The Debts of the Spenders: CFTC's Gensler Calls For Sweeping OTC Regulation

About time. Hopefully the CFTC will be more alert than their colleagues at the "Insider Trading" SEC. Emphasis my own. Remember last summer's incredible run up in energy prices? Last but not least, let's throw some focus onto the CDS sector. Gensler also called for renewd insight into the muni bond market.

NEW YORK (Dow Jones)--The call by the U.S. commodities market watchdog for regulation of over-the-counter derivatives would clarify the government's powers to police manipulation.

Gaming prices in the $4.4-trillion OTC commodities market is often suspected but rarely prosecuted. The credit derivatives that help sink the financial sector were more a problem of bad risk management than fraud, though the Securities and Exchange Commission brought its first-ever case of insider trading in credit default swaps last month.

A proposal made Thursday by Gary Gensler, the new chairman of the Commodity Futures Trading Commission, would give the agency broad new authority to peer inside OTC markets, bringing with it the potential for more enforcement cases.

The fear that malign forces could manipulate futures prices regained attention in the past year as commodities hit record highs. Some worried that big players in the unlit corners of OTC markets were somehow swaying benchmark prices for oil, corn and other basic materials.

But until now the CFTC's powers to go after manipulation have been murky. Gensler's proposal seems set to clarify them.

Commission officials say past efforts to prosecute fraud in the OTC market have been handicapped by a lack of authority to oversee them. The kinds of information the CFTC routinely gets from commodity exchanges aren't currently available from OTC market participants, making it much tougher to detect malfeasance. Gensler's proposal would force more derivatives into clearinghouses, where their size and value can be tracked, or at least reported to trade repositories.

To clamp down on what the Commodity Exchange Act calls "excessive speculation," Gensler has proposed setting limits on commodity trading positions not only on exchanges, where they exist to some degree, but in OTC markets. Major OTC derivatives dealers have used exemptions from exchange-traded limits to let pension funds and other big institutional investors bet on commodity price indexes in the OTC realm - a practice that critics charge drives up prices.

"Position limits must be applied consistently across all markets, across all trading platforms, and exemptions to them must be limited and well defined," Gensler said in prepared testimony.

The proposal has already drawn criticism.

"While more clarity and information is always welcome, clamping down on speculative activity is likely to substantially reduce the liquidity that commodity markets require in order to operate effectively," commodity analysts at Barclays Capital said in a note Thursday.