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CFTC's Gensler Presses for Comprehensive Derivatives Regulation

While saying he favors limiting excess commodities market speculation through position-limit authority, new Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler declined to attribute the recent rise in oil prices to a return of speculative fever. Responding to questions before a Senate Appropriations subcommittee Tuesday, he said "part of what we're seeing is confidence coming back into the market."

Commodity prices can be expected to rise as the markets come out of the recession, Gensler said, and speculation from noncommercials was "not the only cause" of skyrocketing oil prices last year. He appeared before the Appropriations subcommittee on financial services to back up the CFTC's budget request for 2010. Senators noted that the agency would need more money and personnel to pursue a more comprehensive regulatory regime.

The agency currently has a staff of about 500, roughly what it was when it started in 1975, while the market it oversees has grown enormously, from transactions valued at $13 billion to $260 billion. Going forward Gensler said the commission would need between 650 and 700 employees to adequately police the market.

Sen. Susan Collins of Maine, ranking Republican on the subcommittee, quizzed Gensler closely on price speculation, saying fuel oil dealers were back in her office last week complaining that speculators again were driving up the price of home heating oil. Sen. John Testor (D-MT) agreed with her concerns and pressed Gensler to come up with the cause of the recent price rise. Citing his six-day experience in his present post, Gensler deferred, but promised to submit explanations for the record.

Questioned as to the advisability of merging the CFTC with the Securities and Exchange Commission as some have suggested, the new chairman said the two have different missions and there is no need to merge just for a merger's sake. The CFTC has the lead expertise on derivatives and Congress needs to pass "significant amendments to the Commodity Exchange Act to bring all of the over-the-counter derivatives marketplace under regulation" that includes standardized products, central clearing and regulated exchanges, Gensler said. The CFTC should be setting aggregate position limits for dealers and should be able to see 100% of transactions.

Collins said comprehensive regulation or a council of regulatory agencies is needed so new products devised by the market don't fall through the cracks. She pointed out that "credit default swaps grew into a market worth trillions of dollars, jeopardizing the entire financial market, and it didn't fall under securities, it didn't fall under insurance." It fell through a swaps loophole that allows financial institutions to evade position limits on swaps. "We need a system where new products don't fall into a regulatory black hole."

Gensler said he would be working with the SEC chairman and agreed it was "critical that we not have any gaps in regulation."

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