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By Sarah N. Lynch, Christopher Doering and
September 22, 2011 7:21 PM EDT
The U.S. futures regulator has yielded on several contentious parts of a plan to crack down on commodity speculation, marking a modest victory for banks and traders who have lobbied to limit increased market oversight.
A draft of the final rule by the Commodity Futures Trading Commission, reviewed by Reuters late on Wednesday, maintains that the Dodd-Frank Wall Street overhaul law requires position limits -- caps on the number of contracts a single trader can hold -- to prevent excessive speculation in oil, grain, silver and other commodity markets.
But the CFTC modified areas of the plan that were a major concern for big banks like Morgan Stanley and firms like Shell, including whether or not different arms of a single company must count separately managed positions as one, and whether swaps and futures positions can be offset.
While sticking to an unpopular plan to phase in limits over time as the agency gathers more data on the opaque $600 trillion over-the-counter derivatives market, the proposal is the latest sign that regulators are at least partly responding to cries from the financial industry -- as well as Republicans -- that overly tough rules may have a detrimental impact.
Similarly, U.S. regulators are wrestling with how much leeway to give banks in hedging their own risk under the so-called Volcker rules, Reuters has reported.
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"At least they're listening to the industry, because people were concerned that Chairman (Gary) Gensler wasn't," a derivatives lawyer told Reuters.
The final rule would still snag large passive index funds, which critics have blamed for causing a massive run-up in oil prices in 2008 by buying and holding futures contracts without regard to market fundamentals.
It would also still have a major impact for the CME Group Inc and IntercontinentalExchange. The two largest futures exchanges in the United States have fretted that strict limits could drive trading overseas.
The run-up in food and oil prices this year renewed political pressure on the agency to crack down on speculators, whom some blame for the high prices.
"The draft final rule on position limits, as currently written, is extremely weak," said Sen. Bernie Sanders, a staunch critic of the CFTC.
"At a time when the American people are experiencing extremely high oil and gas prices, this proposal will do little or nothing to lower prices and it will not eliminate, prevent or diminish excessive speculation as required by the Dodd-Frank Act," he said.
The 238-page draft, dated September 19, could still be subject to changes. The five-member commission and its staff have been divided on how to craft the rule.
"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.
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