The Commodity Futures Trading Commission on Tuesday passed new proposed limits on how much of the market for oil and other traded commodities any one individual or company can control.
The rules came out of the 2010 revamp of financial regulation, shorted handed as the Dodd-Frank Act. The desire for limits on speculation came after several prominent voices, including former Federal Reserve Chairman Alan Greenspan, said that excessive financial trading of oil was exacerbating oil prices.
In a 3-1 vote Tuesday, the CFTC approved rules_ which take effect 60 days after publishing of a notice of proposed rulemaking. The action marked a second attempt to combat excessive speculation in commodity markets.The first attempt, with rules passed in October 2011, was struck down by a federal judge in Sept. 28, 2012.
The CFTC, said Chairman Gary Gensler in a statement, "determined that the best path forward to expedite positions limits implementation was to pursue the new rule and dismiss the appeal of the court's ruling" pending commission approval of the new rules.
The agency walked a fine line, trying to allow farmers and energy producers enough space to hedge against risks from shifting prices but also reining in the wash of financial-sector money flowing through these markets.
The biggest proponent of the new rules was CFTC Commissioner Bart Chilton, who in an opening statement Tuesday said with the passage of the rules he would be stepping down, something he delayed to continue fighting for speculative limits.
"I’ve waited until now—today—to get this proposed rule out the door, and now—at last—with the process coming nearly full circle, I can leave," Chilton said. "It’s with incredible excitement and enthusiasm that I look forward to being able to move on to other endeavors."
The original rule limited exemptions from the rule for companies that were more than 10 percent owned by a bank. That was softened to allow for exemptions for institutions that have up to 50 percent bank ownership.
The new rules, designed to loosen Wall Street's grip on commodity trading, will narrow the ability of companies to seek a special exemption from the regulations but also broaden the overall number of exemptions under the rules.
The rules affect trading in the futures market, where contracts are bought and sold daily for future delivery of oil, wheat, soybeans, metals natural gas and other products generally considered raw materials.
In all 28 referenced commodities are affected by the new rules, and the changes impact both the spot market, where the products are actually delivered, and the futures markets, where contracts trade hands in much greater frequency and traders seldom take actual delivery.
The rules are designed to prevent from any one person or company from building up speculative positions so large that they can manipulate the market at the expense of other traders and ultimately consumers.
The CME Group, which owns numerous exchanges where the commodities were traded, issued a testy statement of opposition to the new rules adopted Tuesday.
"CME Group supports position limits in our markets and always has. However, we do not believe the proposed rules, which require that federal position limits be set and implemented by the CFTC, are warranted or necessary," the CME Group said.
Sen. Carl Levin, D-Mich., came out in support of the new rules. He'd held hearings recently about what he considers a dangerous move by giant banks to control not only the futures market for commodities but actual involvement in the physical markets with warehouses and storage of product. This enables banks to potentially control supply in ways that create perceptions of shortages and thus drive up prices in the futures market.
"CFTC Chairman Gary Gensler and Commissioner Bart Chilton deserve credit for finally pushing the revised rule over the finish line," Levin said in a news release. "Despite massive pressure from Wall Street against speculative limits, the underfunded, understaffed CFTC has struck another blow on behalf of consumers, business, and fairer commodity prices."