Cost-benefit lawsuits snarl Dodd-Frank implementation
By Nick Paraskeva
NEW YORK/WASHINGTON, (Thomson Reuters Accelus) – A financial industry lawsuit seeking to block new U.S. rules on commodity position limits on the grounds that they lack an adequate cost-benefit analysis could cause regulators to slow their implementation of the Dodd-Frank financial regulatory overhaul and be an indicator of more such challenges. Meanwhile, the Obama administration is saying it will resist efforts to block the law. (more…)
ANALYSIS-CFTC speculation limits may pass quietly, unchanged
By Christopher Doering
WASHINGTON, Dec 17 (Reuters) – New U.S. rules to limit speculation in commodity markets could move forward quickly, and with few alterations, after objections by the measure’s most vocal supporter unexpectedly delayed a key vote.
Gary Gensler, head of the U.S. Commodity Futures Trading Commission, abruptly postponed a vote on Thursday to open proposed new position limits to public comment, evidence of mounting pressures internally as the agency implements dozens of rules meant to make markets safer and more transparent.
The agency must carefully balance the laws it is required to implement as part of the sweeping Dodd-Frank financial overhaul with the opinions of its five commissioners, who disagree on how they should get there.
Gensler has managed to maneuver around the two Republican commissioners who have several times voted against releasing new rules, concerned they could damage the market. This week he pushed forward with a plan to set up special exchanges to trade swaps after delaying a vote last week due to objections.
He faced concerns from the opposite corner on Thursday — Bart Chilton, a Democrat and most ardent supporter of limits, who argued that the two-part approach would leave markets unprotected from rampant speculation for too long.
Those who follow the CFTC believe Chilton will eventually support releasing the position-limit plan for 60 days of public comment.
COLUMN-Cocoa’s rise and fall puts spotlight on FSA: John Kemp
– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, Sept 15 (Reuters) – Cocoa’s stunning rally and equally spectacular bust over the last five months provides compelling evidence that large positions, especially in contracts close to delivery, influence futures prices, and that regulators should develop effective position limits to ensure market prices reflect supply-demand fundamentals and not the impact of dominant positions.
Britain’s Financial Services Authority (FSA), which regulates commodity markets, continues to insist there is no evidence large positions, either singly or collectively, influence futures prices, most recently in a position paper published in December 2009 (http://www.fsa.gov.uk/pubs/other/reform_otc_derivatives.pdf).
The FSA has rejected calls to follow the U.S. Commodity Futures Trading Commission (CFTC)’s lead in imposing position limits on commodity derivatives. It insists that London’s “position management” approach is more flexible and effective.
“Moving away from a regime which is flexible and established, to a different and more rigid system would imply there is an identifiable problem with the current regime. We have seen no evidence of this,” according to the FSA.
Although the article is focused on the FSA, even the CFTC’s powers and policies are far from a preventative measure against excessive positions on futures markets, including cocoa. Fundamentally, it is index traders which are behind the upward pressure on prices. Index traders predominately enter swap agreements with swap dealers such as investment banks, and these swap dealers then hedge their risks in futures markets – and are exempt from positions limits in both the US and the UK. Swap dealers remain bona fide commercial hedgers, and the speculators behind the swap deals effectively escape regulation.
COLUMN-Is the argument from liquidity a fallacy? John Kemp
– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, June 29 (Reuters) – What is the “right” level of speculative activity in commodity markets? Different people reach different conclusions, explaining the fierce debate over position limits and other attempts to impose stricter regulation that has broken out since the price spike in 2008.
Economists and market practitioners are divided about the impact of increased participation by investors and speculators over the last decade. Some claim it has improved price discovery and facilitated more hedging. Others blame it for raising volatility, swamping fundamentals and inflating bubbles.
How people answer that first question shapes their response to a second one about how regulators and policymakers should react. Should regulators encourage more participation to improve the market functioning, or should they be trying to restrict it or at least slow it down to safeguard price discovery?
Some economists and practitioners believe more speculation must always be a good thing. If liquidity is good, more liquidity must be better. But that may not be true if the extra speculation is uninformed and simply add “noise” and volatility rather than sharpening price discovery, as leading options expert Paul Wilmott recently argued in his blog (http://link.reuters.com/kup74m).
