Proposed Rule Limits Size of Commodities Traders’ Positions

In 1979, Nelson Bunker Hunt and William Hunt famously bought up as much silver as they could in the commodities market. By the time they were done, the brothers had acquired more than a third of the world’s supply of silver, sending the price of the precious metal soaring.

Citing the Hunt brothers’ attempt to corner the market more than three decades ago, the Commodity Futures Trading Commission on Tuesday voted 3 to 1 to limit the size of any trader’s footprint in the commodities market.

It is the second time that the commission has voted on a proposal for so-called “position limit” rules. The commission proposed a rule on Oct. 18, 2011, that was rejected by the United States District Court for the District of Columbia last year, after two Wall Street trade organizations filed a lawsuit contending that the rule would cause prices to swing wildly.

Gary Gensler, the chairman of the commission, said on Tuesday that the new position limits would “help to protect the markets both in times of clear skies, price discovery functions, certainly, as well as when there’s a storm on the horizon.”

Bart Chilton, a member of the commission who has been a strong advocate of the limitations, said of the proposal: “I’m reminded of the old Etta James song, ‘At Last.’ At last we’ve got this rule here.” Mr. Chilton also announced on Tuesday that he would “at last” be leaving the commission, without giving any further details.

The commission’s proposal is part the Dodd-Frank financial overhaul signed into law by President Obama in 2010. While the agency has long had rules in place to limit speculation in the markets, those rules previously applied only in the last days ahead of a futures contract delivery and only to nine agricultural commodities, including corn and wheat.

With the new rules the commission has proposed to apply these limitations more broadly to include derivative contracts for 28 different types of commodities future contracts, including agriculture contracts, energy and metal contracts, irrespective of the delivery date for a contract.

The proposal would allow exemptions for traders with bona fide hedging needs. Traders use the commodity futures markets to hedge against price fluctuations in the physical assets they hold. Equally, farmers will hedge the price of their crops, buying futures contracts to lock in the price of the product at a point in time before it is harvested.

Scott D. O’Malia, a member of the commission and the only Republican, cast the dissenting vote. Mr. O’Malia said he had “serious concerns” about the new proposed rule because it failed to use empirical evidence to justify the position limits, did not give enough flexibility for traders and failed to establish what he referred to as a useful process for traders to seek exemptions.

The new rule is open for public comment for 60 days. The commissioners will then vote on a final version of the rule. The commission received more than 15,000 letters from the public after its original proposal.

“To say the public is interested in these matters would be, I think, an accurate statement,” Mr. Gensler said on Tuesday.

Referring to the Hunt brothers’ speculative buying of silver, Lee Ann Duffy, assistant general counsel for the commission, said the new limitations proposed on Tuesday would have “prevented the Hunt brothers and their cohorts from accumulating such large future positions.”

The commission accused the Hunt Brothers of illegally manipulating silver prices in 1985. The brothers denied wrongdoing. In 1989, Nelson Bunker Hunt agreed to pay a $10 million fine. He was also banned from commodities trading.