Commentaries

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Back into the mists of time with the CFTC

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  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. 

CFTC TIMELINE
 
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.

CFTC review process – thinking about the eventual outcome

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Several people have asked what I think will be the eventual outcome of the US Commodity Futures Trading Commission (CFTC)’s review of position limits and hedging exemptions in energy futures markets.  My guess is that the review will result in only fairly minor changes.

The most likely changes to emerge from it are probably: 

(a)  CFTC rather than exchanges will set position limits and be responsible for granting exemptions. 
(b)  Position limits will apply on an aggregate basis that will cover an entity’s positions across all exchanges and OTC.  To enforce this system, CFTC will demand data on OTC positions and on positions that are “near to” those on markets it regulates (ie Significant Price Discovery Contracts). 
(c)  Position limits on contracts close to expiry may be “hardened” to become fully binding (with few or no exemptions other than for physical hedgers intending to make or take delivery). 
(d)  Position accountability levels on contracts further away from delivery may be hardened somewhat but unlikely to become absolutely binding.  CFTC will almost certainly demand more documentation and proof to back up claims that they being held for “bona fide hedging” purposes. 
(e)  CFTC may revisit the classification of traders as commercial/non-commercial.  For firms with both hedging and trading operations, it may require the two to be separated out for reporting and regulating purposes.  The system would then regulate positions rather than entities. 

CFTC prepares to recant speculators’ influence

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johnkempcrop– John Kemp is a Reuters columnist. The views expressed are his own –

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.

from John Kemp:

CFTC needs to provide more detail ….

The problem is that no one knows what Gensler means about using "aggregated position limits" to curb excessive speculation. 
 
At the moment the CFTC gets NYMEX data (compulsorily) and ICE data (on a "voluntary" basis).  It wants to obtain information on OTC positions as well, but would need additional legislative authority and systems to achieve it. 
 
The real question is what does CFTC mean by "aggregated" positions and "limits" on them: 
 
(1) Does aggregation stop at NYMEX+ICE, or will it extend to NYMEX+ICE+OTC?  Is CFTC prepared to include OTC contracts which are similar, but not identical, to exchange contracts (in terms of the deliverable commodity) and therefore exert an influence on exchange prices? 
 
(2) What does it mean by limits?  Market participants already routinely exceed the soft non-binding "position accountability levels" on NYMEX alone.  Adding in other positions on ICE and OTC will not make any difference, UNLESS the CFTC intends to harden enforcement of the non-binding accountability levels.  Is the Commission preparing to harden the limits and make them more binding? 
 
Gensler's comments do not take the discussion forward unless the Commission provides some more detail on what it means.

from John Kemp:

CFTC’s Gensler calls for “aggregated position limits” to curb excessive speculation

15:30 02Jun2009 RTRS-CFTC CHAIRMAN GENSLER BACKS U.S. REGULATION OF OTC DERIVATIVES MARKET, AGGREGATED POSITION LIMITS

15:30 02Jun2009 RTRS-GENSLER SAYS CFTC NEEDS "NEW AUTHORITIES" TO BRING TRANSPARENCY TO OTC DERIVATIVES MARKET

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