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CFTC Nominee: Curbing Futures Speculation a Top Priority

If confirmed, President Obama's nominee for chairman of the Commodity Futures Trading Commission (CFTC) said he wants to take a "fresh look" at the role of speculation in commodity futures markets.

"I believe that excessive speculation in commodity futures can cause sudden or unreasonable fluctuation or unwarranted changes in commodity prices," said Gary Gensler in a letter to Sen. Carl Levin (D-MI), who has been deeply involved in the issue of speculation in energy markets. Gensler said that guarding against excessive speculation would be a top priority of his as CFTC chairman.

Gensler believes speculative trading can affect prices for commodity futures and the underlying commodities. The impact of speculative trading or investing by entities that neither produce nor consume a commodity has been "demonstrated in the commodity futures markets during the past several years," he said in a letter responding to a series of questions posed by Levin.

"I support strong regulation of U.S. commodity markets," Gensler noted, adding that he believes "our financial system and our regulatory structure failed the American people," contributing to the current economic crisis.

Gensler, who was tapped by Obama for CFTC chairman in December, was Treasury undersecretary for domestic finance during the last couple of years (1999-2001) of the Clinton administration (see NGI, Dec. 22, 2008). Prior to that he spent nearly two decades at Goldman Sachs, where he made partner at the age of 30. He also was a senior adviser to former Sen. Paul Sarbanes (D-MD), a co-author of the Sarbanes-Oxley Act of 2002, which introduced major changes to the regulation of financial practice and corporate governance.

Gensler's confirmation hearing has not yet been scheduled by the Senate Agriculture Committee. After meeting with Gensler, Committee Chairman Tom Harkin (D-IA) said he "remain[ed] concerned about the deregulatory orientation of this nominee." As part of the confirmation process, Levin met with, and sent questions to, Gensler. Levin is chairman of the Permanent Subcommittee on Investigations, which specializes in complex financial investigations and is examining issues related to the current financial downturn.

The CFTC has used its authority to establish position limits to prevent traders from acquiring large positions to manipulate the price of commodities traded on futures exchanges and to prevent price distortions at contract expiration, but it has generally not used this authority to establish position limits to prevent levels of speculation that, absent proof of manipulation, may significantly affect commodity prices, Levin said. He pressed Gensler on whether he would establish position limits to ensure that excessive speculation, even in the absence of manipulation, is not causing "sudden or unreasonable fluctuations or unwarranted changes" in the prices of commodities.

"I believe that the CFTC may exercise its authority at its discretion to establish position limits over all physical commodities, including agricultural, metals and energy commodities...I will ensure that all available resources and authorities are deployed to protect investors in the commodities markets," Gensler said.

He further said trading in markets not regulated by the CFTC, such as over-the-counter (OTC) markets or foreign exchanges, "can and does affect the cash prices of commodities in the spot markets and the prices of commodity futures traded on regulated exchanges." As chairman, Gensler said he would work with Congress and his CFTC colleagues to consider "greater oversight and consistent regulation, where appropriate, for all markets relating to commodities."

He said "foreign futures exchanges that have terminals in the United States to which our investors have access and whose contracts are based on the same underlying commodities should have consistent regulation applied, including position limits."

In addition, Gensler said he would weigh appropriate regulations for customized bilateral OTC derivatives and additional regulation of credit default swaps (see NGI, Dec. 15, 2008). "I believe trading and pricing in over-the-counter derivatives markets can and does have a direct effect on regulated futures markets...If confirmed by the Senate, I look forward to working with Congress to consider both the appropriateness and the potential means of extending position limits to certain of these markets," Gensler said.

"I would place a high priority on closing the 'Enron loophole' and promoting uniform standards for contracts that have the same practical effects," he noted. Congress passed a CFTC reauthorization bill last year that closes the "Enron loophole," which for years had allowed large electronic trading platforms to circumvent the full oversight of the CFTC. The CFTC currently is seeking comments on proposed rules to implement the law.

Gensler said the CFTC will need more attorneys and investigators to detect and prosecute fraud and manipulation and to enforce possible new regulations regarding OTC derivatives and excessive speculation in commodities markets. But "significant additional resources" will be required to carry this out.

"The CFTC is underfunded in terms of both budget and staff. Today the staff numbers approximately 490, a decline of nearly 20% from earlier in the decade. During this time, markets have grown exponentially, and the issues the CFTC faces have increased in complexity. I am also concerned that the CFTC lacks the necessary technology to monitor today's markets effectively."

Gensler does not support a merger of the CFTC and the Securities and Exchange Commission. "A merger makes sense only if it enhances our ability to carry out the important tasks with which the CFTC is entrusted. Thus I would not consider a merger simply for merger's sake."

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