Agency set to approve caps on oil trading
Traders are about to be hit with new U.S. rules they’ve long resisted: the first- ever federal restrictions on how much hedge funds and other firms can speculate on key commodities such as oil and metals.
Yet there is a silver lining in having the regulations finished while appointees of President Donald Trump are running government agencies. The measures are softer than what was put forth when Barack Obama was president or what might be on the table should Joe Biden capture the
White House next month.
The Commodity Futures Trading Commission is set to approve what are known as its position-limits rules at a Thursday meeting. Major aspects are little changed from what the CFTC — led by Republican Chairman Heath Tarbert — proposed in January, said three people familiar with the final regulations who asked not to be named before the agency’s commissioners vote on the revamp.
The rules will impose caps on the number of futures that traders can amass for more than a dozen highly traded contracts tied to commodities. However, in many cases the new limits are likely to be looser than the ones exchanges already have in place. Critics say that means some market participants may actually be permitted to expand their holdings.
At issue is a vexing and politically fraught policy question that has confounded derivatives regulators for a decade: how much speculation should be permitted in futures that energy companies, manufacturers and other businesses use to hedge against price changes in raw materials?
Allowing substantial bets by hedge funds and other traders can bring needed liquidity to the contracts. However, too much speculation can cause spikes in volatility. CFTC officials have also said the rules are intended to crack down on potentially manipulative strategies, such as instances of firms cornering the market or so-called squeezes in which a trader buys an abundance of contracts to try to burn market participants who are betting on price declines.
Under the final rules, as was proposed, traders in newly included energy and metals futures would face limits only on the soonest expiring contracts, which are known as spotmonths, said two of the people. The CFTC had proposed tying those restrictions to calculations based on 25 percent of the estimated physically deliverable supply for various commodities.
Under the January proposal, non-financial firmswould also be eligible for exemptions from the trading limits if they are using derivatives to hedge legitimate business risks. It would also set up a process for futures exchanges to approve additional exemptions without prior sign- off from the CFTC.