Montreal, Canada

ETFs, or exchange-traded-funds, that bet on energy, base metals, grains and other edibles have some breathing room ahead of financial reforms starting in early 2011. The same goes for hedge funds and managed futures funds (aka Commodity Trading Advisors).

With commodities prices soaring again this year — especially core markets deemed to be vital according to government officials — the pressure is on to cut speculative bets in the sector.

The CFTC, or Commodity Futures Trading Commission, has delayed legislation on commodity curbs whereby speculators would face new position limits designed to restrict big price gains on any given contract.

Last year, the CFTC imposed position limits on oil, natural gas and the grains complex forcing some ETFs to shut down or overhaul their investment mandates. Now officials want to increase those curbs amid explosive commodity rallies since the Fed announced a new round of quantitative easing, or QE II.

The net result was some ETFs that previously targeted only one sector of the commodity space (e.g. crude oil, natural gas) were forced to diversify if they planned to continue trading on U.S. platforms; some ETFs, like the United States Natural Gas Fund (NYSE-UNG) has moved some of its gas contracts to London where position limits have yet to be legislated.

Position limits are among 30 areas of rules the CFTC must approve under the new Dodd-Frank financial reform bill. The commission is considering introducing a “watch-list” of large traders, tracking any firm trading 50 or more future contracts in 46 commodities, including crude oil, gold and uranium. Eventually, speculators concentrating heavily in commodities will be curbed and fined if they violate position limits.

The CFTC has delayed new rules on position limits until January at the earliest as they seek to decipher more trading statistics, including swap contracts and their impact on the sector.

One thing is for sure: New limits on the size of trading positions will force many speculators like hedge funds and Commodity Trading Advisors (CTA) to dilute their bets on a given commodity contract. And like most legislation, this one seems to be hastily motivated and, in the end, will probably be poorly executed and revoked once this bull market concludes.