Bloomberg News

U.S. Speculation Caps May Hike Consumer Costs, Sommers Says

October 19, 2011

(Updates with comments from CFTC commissioner Chilton in fourth paragraph, CME Group in sixth paragraph.)

Oct. 19 (Bloomberg) -- Limits on speculation in oil, wheat, gold and natural gas that the U.S. Commodity Futures Trading Commission approved yesterday may increase prices for companies that could then be passed on to consumers, said Jill E. Sommers, a panel member who opposed the rule.

“The likelihood exists that bona-fide hedgers will incur increased costs,” Sommers, one of two Republicans at the CFTC, said in a speech at the Exchequer Club of Washington today. “Increased costs for bona-fide hedgers will probably lead to increased costs for consumers -- a result that is at complete odds with the stated goals of Dodd-Frank.”

The so-called position limits rule was approved in a 3-2 vote under a mandate from the Dodd-Frank Act, the 2010 overhaul of financial regulation. Dodd-Frank gave the CFTC authority to limit trading in over-the-counter commodity swaps as well as exchange-traded futures. The rule will limit the number of contracts a single firm can hold.

“Consumers have already been paying a premium for excessive speculation -- a Wall Street premium,” Commissioner Bart Chilton, a Democrat who supported the rule, said today. “That will end with this rule.”

The rule was opposed by Barclays Capital, the International Swaps and Derivatives Association Inc. and CME Group Inc., the world’s largest futures exchange. Delta Air Lines Inc., consumer advocacy groups and lawmakers, including Senators Carl Levin, a Michigan Democrat, and Maria Cantwell, a Washington Democrat, urged the agency to adopt limits on speculation.

‘Concerned’

“We remain concerned that various provisions of the final rule relating to net portfolio and anticipatory hedging strategies will constrain the legitimate risk management activities by commercial participants,” CME Group Inc. said in an e-mailed statement today.

Firms that use derivatives to hedge commercial risk, like airlines, farmers and refiners, will be exempt from limits under the so-called bona fide hedge exemption. Congress narrowed that exemption to exclude swap dealers like JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc., which may be subject to the new limits.

The final rule, not yet published, will list types of transactions that will be eligible for the exemption. In a last- minute clarification added to the rule during yesterday’s meeting, the commission will allow firms to request guidance from the agency on whether their transactions will be covered by the exemption.

“If someone thinks, ‘Well, maybe we’re not covered,’ they can come and knock on the door and we can address that,” CFTC Chairman Gary Gensler said during yesterday’s meeting.

--Editors: Lawrence Roberts, Gregory Mott.

To contact the reporters on this story: Silla Brush in Washington D.C. at sbrush@bloomberg.net; Asjylyn Loder in New York at aloder@bloomberg.net.


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