The argument involves no great point of principle. It is an empirical question about what impact speculation and investment has on price determination, and whether the current level is too much or too little.
COLUMN-Gensler on brink of position-limits victory: John Kemp
– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, June 25 (Reuters) – U.S. Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler appears to be on verge of achieving a big victory in his battle to impose stricter position limits on major energy futures contracts.
Back in January, Gensler unveiled proposals for tough new limits on futures positions in U.S. crude, natural gas, gasoline and heating oil. Unlike previous limits set by exchanges, these would be set by the Commission itself and would aggregate all positions in economically equivalent futures and options for a particular commodity.
The proposals were designed to limit exemptions for firms seeking to hedge financial rather than physical exposures and largely restrict financial and physical hedgers from also running speculative positions.
Finally, the proposals contain strict new account aggregation procedures that would cumulate positions based on a minimum 10 percent equity ownership and largely end the present safe harbour for independent account controllers.
Push-back against the proposals has been fierce. The U.S. Futures Industry Association (FIA) and many major swap dealers have argued the CFTC lacks statutory authority to impose limits unless it finds they are necessary to “diminish, eliminate or prevent” the burden imposed on interstate commerce by excessive speculation.
COLUMN-Consolidated analysis of oil positions needed: John Kemp
– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, May 25 (Reuters) – The standard analysis of speculators’ positions in crude oil markets is highly misleading. By focusing only on futures and options positions in physically-settled NYMEX light sweet oil it ignores important and financially equivalent positions in other WTI-linked derivatives as well as positions on the rival ICE market in London.
The anomaly has been thrown into stark relief by proposals published by the Commodity Futures Trading Commission (CFTC) earlier this year that would start applying position limits for referenced energy contracts on an aggregated basis across similar commodities.
In addition to the four referenced contracts (NYMEX crude, gasoline, heating oil and natural gas) aggregate limits would apply to any other contract exclusively or partially based on the same commodities and deliverable at the same location (75 Fed Reg pages 4144-4172).
While other aspects of the plan have attracted fierce criticism, most accept the logic of applying some form of aggregation when trading is split across different but financially equivalent contracts.
The CFTC plan has highlighted shortcomings in the way in which industry analysts themselves calculate positions. For the market, better aggregation across financially equivalent contracts is a much-needed first step to improved understanding of how investors, swap dealers and commercial hedgers use the market and what impact they have on both prices and the shape of the forward curve.
COLUMN-Pending U.S. bill clears way for CFTC limits vote: John Kemp
– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, May 24 (Reuters) – With Congress poised to enact sweeping financial reforms next month, attention will switch back to the Commodity Futures Trading Commission (CFTC) proposals to impose tougher position limits on major energy contracts.
The Commission voted in January to put its proposals out for a major 90-day consultation exercise, which ended in late April. Staff are wading through almost 8,000 written comments. The Commission will then have to decide whether and how to reshape the proposal in the light of comments received, before putting it to a final vote.
The Commission’s 4-1 vote to put proposals out to consultation concealed hesitation about whether they should eventually be approved. Only CFTC Chairman Gary Gensler and Democrat Commissioner Bart Chilton gave the proposals full support.
Two other commissioners (Democrat Michael Dunn and Republican Scott O’Malia) voted to release them for consultation but made clear they did not necessarily endorse adoption. The fifth commissioner, Republican Jill Sommers, voted against even releasing the proposal.
Gensler needs to win the support of one or both of Dunn and O’Malia to put together a 3-vote majority.
PREVIEW – Odds stacked against CFTC metals position limits
By Frank Tang and Christopher Doering
NEW YORK/WASHINGTON, March 23 (Reuters) – The top U.S. futures regulator, which has struggled to gain support for a plan to curb concentration in energy markets, could face even tougher resistance on Thursday as it considers whether similar provisions are needed for metals.
The Commodity Futures Trading Commission will hold a day-long hearing to determine whether it needs to write a rule to create speculative position limits for gold, silver and copper markets to prevent price manipulation.
Commissioners will hear from metals markets players who oppose position limits and are expected to argue that limits will drive trade to unregulated or overseas markets.
