The Commodity Futures Trading Commission, expected Tuesday to approve long-awaited limits on oil and other energy market speculators, is already facing criticism from the right for overreaching and the left for not being aggressive enough.
The position limit rule is expected to pass along party lines, with the three Democratic commissioners outpolling the two Republicans on the five-member panel, and may spark legal challenges.
Required by the Dodd-Frank Wall Street overhaul bill, the position limits would cap the number of contracts that an individual participant not involved in commercial hedging can control in the oil futures and other commodity markets.
Democrats have long asserted that excessive market speculation has ramped up energy prices.
One of those critics, Sen. Bernie Sanders (I-Vt.), has already labeled the CFTC final rule as too weak to solve the problem.
In a letter to CFTC Chairman Gary Gensler on Monday, Sanders cited media reports on the final rule in saying it “will do little or nothing to lower prices and it will not eliminate, prevent or diminish excessive speculation” as required under the Dodd-Frank law. “At a time when the American people are experiencing extremely high oil and gas prices, this would be simply unacceptable."
Republicans have accused Democrats of targeting speculators as a way to divert attention from GOP efforts to speed up and expand domestic oil and gas production.
CFTC Commissioner Scott O’Malia, a former Senate GOP energy aide, is opposing the final rule. In prepared remarks for Tuesday's meeting, he said it does not fully describe its costs and will be vulnerable to legal challenges.
O'Malia added that the CFTC “has overreached in interpreting its statutory mandate to set position limits.” The commission also has not determined whether they were “necessary or effective” to deal with excessive speculation and “cannot provide a legally sound, comprehensible rational based on empirical evidence for the final rule we will likely pass today,” he said.
Fellow Republican commissioner Jill Sommers is also expected to vote against the rule.
Gensler and fellow Democrats Bart Chilton and Michael Dunn are expected to vote in support.
"The rule sets federally enforced limits, for the first time ever, on the amount of concentration anyone may control in energies and metals," Chilton, a former senior aide to then-Senate Democratic leader Tom Daschle, told POLITICO. "We have seen cases where one trader holds 30, 35 and even 40-plus percent of a market. That can be, and I believe has been at times, manipulative. This rule will stop it."
He added that the rule “balances the needs of consumers and market participants alike.”
The conventional wisdom has often pitted Gensler and Chilton against O’Malia and Sommers on how far to curb excessive speculation, with Dunn acting as a swing vote.
The internal politics of the commission was somewhat turned on its head earlier this year when Gensler sided with O’Malia in bucking demands from Senate Democrats to more quickly issue the new limits after the commission failed to meet a Jan. 17 deadline called for under Dodd-Frank.
The CFTC is proposing two different standards for limiting speculation in crude oil, among other fuels, metals and crops traded in the markets.
For contracts about to mature, a speculator could control no more than 25 percent of the deliverable supply. And separately, a speculator could have an open interest in 10 percent of the first 25,000 longer-term contracts, and 2.5 percent thereafter.
An estimated 85 traders in maturing energy contracts would be affected by the regulations, according to the CFTC.
For his part, Sanders wants the CFTC to establish position limits on crude oil, heating oil and gasoline that would prevent any one speculator from controlling more than 5 percent of the physical market in the spot month and 5 percent of open interest in the out months. He also wanted limits for the cash-settled oil markets at no more than 5 percent of total contracts.
CFTC staff noted that the limits on the longer-term, out-month contracts could be more rigorous than the 5 percent championed by Sanders. If the oil market had 4 million contracts, the two-step approach recommended by the CFTC would limit their holdings to 3.1 percent of the market.
This article first appeared on POLITICO Pro at 8:00 a.m. on October 18, 2011.
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