CFTC prepares to recant speculators’ influence
Like Archbishop Thomas Cranmer before he was burned at the stake for heresy, the U.S. Commodity Futures Trading Commission (CFTC) seems about to make a dramatic recantation.
Later today, the Commission will hold the first of three public hearings to discuss whether to impose tougher position limits in energy markets and restrict the availability of hedging exemptions. But it is already preparing to release a report that will accuse speculators of playing a significant role in last year’s oil price spike, according to a report in the Wall Street Journal.
While it might seem a minor shift in emphasis, it is a radical reversal of the Commission’s previously stated view that there was “no evidence” that investment flows had a material impact on prices. Commission staff have doggedly maintained that physical supply and demand factors could explain all the observed volatility in oil and other commodity prices over the past two years.
The position was stated most forcefully by CFTC Chief Economist Jeffrey Harris in testimony to the House of Representatives’ Agriculture Committee in May 2008 (http://www.cftc.gov/stellent/groups/public/@newsroom/documents/speechandtestimony/harris-fenton051508.pdf).
It was repeated in September 2008 in the CFTC’s “Staff Report on Swap Dealers and Index Traders” and again this year in a joint report with the United Kingdom’s Financial Services Authority (FSA) on commodity regulation for the International Organisation of Securities Organisations (IOSCO).
The Commission’s view has come under pressure from sceptical legislators as the scale of speculative positions in commodity markets and the number of exemptions the Commission and exchanges have granted have been revealed. Congressional anger threatened to derail Gensler’s confirmation. The price of allowing him to take office seems to have been a promise to take a tougher approach.
The CFTC’s position had become politically unsustainable. The climbdown was foreshadowed earlier this year when incoming CFTC Chairman Gary Gensler admitted in a pre-confirmation letter that “rapid growth in commodity index funds was a contributing factor to a bubble in commodities prices that peaked in mid-2008″ and “the expanding number of hedge funds and other investors who were increasing asset allocations to commodities … also put upward pressure on prices”.
But most observers expected it to announce a shift only after the three public hearings planned for July and August, giving the futures industry an opportunity to water-down the conclusions. The Commission’s early move suggests it does not intend to be side-tracked from determined reform by vested interests.
The shift is significant because it changes the question from “whether” to limit the impact of investment money on commodity markets to one of “how”. The Commission has issued a set of questions for the hearings that include a strong presumption the outcome will be some form of tougher and more comprehensive position limits (http://www.cftc.gov/newsroom/generalpressreleases/2009/pr5681-09.html).
The move leaves the FSA increasingly exposed. It has not accepted there is a problem in the commodity markets it regulates, let alone agreed that the solution is tougher limits and more stringent regulation. The FSA’s line is still that there is “no evidence” speculation has influenced prices. If the CFTC abandons that position, however, the FSA’s could become intellectually indefensible, and London’s sleepy regulator may come under strong pressure to fall into line.