House approves speculation limiting bill

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Earlier this summer a House bill limiting speculation in energy and other futures markets was unable to meet the needed two-thirds majority in the House. But Thursday, under normal majority rules, the House successfully passed a bill by a vote of 283-133 that hopes to rein in the number of speculative positions in futures markets and bring more convergence to the volatile marketplace.

H.R. 6604, the Commodity Markets Transparency and Accountability Act of 2008, a bill sponsored by House Agriculture Committee Chairman Collin Peterson, (D. - Minn.), hopes to increase transparency and oversight in commodity futures and options markets.

Much of the summer's slide in commodity prices came as a result of increased scrutiny on Capitol Hill to place more limitations on speculative interests in the soaring markets. The move to implement speculative limits could curb over investment in commodities, explained Allendale analyst Joe Victor. "Many of the longs that were nervous have left the building," Victor said, explaining the significant liquidation of positions experienced earlier this summer.

H.R. 6604 strengthens trader position limits on oil and other futures markets as a way to prevent potential price distortions caused by excessive speculative trading. Victor stated the million dollar question is what classifies as "excessive."

As it stands, the bill requires the CFTC to set trading limits for all agricultural and energy commodities, in order to prevent excessive speculation. Provisions also call for foreign boards of trade to share trading data and adopt speculative position limits on contracts that trade U.S. commodities similar to U.S.-regulated exchanges.

The bill directs the CFTC to get a clearer picture of the over-the-counter (OTC) markets. It also authorizes CFTC to take action if it finds disruption in over-the-counter markets for energy and gas. The bill requires the CFTC study the effectiveness of establishing position limits in over-the-counter markets.

It calls for a minimum of 100 new full-time CFTC staff to improve enforcement, prevent manipulation, and prosecute fraud. Despite record trading volume in the futures and options markets, CFTC staffing is at its lowest level since the agency was created in 1974.

"Commodities markets have seen significant changes in recent years," Peterson said. "Trading volume is at record levels, tradable products are more complex, and an unexplained lack of convergence between futures and cash prices in some contracts has called into question the effectiveness of these markets as a source of price discovery and risk management."

The National Farmers Union, which has been one of many groups calling for additional oversight in addressing the volatility in the marketplace, welcomed the legislation as a first step to address concerns in the markets.

"There are many reasons for high energy prices; this bill does not and cannot address all of them," said NFU President Tom Buis. "This legislation addresses the concerns producers have about speculation in the energy futures markets, a particular concern for agriculture producers whose input costs are directly related to U.S. and world energy prices."

The White House has already issued a veto threat on the bill. The House's vote did pass it by a two-thirds majority, which would be enough for a veto override.

The bill leaves the House with some momentum but will need to pick up specifically more to find approval in the Senate, Victor said. A speculation bill in the Senate has stalled over the lack of agreement on limiting amendments.

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