Back into the mists of time with the CFTC

July 29, 2009

  This is not the first time that the CFTC has considered the issue of “excessive speculation” and position limits. 
   In the wake of the Hunt Brothers silver scandal, Congress directed the Commission to submit a report on the events in the silver market (see timeline below, reproduced from the CFTC website). 
   The CFTC also considered the broader question of whether “unchecked speculation” could pose a danger to markets.  On that occassion the Commission concluded: 
“It appears that the capacity of any contract market to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions, i.e., the capacity of the market is not unlimited. Recent events in the silver market would support a finding that the capacity of a liquid futures market to absorb large speculative positions is not unlimited, notwithstanding mitigating characteristics of the underlying cash market.” 

“Establishment of Speculative Position Limits,” 46 Fed Reg. 50938, 509040 (October 16, 1981).
  So the Commission has considered these questions before.  Last time, it concluded that position limits were necessary to safeguard the effective functioning and price discovery mechanism of the market. 
  What seems to have happened since then is that the Commission was (gradually) persuaded to change its view as part of the broad thrust away from government regulation and towards “self-regulation” that dominated policymaking in the 1980s and 1990s.  Seeing little point in the position limits themselves, the CFTC was comfortable granting an increasing number of exemptions to them. 
  Now the pendulum is swinging back.  For a full discussion of the issues now before the Commission, most people could do worse than go find the relevant entries in the Federal Register for 1980-81. 
  History most definitely rhymes, even if it does not quite repeat exactly. 

March 28, 1980—After careful consideration of a host of market factors, the CFTC votes not to use its emergency powers to order a suspension of trading in silver futures as prices plummet.

May 29, 1981—As required by Public Law 96-276, the CFTC transmits to Congress a report on events in the silver market during late 1979 and early 1980, and on issues involving futures contracts on financial instruments.

September 8, 1981—The CFTC adopts a comprehensive set of regulations to govern exchange-trading of options on futures contracts under a controlled and monitored three-year pilot program.

October 16, 1981—The CFTC adopts Regulation 1.61 (now part of CFTC Regulation 150, 17 CFR 150) requiring exchanges to establish speculative position limits in all futures contracts.

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