Trading in commodities futures will be capped under a federal rule adopted Tuesday that seeks to clamp down on speculative trades, which some have blamed for driving up food and gas prices in the past year.
The Commodity Futures Trading Commission voted 3-2 to approve the rule, which doesn't take effect until 2012. It was required under the financial regulatory overhaul.
Critics say the cap on futures contracts, which locks in prices, won't curb inflation. Liberals complain that the rule is filled with exemptions that would allow banks and hedge funds to continue speculative trading. Conservatives say too few companies can qualify for exemptions.
Under the rule, airlines, agriculture companies and others are exempt from the cap. Those companies buy futures contracts to guard against sharp price swings. There are also exemptions for companies where payments of royalties or service fees are tied to production of a commodity. That could occur with natural gas, for example, CFTC staff said.
CFTC Commissioner Jill Sommers, a Republican, said the exemptions are narrower than what is required by the overhaul law. That will make it harder and costlier for commercial companies to hedge against price swings.
The curbs are aimed at investment firms and others who trade commodity futures to profit from swings in market prices. Hundreds of millions of dollars in profits for Wall Street banks are at stake.
Under the new rule, the volume of futures contracts that financial investors can trade for 28 commodities will be restricted. The buyer of a futures contract commits to purchase something at a specified date and price. Futures are supposed to reduce price volatility. But financial investors use them to bet on prices, which critics say can magnify price swings.
Michael Masters, chairman of Better Markets, a group advocating restraints on financial speculation, called the new rule "a good first step." Masters is a hedge fund manager and oil market expert.
The rule is expected to cost the government about $99 million to administer and enforce in the first year.
Commodity index funds, investments tied to the value of a basket of commodity futures, were created by big Wall Street firms. They've ballooned in recent years among mutual funds and other big investors, pumping hundreds of billions of dollars into the futures markets. Critics say their in-and-out trading in futures contracts has worsened the boom-and-bust cycles in commodity prices.
Increases in wholesale prices of commodities get passed on to consumers in the form of higher gas prices, costlier airline tickets and more expensive food.
Some experts say speculators aren't entirely to blame for price increases in commodities. They point to other factors, such as weather, supply disruptions and demand.
Agricultural commodities such as corn and wheat have been subject for years to caps on speculative futures trading imposed by exchanges. Yet their prices have risen, experts say. The new limits on trading for 28 commodities and related financial instruments mark the first time the federal government has imposed broad curbs.
Pope Benedict XVI and Howard Schultz, the CEO of Starbucks, are among the public figures who have recently denounced commodity speculation. Last week about 400 economists from 40 countries signed a letter to finance chiefs of the world's leading economies seeking curbs on speculative trading, which they say has driven food prices higher.