Traders would be limited in the positions they can hold in oil,wheat, gold, and other commodities under a proposal approved by theU.S. Commodity Futures Trading Commission (CFTC).

The CFTC proposal, approved on a 3-to-1 vote yesterday, wouldcap the number of futures contracts a company can hold in 28commodities. The limits were sought by Congress after airlines,trucking firms, and consumer groups blamed speculators for surgingfuel prices in 2008. Among the measure's supporters wasCommissioner Bart Chilton, who yesterday announced that he wouldsoon step down from the agency.

The vote marks the CFTC's second attempt at a position-limitsrule, after a federal judge rejected an earlier version on groundsthat the agency failed to show why the limits were needed. Industrygroups have successfully challenged other Dodd-Frank Act mandatesby arguing that policy makers misread statutes or failed toconsider business impact.

“It is critically important that these position limits beestablished,” CFTC Chairman Gary Gensler said. “The agency hashistorically interpreted our obligation to include ensuring thatmarkets do not become too concentrated.”

The CFTC's vote releases the proposal for 60 days of publiccomment. In addition to Gensler and Chilton, the measure wassupported by Mark Wetjen, a Democrat. Republican Scott O'Maliaopposed the proposal.

Congress included the speculation-limits rules in Dodd-Frankafter commodity prices soared in 2008, when wheat reached a recordof $13.495 a bushel and oil rose to $147.27 a barrel. Relatedconsumer prices climbed as well, and airlines and other businessessensitive to commodity prices blamed speculators. The CFTC'srulemaking effort generated 13,000 public comments.

Consumer Impact

Chilton said he waited to announce his resignation until theagency voted to propose a rule curbing the size of positions inspeculative commodity trading, which he has blamed for driving upconsumer prices for gasoline. He didn't state what he'd do afterleaving the commission.

“Definitely, oil was the big issue,” said Tyson Slocum,energy-program director at Public Citizen, which advocated forposition limits. “It's kind of like an antitrust rule. It justlimits the ability of one or a small handful of players to dominatea given market.”

The CFTC's previous rule relied on an interpretation that thelaw didn't require it to show position limits were needed todiminish or prevent excessive speculation. The agency still assertsCongress required it to impose the limits, which the CFTC says maybe established without a study showing they are needed.

Academic research examining the relationship between speculationand commodity price volatility shows mixed results, Gensler said.Some studies show the level of speculation affects price movement,while others conclude it doesn't and some draw no conclusion, hesaid.

“I find that if a third of the studies say that it does have aneffect and a third say it doesn't, that it's better to err on theside of caution,” Gensler said.

The position limits would regulate the activity of speculators,or traders who buy and sell futures and swaps but don't use theunderlying commodity for commercial purposes. The limits apply to28 physical commodity futures and their financially equivalentswaps, according to a CFTC summary. Those include contracts forcorn, wheat, soybeans, oats, cotton, oil, heating oil, gasoline,cocoa, milk, sugar, silver, palladium, and platinum. Approximately400 firms may be affected by the trading limits, the agency said inthe summary.

Spot-Month Limits

The regulation would limit traders to 25 percent of deliverablesupply in the month when a futures contract matures. The spot-monthlimits apply separately to physically settled and cash-settledcontracts.

Cash-settled contracts will be subject to a different regime. Inthat case, traders will be permitted to hold contracts equal tofive times deliverable supply as long as they stay out of thephysical-delivery spot-month contract for the same commodity, theCFTC said in the fact sheet.

Outside the spot month, the caps limit traders to 10 percent ofthe first 25,000 contracts of open interest and 2.5 percent ofamounts beyond that.

Senator Carl Levin, a Michigan Democrat who has blamedspeculators for driving up commodity prices and manipulating pricesin some cases, said the CFTC's rule “will help fill a big hole inthe needed protections against such abuses.”

New Exemptions

The CFTC's plan adds new exemptions to the position limits forbona fide hedging, which would benefit utilities and royaltyowners, according to the summary.

The position limit rules will affect about 400 firms, the CFTCsays. The limits are set high enough that only a few mutual fundsor exchange-traded funds will be affected, said John T. Hyland,chief investment officer of United States Commodity Funds, whichmanages $2.5 billion through 12 exchange-traded funds.

A separate proposal outlines how firms would account for tradingat affiliated entities or subsidiaries for the purpose of complyingwith position limits. A firm could separately count trading at anaffiliate in which it holds an ownership interest of less than 50percent as long as the affiliate's trading was independentlymanaged, the CFTC said in the summary.

Big Wall Street banks such as Goldman Sachs Group Inc. wouldhave to track their commodity positions across different legalunits and account for any hedges to comply with the total tradinglimits, Hyland said. Some banks may shut down less-profitable unitsin order to stay under the limits, he said.

“If you are a place like Goldman, you can have half a dozendifferent entities within your firm that for the house account arebuying and selling futures contacts on commodities,” Hyland said ina phone interview. “This is a headache for the big banks because ofthe logistics of keeping track of it, which is an added layer ofexpense.”

The earlier CFTC proposal was overturned after two Wall Streetlobbying groups, the International Swaps and DerivativesAssociation and Securities Industry and Financial MarketsAssociation (SIFMA), sued the agency in December 2011.

“SIFMA will review the proposed rule with our members andprovide comments to the CFTC once we have fully assessed thisproposal,” SIFMA president Ken Bentsen said in a statement. “SIFMAsteadfastly believes that any new regulation should not adverselyimpact liquidity, price discovery, and the ability to hedge in thecommodities and broader derivatives markets for end users and allmarket participants.”

While agreeing that Dodd-Frank authorized the CFTC to limittrading in over-the-counter commodity swaps and exchange-tradedfutures, U.S. District Judge Robert L. Wilkins ruled in September2012 that the agency failed to consider whether limits werenecessary or appropriate.

The CFTC appealed Wilkins' ruling. Chilton said on Oct. 31 thathe expects the agency to withdraw the appeal after issuing the newproposal.

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