U.S. futures regulators are yielding to banks and other major traders of commodities on several key provisions in a plan to crack down on speculation, but are holding their ground on the need to forge ahead with position limits.
A draft of the Commodity Futures Trading Commission's final rule, reviewed by Reuters late on Wednesday, is likely to be seen by traders as somewhat less draconian than an initial proposal floated by the CFTC earlier this year.
The CFTC's final rule maintains that the Dodd-Frank Wall Street overhaul law requires position limits—caps on the total number of commodity-linked contracts that any one trader can hold—to prevent excessive speculation in oil, grain, silver and other commodity markets.
The rule also keeps intact a game plan to phase in position limits over time until the agency can gather greater data on the opaque $600 trillion over-the-counter derivatives market.
But in the details of the plan, the CFTC modified key areas that were a major concern for big Wall Street banks like Morgan Stanley and oil companies such as Shell.
The final rule, however, still would snag large passive index funds, which critics have blamed for causing a massive run-up in oil prices in 2008 by buying and holding contracts without regard to market fundamentals.
It would also still have a major impact for the CME Group and IntercontinentalExchange, the two largest futures exchanges in the United States, which both have expressed concerns that overly strict limits could drive trading volume overseas.
The 238-page draft, dated Sept. 19, could still be subject to changes, especially as the five-member commission and its staff have been divided on how to craft the rule.
The run-up in food and oil prices this year has renewed political pressure on the agency to crack down on speculators, whom some blame for the high prices.
The CFTC's final rule is tentatively slated for a vote on Oct. 4.
"It remains a work in progress... and our commissioners haven't fully weighed in yet," said CFTC spokesman Steve Adamske, who declined to comment on the details late Wednesday night.
Aggregation Policy Changes
One of the key changes in the final draft relaxes some proposed requirements for large commodities players that have ownership stakes in entities that hedge, deal and speculate.
The CFTC had initially wanted to add or aggregate positions for entities that share common ownership, regardless of whether they share trading strategies and control.
The agency is now backing down, allowing companies to avoid aggregating all of the different positions in various trading accounts, provided those accounts are independently controlled and the companies impose vigorous firewalls between their trading desks.
"To the extent that such accounts and programs are traded independently and for different purposes, such trading may enhance market liquidity for bona fide hedgers and promote efficient price discovery," the CFTC said.
The CFTC is refusing, however, to exempt index funds.
"The proposal would require aggregation for positions in accounts or pools with identical trading strategies (e.g., long-only position in a given commodity), including passively managed index funds," the draft says.
Class Limits Eased
Another important change that the industry has been seeking revolves around so-called class limits.
The CFTC's plan applies to 28 commodities and for most markets would be based on a formula of 10 percent of the first 25,000 contracts of open interest, and 2.5 percent thereafter.
Initially, the CFTC said it would have class limits, applying the formula to exchange-traded futures, related over-the-counter swaps, and across both of those classes combined.
But in the face of major opposition, the CFTC said it would relax the class limits so that traders exceeding the futures limit can use opposing positions that fall underneath the swaps limit to reduce their overall net position. The CFTC added that it will revisit the issue at a later time.
"While class limits can be an effective tool to address undue market power in a particular segment of the derivatives market, the commission has determined that such limits should not be imposed without additional data and analysis," the draft says.
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