposal would limit the number of contracts a single firm can hold. “This is a very important rule for the futures and derivatives industry,” Paul Pantano, a Washington-based partner at New York law firm Cadwalader Wickersham & Taft LLP, said yesterday in a telephone interview. If approved, the rule will limit traders to 25 percent of deliverable supply in the month nearest to delivery. The spot- month limits will apply separately to physically settled and cash-settled contracts. Deliverable supply will be determined by the CFTC in conjunction with the exchanges. Henry Hub Cash-settled natural gas contracts will be subject to a different regime. Traders will be permitted to hold contracts equal to five times deliverable supply in Henry Hub swaps, derivatives that settle in cash instead of the delivery of the underlying commodity. Henry Hub is a natural gas delivery point in Erath, Louisiana, and the benchmark for U.S. futures. Outside the spot month, the caps limit traders to 10 percent of the first 25,000 contracts of open interest and 2.5 percent thereafter. The commission estimates that the limits will affect 85 energy traders, 12 metals traders and 84 traders of certain agricultural contracts. The caps will go into effect 60 days after the agency defines the term “swap.” The agency declined to estimate when that will be. Limits outside the spot month are likely to go into effect in late 2012. The rule calls for traders to aggregate their positions, a change that may affect large firms with multiple strategies. It also would tighten an exemption allowing so-called bona fide hedgers to exceed the caps. ‘Clear Tension’ “There is a clear tension in staying true to the statute without bringing unintended harm to the markets,” De’Ana Dow, a senior vice president at Washington-based Ogilvy Government Relations who was a lawyer for more than 20 years at CFTC, said in a phone interview. The legislation gave the commission jurisdiction over the estimated $300 trillion U.S. derivatives market, and the CFTC has proposed more than 50 rules. The agency missed deadlines to impose position limits in energy and metals markets by mid- January and agricultural markets by April. Senators Carl Levin, a Michigan Democrat, Maria Cantwell, a Washington Democrat, Bill Nelson, a Florida Democrat, and Bernie Sanders, a Vermont independent, have criticized the agency, chaired by Gary Gensler, for the delay. Levin, chairman of the Permanent Subcommittee on Investigations, had scheduled a hearing on Oct. 6 to scrutinize the CFTC’s compliance with the position limit requirement. He delayed the hearing to Nov. 3 after the agency said it would vote on the regulations as early as today. Speculation Inquiries Levin’s committee has led inquiries into speculation in the past five years as raw-material investing gained in popularity. The first exchange-traded funds in 2003 allowed investors to bet on raw materials without the hassle of storing physical materials or managing a futures account. The SPDR Gold Trust, best known by its ticker GLD, went on the market in 2004 and has $66 billion in assets backed by physical gold. Investment in agricultural exchange-traded products reached a record in April, according to data compiled by Bloomberg. Derivatives made the boom possible. Unlike futures contracts, which trade on regulated exchanges and fall under CFTC jurisdiction, swaps traded on the over-the-counter market where the commission had no authority, allowing traders to amass large unregulated positions. Off-exchange bets played a role in the September 2006 collapse of Amaranth Advisors LLC, a hedge fund that lost $6.6 billion on natural-gas bets. The Greenwich, Connecticut-based fund had sidestepped limits and built a large position in swaps on IntercontinentalExchange Inc. (ICE) after being told to reduce its futures position on the New York Mercantile Exchange. Amaranth’s implosion triggered Senate scrutiny. In June 2007, the Senate Permanent Subcommittee on Investigations issued a report blaming Amaranth for distorting prices. Amaranth later paid $7.5 million to settle CFTC allegations of manipulation. Record High Prices Rising commodity prices kept Congress and consumers focused on market regulation and the role of speculators. Wheat reached a record of $13.495 a bushel in February 2008, and oil soared to $147.27 a barrel five months later. Gold futures hit an all-time high of $1,923.70 last month. The CFTC is also poised to complete a rule designed to broaden access to clearinghouses for interest rate, credit and other derivatives. The agency in December proposed requiring clearinghouses to open membership to firms with $50 million in net capital. Clearinghouses could scale a member’s participation depending on the amount of capital a firm holds. MF Global Holdings Ltd., Jefferies Group Inc., hedge funds and other smaller brokers and banks have supported lowering the capital requirements to allow more participants. Wall Street’s largest dealer banks have said members need experience and adequate resources to manage defaults. The CFTC is also set to propose a delay for Dodd-Frank rules that were scheduled for completion last July. The agency already delayed some rules from taking effect in the market until as late as the end of the year. Gensler said on Oct. 11 that the agency would vote on an additional delay into 2012. To contact the reporters on this story: Asjylyn Loder in New York at aloder@bloomberg.net; Silla Brush in Washington D.C. at sbrush@bloomberg.net. To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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