A group of gold and silver “bugs” who believe governments and banks artificially depress precious metals prices are expected to ask the commission to prevent price manipulation in metals markets.
Bart Chilton — one of five CFTC commissioners and the most outspoken in favor of position limits across all commodities of finite supply — tamped down support for metals curbs ahead of the hearing, but said he remained optimistic.
“At this point I don’t think there is support on the
COLUMN – U.S. futures industry risks Pyrrhic victory in battle with CFTC: Kemp
– John Kemp is a Reuters columnist. The views expressed are his own –
By John Kemp
LONDON, March 19 (Reuters) – By rejecting position limits on energy markets, and calling into question the Commodity Futures Trading Commission’s (CFTC) authority to regulate in this way, the Futures Industry Association (FIA) has dangerously escalated the conflict with its regulator and ultimately with Congress.
It is a sign of the industry’s renewed self-confidence after the crisis, as well as its visceral hostility to restrictions of any sort on position sizes, that the FIA is strenuously opposing limits most observers have described as extremely generous, and has made veiled threats that the position limits could be struck down in court.
This is a high-risk strategy. The FIA’s objections are statutory not constitutional. Even if it forces the Commission to back down, or prevails in court, it would be a relatively simple matter for Congress to amend the 1936 Commodity Exchange Act to give the CFTC more complete authority to impose and enforce the limits FIA has opposed.
SENSE OF CONGRESS
If it blocks the CFTC’s current proposals, the FIA would almost certainly face the threat of new legislation. There is a groundswell of support in Congress for giving the CFTC more power, not less, to regulate energy markets:
@BrianR
Thanks for the comment. You are absolutely correct on the specifics, but I think the larger context is more important here.
While it is true FIA has asked the CFTC to delay its action pending legislation, FIA has also stated that it “agrees with some and disagrees with many of the statutory changes in the House bill’s Section 3113″ (page 13 of the comment letter).
From the various objections contained in the comment letter, and the rather limited suggestions for “reform” that it does countenance, the real purpose seems to be to postpone reform or enmesh the CFTC in litigation in the hope the whole thing will go away and leave the status quo in place.
It is not clear to me that that strategy will work or is reasonable. My reading of the congressional process is that reform *is* coming. The industry would do better to work with the grain here and try to shape reforms in a constructive manner than oppose them wholesale and then get steam-rollered by lawmakers.
Gensler and the CFTC have been holding out an olive branch here with limits set a very high level (at least for the more liquid markets such as oil and gas). The industry needs to engage constructively, not simply try to derail the process. The alternatives could be much worse.
ANALYSIS-Big traders face ‘landmine’ in CFTC energy rule
By Christopher Doering and Roberta Rampton
WASHINGTON, Feb 17 (Reuters) – Buried deep in the proposal to set position limits on oil and gas futures is a possible “landmine” that could force the industry’s biggest traders to make a stark choice: Keep your hedging exemptions, or keep your speculative book. But you can’t keep both.
Weeks after the Commodity Futures Trading Commission
unveiled its long-awaited proposal to prevent concentration in energy markets, industry executives have zeroed in on a little-noticed clause that would force big players to exit speculative trading positions if they wrest an exemption from
regulatory limits on their hedging operations.
That could be a big blow to traders at the likes of oil giant BP Plc or Swiss trading house Vitol,
who regularly use futures contracts both to protect themselves from risks on physical market positions and to make bets on prices.
In no sense is this a “landmine,” “buried deep in the proposal.” There is a clear pointer to it on page 3 of the Q & A, and it was referred to at many points in the public meeting at which the proposal was discussed:
http://www.cftc.gov/newsroom/cftcevents/ 2010/oeaevent011410.html
– and hey, what’s to stop these large, international financial houses from actually reading the proposal?
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In context of SIFMA’s ability to delay and derail necessary regulation, it is informative to read The Bond Buyer article on “SIFMA: A Lobbying Powerhouse.” (see http://www.bondbuyer.com/issues/120_235/ sifma-powerful-lobbying-group-1033980-1. html)
All this suggests that it is high time the actions of SIFMA and Ira Hammerman in particular be subjected to intense scrutiny.