From the January 01, 2010 issue of Futures Magazine • Subscribe!

Regulation debate rages on

At a charity dinner a few weeks ago, our table got to talking about regulation and all the changes afoot. One fellow at the table made some disparaging comments about current Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler. What surprised me was he wasn’t from an exchange or a brokerage firm, nor was he a trader. He actually came from a regulator.

What a refreshing change, I thought to myself as he expounded on why he thought Gensler wasn’t doing a good job. His main beef was he believed Gensler to be a whipping boy who doesn’t understand the business he regulates. He denounced Gensler’s drive to impose position limits on energy products and his (it seemed) agreement with those who blamed oil speculators for running up prices.

Although I agreed with him on the ‘oil specs as scapegoats’ issue, I begged to differ on his target. The CFTC had done a study last year and found speculators weren’t to blame; surely Gensler recognizes that, I said. I added that it was CFTC Commissioner Bart Chilton who was quoted in the Wall Street Journal saying that study was flawed and a review of its data was soon coming out that would implicate oil speculators. My tablemate was even less impressed by Chilton.

Not dismissing the anecdotal evidence that Gensler isn’t the most popular person in the industry now, I will say he entered the job during a firestorm that won’t die. To even get the job, he had to make some promises about pistol whipping oil speculators. For the most part, it seems to me, he’s moving the pieces around the board but not necessarily making a move. That alone is the better part of valor.

Perhaps we also need to see the bigger picture: Congress is reactionary. Crude oil shot up to $147 per barrel in 2008. Some say the fundamentals didn’t support that price level, thus traders had to be running the market. I hear this from more than just politicians. Some pretty smart guys who run big funds also are suspicious, stating that investment bank trading desks are the culprits.

There are a lot of moving parts here, as discussed in Managing Editor Dan Collins’ story, “How hard will hard limits be?”. The exchanges that trade oil futures don’t want hard limits (and as I witnessed at a CME Group dinner in October, they are eloquent in their argument against limits). However, the exchanges are practical and figure if it is to happen, it should happen on their terms. The problem is CME Group and Intercontinental Exchange (ICE) don’t agree on who should set and police the limits. CME Group believes it should be the exchanges. ICE believes the CFTC should set the limits. Further, CME Group believes limits should be set on a sliding scale linked to volume and open interest. ICE, the smaller exchange, says that’s anti-competitive.

Meantime, Congress is calling for the heads of oil speculators everywhere and unfortunately, regulators are beholden to their government overlords. Will speculators run offshore if hard limits happen? Maybe, but regulations can cut both ways; people may purposely trade in the United States because of the protections it offers.

So for now, perhaps the industry (and other regulators) should give Gensler a break. He might end up only giving Congress an ear, and anyone who knows negotiation would call that a win.

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