The top U.S. futures market regulator would strip liquidity needed to make the market run efficiently if it failed to allow certain traders to exceed position limits, a Goldman Sachs Group Inc
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, said in prepared remarks before the Commodity Futures Trading Commission.
Swaps are private, usually one on one, counter-party transactions tailored to the need of the buyer and seller. They have grown in popularity as a way to avoid big ticket margin calls on futures exchanges while still obtaining a hedge for bank financing.
Swap dealers play an important role in providing liquidity, price discovery and customized risk management products to end-users on favorable credit terms, he added.
Goldman Sachs, a major swaps dealer, was among those who will deliver remarks on the second day of CFTC hearings into whether to set position limits in energy markets and if it should allow some traders to exceed those limits.
The CFTC has vowed to clampdown on excessive speculation in energy and commodity trading, especially in oil which soared to $147 a year ago. Oil and other commodity prices, while volatile, have largely climbed down from last year's highs.
This 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.
Eliminating exemptions for swap dealers could drive more traders to outside futures exchanges and cause the market to splinter, spreading exposure among more swap dealers and other financial intermediaries, Casturo said.
Instead the CFTC should be careful to impose position limits that are low enough to prevent excessive speculation while still being high enough so as not to restrict the level of speculation that is necessary to ensure a balance between commercial and speculative interests, he said.
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.
During the first day of hearings on Tuesday, CFTC chairman Gary Gensler said 70 parties exceeded accountability levels on the four major energy contracts during the last year.
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. With a number of anti-speculation bills pending in Congress, the CFTC's actions have been praised by some lawmakers, especially Democrats.
(Editing by Russell Blinch)