By Christopher Doering

WASHINGTON, July 28 (Reuters) - The regulator of U.S. futures markets risks increasing volatility and distorting crucial pricing functions unless proposed measures to curb excessive market speculation are thoroughly vetted, a top commodity exchange executive said Tuesday.

"While well intentioned, these measures often fail to achieve their desired objectives or, worse yet, lead to unintended consequences ...that would otherwise be discovered in properly operating markets," said Jeffrey Sprecher, chief executive of Intercontinental Exchange <ICE.N>.

Officials from the Intercontinental Exchange and the Chicago Mercantile Exchange <CME.O>, the world's largest exchange, were among those testifying before the Commodity Futures Trading Commission which is reviewing whether to set position limits for all finite commodities.

The CFTC is undertaking a thorough review of the way it regulates energy markets amid volatile swings in oil prices blamed on an influx of hot money from index, pension and hedge funds looking for new investments. The agency also will hold meetings on July 29 and Aug. 5.

U.S. futures markets said fundamental supply-and-demand factors, not speculation, were responsible for the increased price volatility impacting everything from oil to wheat. They stand to lose revenue if tougher position limits are put in place.

Sprecher said CFTC should set limits and levels for traders across all trading venues and should not set positions as a percentage of an exchange's open interest. It also should regularly update position limits to reflect changing market conditions.

To protect against market manipulation, the CFTC sets limits on the amount of contracts each investor can hold in some agricultural commodities. But for energy products such as oil, the limits are set by the futures exchanges.

The move to toughen up oversight marks a sharp turnaround for the CFTC which has drawn criticism for its hands-off approach toward market regulation, especially last year when commodities rocketed to record highs.

"We and our consumers cannot continue down the same path," said Sean Cota, testifying on behalf of the Petroleum Marketers Association of America. "It is time for a concerted effort toward meaningful reform to restore stability and confidence in these markets."

Ben Hirst, senior vice president and general counsel for Delta Air Lines Inc <DAL.N>, told the CFTC extreme volatility in oil prices "has made it impossible to undertake necessary corporate planning and has been devastating to our industry."

Delta, the world's biggest carrier, estimated each $1 change in the cost of a barrel of oil has an impact of $100 million on its bottom line. Hirst said the sharp rise and fall of oil between mid-2007 and mid-2008 cost the airline $8.4 billion, compared with what it would have spent on jet fuel if oil had remained at $60 a barrel.

Some fear new rules to curtail speculation could make markets less efficient by reducing trading volumes and moving traders to offshore exchanges. Fewer speculators would mean fewer traders willing to absorb risk and lead to higher prices.

With a number of anti-speculation bills pending in Congress, the CFTC's actions have been praised by some lawmakers, especially among Democrats. (Additional reporting by Tom Doggett, Tim Gardner and Ayesha Rascoe; Editing by John Picinich)

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