A key federal regulator said Tuesday his agency must "seriously consider" imposing stringent limits on speculative trading of energy futures contracts, a move that would mark a major shift for the government.
Gary Gensler, chairman of the Commodity Futures Trading Commission, made the assertion as the agency prepared to hear from consumers, businesses, traders and big financial firms. The Chicago Mercantile Exchange expressed willingness itself to set new limits on energy trading but insisted that it, not the government, was the proper authority to do so.
Gensler said at a hearing organized by the agency that it must assess the impact of speculators and its rules "should address times of volatile or uncertain markets."
The futures contracts are supposed to reduce price volatility. But speculators use them to bet on market prices, and critics say this magnifies price swings. Regulators, they maintain, have long let speculation in energy markets inflict financial pain, triggering wild price swings, hurting gasoline wholesalers, damaging airlines and squeezing consumers at the gas pump and airline ticket counter.
"I believe we must seriously consider setting strict position limits in the energy markets," Gensler said.
Craig Donohue, the CEO of CME Group Inc. — owner of the Chicago Mercantile Exchange where energy futures are traded — said his firm "is in the best position" to impose and manage trading limits and is "prepared to act in the near term, before the (CFTC) or Congress."
"We strongly believe we have our own responsibility," Donohue said.
By law, the CFTC sets limits on the amount of futures contracts in agricultural products like wheat, corn and soybeans that can be held by each market participant to protect the market against manipulation. But for energy commodities — crude oil, heating oil, natural gas, gasoline and other energy products — it is the futures exchanges themselves that set the position limits.
That divergent approach has prompted the examination by the CFTC of whether it should step in and Specifically, the agency is weighing whether to restrict the amount of trading in energy futures by those who are solely financial investors.
Commissioner Jill Sommers said the agency should carefully approach such intervention in the market. "It's clear to me that the unintended consequences can be significant."
But Bart Chilton, another commissioner, warned that speculative activity left unchecked "could have the same dangerous consequences."
In addition, Gensler said, the CFTC must ask Congress for new authority to set trading position limits in all commodities to prevent market players from moving to non-U.S. exchanges or to markets outside of exchanges.
Sen. Bernie Sanders, a Vermont independent, urged the CFTC commissioners to set strict limits on speculative oil trading. Americans are tired, he said, "of being ripped off at the gas pump by the same Wall Street gamblers" that brought the meltdown of financial markets.
The CFTC could adopt the new restrictions by late summer or early fall.
"My commitment is to listen with an open mind ... and to work with my fellow commissioners to ensure that we have a functioning futures industry," Commissioner Michael Dunn said at the start of Tuesday's hearing.
Officials of the Petroleum Marketers Association of America and Delta Air Lines were among the witnesses scheduled to testify.
Experts and economists are divided on whether speculative trading in the futures markets fans price volatility. Part of the confusion is that "hot" speculative money flows into energy commodities in numerous ways. The CFTC doesn't track all of them. So it's hard to quantify the impact of speculation.
The agency doesn't, for example, keep records of the speculative side bets that traders make. Nor does it monitor markets that include over-the-counter swaps — those that aren't traded on exchanges — by pension funds and other investors.
A CFTC report to be issued later this month suggests that speculators played a major role in the wild oil price swings of last year — a reversal of the agency's position in a 2008 report, Chilton told The Wall Street Journal in an article published Tuesday.
The free-market sentiment that held sway in Washington for years helps explain why regulators kept their hands off the volatile oil futures markets. The Bush administration generally opposed tighter regulation in the financial industry.
Though the CFTC is supposed to be independent and insulated from politics, "there were people appointed to the CFTC who were part and parcel of the philosophy of the Bush administration," Sen. Byron Dorgan, a Democrat, said in an interview.
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 Barack Obama has raised fears of tighter regulation.
Gensler's confirmation was held up for months by senators who felt his stance had been overly deregulatory when he served in the Clinton administration's Treasury Department. But now Gensler seems eager to cast himself as a tough overseer.
Another reason why the agency's hands-off approach prevailed for so long, critics say, was the deep-pocketed financial industry and its lobbying muscle. The industry opposes new limits on speculative trading, arguing they would crimp the cash flowing through the market and drive business overseas.