The Commodity Futures Trading Commission will consider every option to clampdown on excessive speculation in energy markets, the head of the agency said on Tuesday.

The CFTC, regulator of U.S. futures markets, is reviewing how to limit how many futures contracts can he held, so-called position limits, and if some traders should be allowed to exceed those limits.

The agency held its first hearing on Tuesday to study proposed changes. Meetings continue on Wednesday and August 5.

I believe we must seriously consider setting strict position limits in the energy markets, said CFTC Chairman Gary Gensler. Every option must be on the table.

Officials from the IntercontinentalExchange Inc, or ICE, and the Chicago Mercantile Exchange, the world's largest exchange, urged the CFTC to beware of potential unintended consequences of efforts to curb speculation.

The exchanges said the CFTC risks increasing volatility, distorting pricing functions and pushing traders to less regulated offshore markets.

While well intentioned, these measures often fail to achieve their desired objectives or, worse yet, lead to unintended consequences ... that would otherwise be discovered in properly operating markets, said Jeffrey Sprecher, chief executive of ICE.

Gensler said several questions remain that the CFTC must still answer, including what the position limits should be; who should set them, the CFTC or the exchange; and if exemptions should be allowed for traders to manage purely financial risk, rather than accepting the delivery of the actual commodity.

Several commissioners warned the CFTC must be cautious. But, at the same time, Commissioner Bart Chilton said the unprecedented volatility over the past year had increased the urgency for the CFTC to make changes. Whatever manner the agency proceeds, 'going slow' is not an option, he said.

U.S. futures markets said supply-and-demand factors, not speculation, were responsible for the increased volatility.

Sprecher of ICE complained the position limits, currently set by ICE rival CME Group Inc, lack transparency. He said ICE supports having the CFTC take over that authority.

Craig Donohue, the head of CME, countered ICE on setting rules for the market. To say you are dependent on our limits is ridiculous. Adopt your own limits, he said.

During this testimony, Donohue said the CME has the authority to administer position limits and hedge exemptions for energy commodities. He supported a hard limit regime, including single-month and all-month combined limits, to complement the existing measures that are in place.

We're trying to address the perception issues out there even though I think it's been abundantly clear that there is no evidence of speculation driving up oil prices, said Donohue.

Currently, exchanges try to prevent manipulation and congestion by imposing limits on energy products in the last three trading days before a contract expires. The exchanges have accountability levels that trigger additional oversight tools, if a position exceeds a certain size.

Gensler estimated 70 parties exceeded accountability levels on the four major energy contracts during the last year.

To protect against market manipulation, the CFTC sets limits on the amount of contracts each investor can hold in some agricultural commodities. But the futures exchanges set limits for energy products such as oil futures.

The move to toughen oversight marks a turnaround for the CFTC, whose hands-off approach toward regulation drew criticism last year when commodity prices rocketed to record highs.

We and our consumers cannot continue down the same path, said Sean Cota, testifying on behalf of the Petroleum Marketers Association of America. It is time for a concerted effort toward meaningful reform to restore stability and confidence in these markets.

With a number of anti-speculation bills pending in Congress, the CFTC's actions have been praised by some lawmakers, especially Democrats.

(Additional reporting by Tom Doggett, Tim Gardner; Editing by Walter Bagley)