EXCLUSIVE - China securities regulator orders major commodities exchanges to control futures speculation - sources

By Xiaowen Bi HONG KONG (Reuters) - China's securities regulator ordered the country's major commodity futures exchanges this week to control speculative trading activity, sources told Reuters, after a surge in prices sparked fears of a boom-and-bust cycle. In response, commodity futures exchanges in Dalian, Shanghai and Zhengzhou ordered major institutional investors that lack a commodities background to rein in their trading, three people with direct knowledge of the situation said. The sources didn't define what was meant by a lack of background in commodities. Investors, including hedge funds and retail investors, have placed big bets on Chinese commodities futures this year, driving up contracts including in iron ore, rebar, cotton and even eggs. The rally has prompted many analysts to warn of similarities with a boom in the country's stock markets, which reversed into a sharp crash last summer. "Many local media and researchers mentioned the huge volume and volatility," said one of the people. "The regulator felt nervous. They hope to keep stability." The CSRC did not immediately respond to a request for comment. A spokesman at the Dalian Commodity Exchange declined to comment on the CSRC order, but said the exchange would further improve its mechanism for controlling risks. The Shanghai Futures Exchange did not immediately respond to a request for comment. The Zhengzhou Commodity Exchange could not be reached for comment. The people said the CSRC ordered the exchanges on Monday to bring speculative trading under control. They said the latest measures are partly aimed at cracking down on high-frequency trading, although they did not provide further details. However, the exchanges have made several public announcements this week of measures that increase the cost of trading, such as a rise in transaction fees and minimum margin requirements, action that has taken some of the heat out of the rally and traded volumes. Market trading limits have also been widened. At their peak this year, Dalian iron ore had risen 73 percent, and Shanghai rebar 62 percent. On some days, the trading volume in iron ore futures on the Dalian exchange exceeded China's total imports for 2015. Analysts said speculators have been betting that government plans for more infrastructure spending and signs of a pick up in the economy would fuel more demand for commodities. Others suggested commodities futures markets were the only place left for speculators to make quick profits given weakness in stocks, bonds and housing. The measures this week appear to be having an impact. Steel and iron ore futures steadied on Thursday, while other commodities fell further. "The aim is to restrict the oversized space for profiting from short-term trades, reduce elevated holdings of related products and curb speculation," the Dalian Commodity Exchange said on Wednesday, referring to the moves to increase trading costs. The volatility in prices has already deterred some major industry players from using the futures market, causing some to take losses and others to reduce their positions. It also marks a setback for attempts to give China's domestic markets more influence over global pricing, analysts say. A run up in steel prices has been blamed for encouraging some idled steel mills to restart production, adding to a production glut in the country and exports of the metal, which is upsetting other countries. The CSRC came under fire as China's Shanghai and Shenzhen stock markets slumped as much as 40 percent in just a few months last summer. In a further blow, a stock index "circuit breaker" introduced in January to limit stock market losses was deactivated after four days of use because it was blamed for exacerbating a sharp selloff. In its attempts to stabilise stock markets last year, the CSRC instituted a flurry of blunt measures including halting short selling, suppressing trading in index futures and banning share sales by major shareholders in companies. The official state news agency Xinhua reported in February, without giving details, that the head of the regulator had been removed and succeeded by Liu Shiyu. (Additional reporting by Ruby Lian in SHANGHAI and Watson Zhang in BEIJING: Writing by Pete Sweeney; Editing by Jason Subler and Neil Fullick)