Financial Regulatory Forum

ANALYSIS-CFTC’s expanded trader reports to add transparency

By Reuters Staff
August 19, 2009

Traders work in the crude oil futures trading pit at the New York Mercantile Exchange, February 12, 2009.   By Tom Doggett and Ayesha Rascoe
WASHINGTON, Aug 19, (Reuters) – The plan by U.S. commodity regulators to provide more information on the traders doing business on futures exchanges will shine more light into the opaque markets, but will still give the often-criticized speculative investor a measure of cover.

The Commodity Futures Trading Commission will start including more detailed classifications this month in its weekly reports on traders buying and selling futures on oil, wheat and other popular commodity contracts listed on regulated futures exchanges.

The agency’s expanded Commitments of Traders reports, commonly known as COTs, will put traders in four categories: producers and merchants; swap dealers; managed funds and “other” market participants.

The current COTs, which are released every Friday afternoon and scrutinized by market participants, provide a breakdown of the open interest in a futures contract in which 20 or more traders hold positions that equal or exceed the reporting levels set by the CFTC.

“In general we would welcome any improvements in the COT reports that increase the level of transparency in the regulated futures markets without jeopardizing the anonymity of individual market participants,” said John Damgard, president of the Futures Industry Association.

FIA represents brokerage firms trading on futures exchanges.

Said Jim Ritterbusch, president of Illinois-based Ritterbusch & Associates: “I’m all for it, because anything that increases transparency is a good thing. I’m sure there are some people out there who don’t want these details to be revealed, but I think most people benefit,”

The expanded COT reports will provide aggregate data on contract positions, but it won’t reveal individual trader’s positions.

But one drawback to the new COT reports is the four
categories won’t distinguish between commercial traders, who need to hedge against swings in commodity prices and lock in supplies, and speculators, who bet on futures prices and don’t generally take or make physical delivery of the commodity.

“It categorizes by market participant type, not by activity,” said Jennifer Han, assistant general counsel at the Managed Funds Association.

“That is what people are ultimately trying to get at — whether activity is hedging activity or speculative activity,” she said.

Still, the detailed reports should show the trend in a particular futures contract. For example, the managed funds category will mostly consist of speculators and funds generally invest in a commodity if they think its price will rise.

So, if the share of oil futures contracts, for example, held by managed funds increases, that could indicate an expected rise in oil prices. Meanwhile, if funds pull out of the oil futures contract week after week, that could be a sign crude prices may fall.

As a result, the new reports might shed some light on the role of certain speculators in futures markets.

“I think this is making both the commission and the interested public more familiar with exactly what’s going on in these regulated markets so assessments can be made about the extent to which speculators should be allowed into these markets,” said Michael Greenberger, a law professor at the University of Maryland and a former CFTC director.

The distinction between hedgers and pure speculators can be murky. Some analysts say the new categories may cause the commission to reevaluate the way it classifies transactions.

“Speculators are not supposed to be dominant participants in the market. If it does show that, then it’s very likely Congress and the CFTC will act,” said Michael Masters, manager of the hedge fund Masters Capital Management LLC.

Masters has been a vocal critic of the role hot money has played in driving oil prices to a record above $147 a barrel last year.

The overhaul of the weekly reports comes as the commission moves to clamp down on excessive speculation. The commission recently held hearings on limiting the number of energy futures contracts that can be controlled by speculators.

Unlike possibly imposing contract positions limits, there does not seem to be much concern that the expanded COT reports would cause traders to migrate to less-regulated markets.

“I can’t imagine it will chase away anyone who is doing something legitimate,” said Peter Beutel, president of Cameron Hanover in New Canaan, Connecticut.

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