The Commodity Futures Trading Commission on Thursday released a long-awaited proposal to set position limits in commodity markets.
The agency took heed of fierce objections raised by Wall Street since it first put forward a plan to cap the influx of investor capital that some blamed for driving oil and grain prices to record highs in 2008.
But the core principle was unchanged: restricting the number of swaps and futures contracts that speculators can hold in energy, metals and agricultural derivative markets, a rule it estimated could affect nearly 80 agricultural traders and dozens of metals and energy players.
The new rules are subject to a 60-day public comment period.
ANALYST AND TRADER COMMENTS:
CHAD HART, AGRICULTURE ECONOMIST AT IOWA STATE UNIVERSITY:
"They are being sensitive and trying not to be overly restrictive on these markets. Holding off on the crowding rule -- that's part of what they're doing here. They recognize that any time you start to talk about position limits, you do get some movement in the markets that you might not be crazy about.
"Just the rumor of position limits has changed how some of our speculators play within the market. This is the CFTC trying to stick to the letter of the law -- in that they are trying to implement what they can -- but at the same time ease their way into the rule making process with the market, recognizing that the markets are kind of jittery about whatever comes down the line."
BILL O'GRADY, CHIEF INVESTMENT STRATEGIST, CONFLUENCE INVESTMENT MANAGEMENT IN ST. LOUIS, MISSOURI:
"There's enough weasel room in these regulations to not kill the ETF business.
"Had the CFTC gone after the ETFs (exchange traded fund), the ETFs would have bought physical assets, like grain elevators.
"Speculators were not the problem, and I believe the CFTC understood that. The problem has been the U.S. monetary policy, which has had the effect of pushing more money into commodities on inflation worries.
"The more complicated these regulations are, the more likely that all kinds of exemptions are built in."
GEORGE GERO, VICE PRESIDENT, RBC CAPITAL MARKETS GLOBAL FUTURES, NEW YORK:
"The key questions are who and what will be hedge exemptions? That's a major point. The other thing I am not clear on is what will be the treatment of ETFs.
"They are talking about 25 percent of deliverable supply, but the question is what is deliverable supply? There are more questions than answers at this point.
"Whenever there is indecision, or insecurity, or confusion in the markets, people tend to take some money off the table."
JOHN KILDUFF, PARTNER AT AGAIN CAPITAL LLC IN NEW YORK
"Relief on the 'look-through' and the 'crowding out' will certainly benefit the banks and the various energy companies that engage in 'hedge-ulation'.
"However, their participation is necessary for the markets to remain robust and liquid. The market needs more liquidity not less.
"I think most market participants can operate within these limits, but look for more combinations involving traditional commodity producers and trading firms in order to avail themselves of the 'crowding out' exemption."
SCOTT IRWIN, UNIVERSITY of IllINOIS ECONOMIST:
"From the ag side I would put the new rules in the 'be careful what you wish for' category.
"The main ag implication revolves around the eventual aggregation of swap positions related to index investments. This is unlikely to impact traditional speculators in ag markets much."
BOB FITZSIMMONS, HEAD OF THE DERIVATIVES BUSINESS At INVESTMENT TECHNOLOGY GROUP:
"I think it plays into the hands of trade associations, they're largely getting what they want. It largely comes at the detriment of the marketplace and price discovery. Any time you limit the amount of activity it just hurts the price discovery process."
"You deal with the new reality, you kind of swallow the pill, but then look for an opportunity to undo it (position limits)." "I think people are waiting for the change of the guard in Congress, and then certainly using that leverage to persuade Commissioners to revisit this issue."
JEREMY CHARLESWORTH, CHIEF INVESTMENT OFFICER AT MOONRAKER FUND MANAGEMENT IN LONDON:
"All a hedge fund has to do is set up subsidiary hedge funds, each a different entity, then put on the same position that works out at 10 percent but they comply with the rules. I think the industry will find a way round it."
"I can see why the regulators think that placing these limits will be helpful in maintaining an orderly market, but people might breach the limits by mistake. For example, if someone takes a 9.9 percent position and the contract rolls, and not everyone rolls but you do, you'll be in breach of the regulations despite your best intentions of remaining within the limits.
"The 10 percent limit will affect the banks and the very large hedge funds the most, but they are clever enough to find ways of getting round it."
(Editing by Alden Bentley)