Commodity Futures Trading Commission reviewing policy on speculators' trading of energy futures; Exchange chiefs spar

Always ready to play the spoiler, Jeffrey Sprecher, CEO of the Intercontinental Exchange, did not hesitate to contradict his counterpart at the Chicago Mercantile Exchange, Craig Donohue, regarding position limits at a hearing yesterday on position limits in energy futures.

The hearing before the Commodity Futures Trading Commission comes as the new chairman, Gary Gensler, seeks to limit the impact of speculative trading on prices in energy futures. The volatile trading that led oil futures to rise to $147 a barrel last year has lawmakers clamoring for new efforts to dampen volatility.

The two exchange chiefs did agree that there was little evidence that speculation actually led to volatility or higher prices. This position is widely held in the industry and was backed up last year by the CFTC itself, which produced a report saying as much.

However, the regulatory agency, now under new management, is preparing a new report that will show that speculative trading in fact does lead to higher prices, according to CFTC commissioner Bart Chilton, in recent newspaper interviews.

Donohue and Sprecher also agreed that clumsy attempts to impose limits could reduce liquidity in the market, contribute to volatility and lead to unintended consequences, such as futures traders abandoning U.S. markets for foreign venues.

But Gensler insisted at the beginning of the hearing that the CFTC must “seriously consider” setting strict position limits in the energy market. Currently, there are hard limits only in the last three days of the current month contract.

“Every option must be on the table,” Gensler said. “We should apply consistent, across-the-board regulations to all futures market participants.”

It was in accepting this proposition that Donohue and Gensler parted ways.

CME, which owns the New York Mercantile Exchange – the largest energy futures exchange, is ready to set exchange limits on energy products, Donohue said.

“We recognize that others have concerns respecting the role of index funds and swap dealers in the futures market, and in particular, the impact that their participation in the markets might have on energy prices.” Donohue said. “We are prepared to respond to those concerns by adopting a hard limit regime for those products.”

This measure “should alleviate external concerns that positions held by these investors and hedgers will increase price volatility or artificially inflate or deflate prices,” he said.

Sprecher was having none of it. ICE offers energy futures in London that mirror the Nymex contracts.

Sprecher insisted that the CFTC itself must set the limits. “Only the CFTC has the placement to view a trader’s positions across all venues to observe true position size – no single exchange or venue is in such a position,” he said.

Sprecher said the ICE, which trades the energy contracts through an exemption granted by a no-action letter from the CFTC, is currently bound by limits set by the CME – an inherent conflict of interest. Donohue disputed that claim, however, and said that ICE should just set its own limits.

The CFTC must use a transparent and consistent method to set the limits, Sprecher added.

The CFTC currently sets position limits for contracts in some agricultural commodities, but not for energy contracts.

The hearing Tuesday was the first of three that the CFTC has scheduled over the next week. The agency will also consider whether Wall Street firms, which currently enjoy an exemption from any limits in order to trade for clients, should continue to have that privilege.