Financial firms that play a dominant role in the energy futures market brought their case to federal regulators Wednesday against new limits on speculative trading that would apply to them in their role as market middlemen.
Speculative trading has been blamed by some market watchers for widening the oil price swings that have punished industries and consumers.
Marking a potential shift for the government, the Commodity Futures Trading Commission may be moving toward setting new restraints on the amount of trading in energy futures by Wall Street firms and other participants that are solely financial investors.
“No longer must we debate the issue of whether or not to set position limits,” CFTC Chairman Gary Gensler said at a hearing organized by the agency. “There are three important questions that do remain: Who should set position limits? Who should be exempted from position limits? And at what level should position limits be set?”
The agency isn’t going to dictate prices, but will use its authority to help ensure “fair and orderly functioning of markets,” Mr. Gensler said.
Commissioner Bart Chilton insisted that “going slow is not an option” for the agency in moving to set new limits on speculative energy trading.
Executives of JPMorgan Chase & Co. and Goldman Sachs Group Inc., among the biggest players in the energy futures markets, said that if new curbs on the size of speculative trading positions are imposed, they should apply to participants like pension funds - which invest in commodity indexes brokered by the big banks.
“The CFTC should … apply position limits at the market participant level,” Blythe Masters, head of JPMorgan Chase’s global commodities group, said at Wednesday’s hearing, the second day of public airing of the issue.
“We’re not asking for special treatment,” Ms. Masters said, except to the extent that the bank is facilitating transactions for other participants.
Mr. Gensler, who worked on Wall Street in an 18-year career at Goldman Sachs before coming to the government in the 1990s, said it was hard for him to view the big investment houses brokering billions of dollars of transactions as “passive mechanics” in the energy futures market. “It is a highly sophisticated risk business,” he said. “I dont think it’s a passive business. I don’t think the American public thinks it’s a passive business, either.”
Mr. Gensler said the CFTC recognizes the positive role played by the Wall Street firms and other speculators in the futures markets, which enable farmers, oil producers and oil users to hedge their risks and facilitates fair determination of prices.
At the same time, the agency must strive to prevent market power from being concentrated in a small number of powerful players, he said.
The Bush administration generally opposed tighter regulation in the financial industry. Among hedge funds and Wall Street banks that invest in and manage billions in commodities trading, the shift to a Democratic White House and a CFTC chairman appointed by President Obama has raised fears of tighter regulation.