Firms make case against new trading limits

WASHINGTON — Financial firms that play a dominant role in the energy futures market brought their case to federal regulators Wednesday against new limits on speculative trading that would apply to them in their role as market middlemen.

Speculative trading has been blamed by some market watchers for widening the oil price swings that have punished industries and consumers.

Marking a potential shift for the government, the Commodity Futures Trading Commission may be moving toward setting new restraints on the amount of trading in energy futures by Wall Street firms and other participants that are solely financial investors.

“No longer must we debate the issue of whether or not to set position limits,” CFTC Chairman Gary Gensler said at a hearing organized by the agency. “There are three important questions that do remain: Who should set position limits? Who should be exempted from position limits? And at what level should position limits be set?”

The agency isn’t going to dictate prices, but will use its authority to help ensure “fair and orderly functioning of markets,” Gensler said.

Commissioner Bart Chilton insisted that “going slow is not an option” for the agency in moving to set new limits on speculative energy trading.

Executives of JPMorgan Chase & Co. and Goldman Sachs Group Inc., among the biggest players in the energy futures markets, said that if new curbs on the size of speculative trading positions are imposed, they should apply to participants like pension funds — which invest in commodity indexes brokered by the big banks.

“The CFTC should … apply position limits at the market participant level,” Blythe Masters, head of JPMorgan Chase’s global commodities group, said at Wednesday’s hearing, the second day of public airing of the issue.

“We’re not asking for special treatment,” Masters said, except to the extent that the bank is facilitating transactions for other participants.

Gensler, who worked on Wall Street in an 18-year career at Goldman Sachs before coming to the government in the 1990s, said it was hard for him to view the big investment houses brokering billions of dollars of transactions as “passive mechanics” in the energy futures market. “It is a highly sophisticated risk business,” he said. “I dont think it’s a passive business. I don’t think the American public thinks it’s a passive business, either.”

Gensler said the CFTC recognizes the positive role played by the Wall Street firms and other speculators in the futures markets, which enable farmers, oil producers and oil users to hedge their risks and facilitates fair determination of prices. At the same time, the agency must strive to prevent market power from being concentrated in a small number of powerful players, he said.

The Wall Street firms have taken “very large positions in unregulated form” in the energy futures market, said Tyson Slocum, director of Public Citizen’s energy program.

Only parties that have a direct economic interest in hedging risk, like the airlines and fuel dealers that use the market, should receive exemptions from the regulators from quantity limits on trading, Slocum said at the hearing.

JPMorgan Chase, Goldman Sachs, Citigroup Inc., Bank of America Corp. and Morgan Stanley “have turned energy markets into lucrative profit centers for the firms, taking full advantage of the lack of regulatory oversight over their operations to maximize market power and control information,” Slocum said.

Gensler said last week the agency may propose new rules setting limits in the fall, timing he didn’t dispute on Tuesday.

In a series of hearings, the CFTC is gathering views from consumers, businesses, traders, futures exchanges and financial firms as it weighs possible new restraints.

The futures contracts are supposed to reduce price volatility. But speculators use them to bet on market prices, and critics say this magnifies price swings. Regulators, they maintain, have long let speculation in energy markets inflict financial pain, triggering wild price swings, hurting gasoline wholesalers, damaging airlines and squeezing consumers at the gas pump and airline ticket counter.

By law, the CFTC sets limits on the amount of futures contracts in agricultural products like wheat, corn and soybeans that can be held by each market participant to protect the market against manipulation. But for energy commodities — crude oil, heating oil, natural gas, gasoline and other energy products — it is the futures exchanges themselves that set the position limits.

That divergence has prompted the examination by the CFTC of whether it should step in.

Experts and economists are divided on whether speculative trading in the futures markets fans price volatility. Part of the confusion is that “hot” speculative money flows into energy commodities in numerous ways. The CFTC doesn’t track all of them, so it’s hard to quantify the impact of speculation.

The agency doesn’t, for example, keep records of the speculative side bets that traders make. Nor does it monitor markets that include over-the-counter swaps — those that aren’t traded on exchanges — by pension funds and other investors.

The Bush administration generally opposed tighter regulation in the financial industry. Among hedge funds and Wall Street banks that invest in and manage billions in commodities trading, the shift to a Democratic White House and a CFTC chairman appointed by President Barack Obama has raised fears of tighter regulation.