New U.S. commodity futures reporting may raise transparency, questions

August 25, 2009

By Alden Bentley
NEW YORK, Aug 25 (Reuters) – More transparency or too much information?

Energy traders, analysts and mom-and-pop farmers may find themselves swimming in detail on the big bets and hedges in the commodity markets, when the U.S. futures market regulator overhauls its widely-watched report on trader positions.

To help level the playing field between funds, commercial players and and smaller participants, the Commodity Futures Trading Commission will break down positions by producers, merchants, swap dealers and hedge funds in its Commitments of Traders report, released every Friday afternoon.

The agency has pledged to issue the expanded report by the end of the month, which gives it until Monday.

Some questions, at least initially: What will the revamped report reveal? How well will it shed light on positions held on overseas exchanges? How easy will it be to compare the new categories with the old report?

“CFTC is just trying to give us more tools, better tools to help assess a market. But I can’t imagine they make a significant enough change that it makes a big difference,” said Don Roose, analyst with U.S. Commodities.

The Commitments of Traders report is a crucial supply/demand indicator for futures markets. Analysts and traders use it to calculate the size of the net noncommercial, or speculative, position in a market.

If funds have bet heavily on the long side, on price gains, it can indicate the strength of a trend and a risk of prices being too high. Funds also may be oversold on the short side.

CFTC has said it will not provide new analysis of the data or whether it validates a 2008 CFTC study showing fundamentals, not speculators, were mainly behind runaway oil prices.

The CFTC aims to enhance transparency in the commodity markets, enforce position limits, and limit speculation that caused disruptions to farmers, merchants and other traditional hedgers last year. Crude oil hit $147 a barrel in 2008 and many commodity prices set record highs. This sparked panic about fuel costs, and food riots hit some countries.

The enhanced report dovetails with proposals by the Obama Administration to regulate the vast and opaque over-the-counter business in credit default swaps, energy and other markets, and reduce systemic risk by moving trade through exchange clearinghouses using standardized OTC contracts.

“I support the more granular reporting of market positions. I think it could add marginally improved information to the marketplace,” said Scott Irwin, professor of agricultural marketing at the University of Illinois

Irwin said most large commodities investors already have good intelligence on the main players and their positions.

“But there’s a whole raft of other market participants like interior country elevator hedgers, farmer hedgers, small speculators, etc, where this kind of information might well be helpful in their assessment of the market,” he said.

Currently, the weekly CFTC report provides 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.

The CFTC previously classified big positions into commercial and noncommercial only and shunted smaller players off into a nonreportable category.

The CFTC has tinkered with the reports over the past year and a half. Last month it included trader positions on ICE Futures contracts on Europe’s West Texas Intermediate crude oil. In 2007, it broke out index trader positions in selected agriculture futures.

Tim Evans, energy analyst at Citi Futures Perspectives,
said a few large players might feel more self-conscious regarding their positions. Still the exchanges and the CFTC have been able to monitor individual positions all along, even if they did not break them down in detail.

“These changes also only run parallel to reporting that has been available in selected agricultural markets over the past two years, with no particular harm to those markets,” Evans wrote to Reuters in an email.

Last week CFTC Chairman Gary Gensler told Reuters that a detailed report should also be released this month on index traders and said the agency would like to release historical data with the new trader categories.

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