The top U.S. futures regulator on Wednesday expressed concern that exempting some investors from proposed position limits on futures contracts could undermine efforts to clamp down on excessive speculation in energy trading.

The Commodity Futures Trading Commission aims to rein in speculation in energy and commodity trading, especially in oil, which soared to $147 a barrel a year ago. Prices for oil and other commodities have largely fallen from last year's highs.

While I believe that we should maintain exemptions for bona fide hedgers, I am concerned that granting exemptions for financial risk management can defeat the effectiveness of position limits, CFTC Chairman Gary Gensler said at a second hearing looking into tightening regulatory oversight of U.S. futures markets.

The CFTC is holding hearings on proposed position limits to prevent manipulation of energy markets by dominant players. It also is examining whether some traders should be able to exceed whatever limits are imposed.

Gensler said he saw support for CFTC limits on how many futures contracts can he held.

There seemed, at least, that the commission is hearing support, Gensler said following the hearing. I think it's more a question of how, than whether.

But top Wall Street firms expressed concern that a regulatory crackdown would scare business to foreign exchanges, shrink trading volumes and impair market efficiency.

We believe that eliminating or limiting swap dealer hedge exemptions not only will not address the 'swap loophole' but actually will have several negative consequences, said Donald Casturo, managing director of Goldman Sachs Group Inc .

Swaps, private transactions tailored to the needs of the buyer and seller, have grown more popular as a way of avoiding big margin calls on futures exchanges while obtaining a hedge for bank financing.

Those transactions are vital to the counterparties entering into them for risk-management or investment purposes, both of which are legitimate and important objectives, said Blythe Masters, managing director and head of the global commodities group at JPMorgan Chase & Co .

Gensler questioned the proposal from the two investment banks that end users be subject to position limits, while swaps dealers still receive some exemptions.

I don't see a Goldman Sachs swap desk or J.P. Morgan swap desk as a passive mechanic, said Gensler, a former partner at Goldman Sachs. It is a highly sophisticated risk business and it's an important component of our financial market.

The representatives of the two financial companies maintained they were not asking for special treatment.

Any time you restrict players in any market, speculators or hedgers, which are what makes markets, will often see more harm done in the long run, said Chris Jarvis, President of Caprock Risk Management in New Hampshire.

To keep speculators in check, Jarvis said it would be better for regulators to increase the amount of money, or margin, that investors must put up to trade futures.

Speculators' tool of choice to manipulate markets is leverage, and that can better be controlled by raising margin requirements, he said.

The hearing seems to me to be a euphemism for what we can do to make sure that crude doesn't trade over $140 again, said Henry Jarecki, chairman of Gresham Investment Management. Oil prices were indeed remarkably high last year. But such high prices were also found in steel, coal, and cobalt, and they don't trade on the futures markets at all.

The CFTC's hands-off approach toward regulation drew criticism last year when commodity and energy prices rocketed. Gensler said the review of position limits was not politically motivated.

We are not price setters ... but we are about making sure markets are fair and orderly and work for the American public, he said.

(Editing by Tom Doggett and David Gregorio)