US agency proposes limits on futures trading volume to restrain speculation in 2nd try

WASHINGTON – Trading in commodities futures would be capped under a federal rule proposed Tuesday, an effort to clamp down on speculative trades that can drive up food and gas prices.

The Commodity Futures Trading Commission voted 3-1 to send the revised proposal out for public comment, its second attempt at a rule that was struck down last year by a federal court. The rule was required under the 2010 financial overhaul law.

The latest proposal restricts trading volume of futures contracts for 28 commodities, from corn and oil to metals and frozen orange juice. Exemptions for financial firms are narrower than in the previous rule but still allow firms to promote futures trading by their commercial customers to hedge against price swings, CFTC officials said.

The CFTC could finalize the rule sometime after the 60-day public comment period.

The curbs are aimed at financial firms and others that seek to profit from swings in commodity prices. Hundreds of millions of dollars are at stake. The goal is to limit a single firm from controlling too much of the market and protect consumers from unusual price swings.

Commissioner Bart Chilton said the proposal would be “unassailable in court, good for markets and good for consumers.”

A futures contract is a commitment to buy a commodity at a later date at a set price. Companies like airlines and agricultural producers buy futures contracts to guard against sharp price swings. But financial investors use them to bet that prices will go up or down, which can distort prices.

Under the proposal, commercial companies aren’t subject to the caps on trading volume. The agency estimated that about 400 financial firms could be affected by the limits.

Industry groups fought the original rule, adopted by a divided CFTC more than two years ago. They maintain that trading limits can make prices more volatile by reducing the amount of money flowing in the markets.

A federal judge ruled in the opponents’ favour in September 2012. The agency appealed the decision but recently withdrew its appeal to focus on drafting a new rule.

Investor advocates had complained that the original rule was filled with excessive exemptions allowing banks and hedge funds to continue speculative trading.

Increases in wholesale prices of commodities can get passed on to consumers in the form of higher gas prices, costlier airline tickets and more expensive food.

Some experts say speculators aren’t entirely to blame for price increases in commodities. They point to other factors, such as weather, supply disruptions and demand.

Agricultural commodities such as corn and wheat have been subject for years to caps on speculative futures trading imposed by exchanges. Yet their prices have risen, experts say. The proposed limits on trading for 28 commodities mark the first time the federal government has imposed broad curbs.