The most sweeping rewrite of Wall Street rules since the 1930s will encourage traders to invest in physical commodities, potentially keeping supply off the market and affecting prices, said Jennifer Fan, a partner and senior portfolio manager with Arrowhawk Commodity Strategies, a hedge fund in Darien, Connecticut.
The Commodity Futures Trading Commission is trying to limit the impact traders have on the prices for raw materials, Fan said. Reining in futures trading won’t be effective because it will drive traders to the physical markets, she said.
“It’s driving people to invest in physical commodities and actually taking commodities that we produce and holding them off the market, not using them and just keeping them for investment purposes, and I think that’s pretty clear that that affects the price of commodities,” Fan said today at the Bloomberg Link Hedge Fund and Investor Briefing in New York during a panel titled Timing the Peak of the Global Commodities Rush.
The Dodd-Frank financial overhaul, which became law in July, gave the CFTC a year to establish rules governing the $615 trillion over-the-counter derivatives market. The commission has until January to impose limits on the number of contracts a single trader can hold for commodities including oil, natural gas and gasoline. It has until April to impose limits on agricultural products.
“Folks are always going to try and find a way around the law, rules or regulations,” said CFTC Commissioner Bart Chilton in an e-mail. “Sometimes that is sort of like pushing on a balloon. You may make a difference in one place, but it comes out another.”
The law also includes the so-called Volcker rule barring banks from trading on their own accounts, as well as rules designed to push the over-the-counter market onto regulated clearinghouses and exchanges -- two issues that have garnered much attention from Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp., according to meetings posted on the Web sites of the federal regulators.
The CFTC, along with the Securities and Exchange Commission, must also determine which companies will be categorized as swap dealers or major swap participants. Those are designations that entail higher capital requirements and increased scrutiny.
The law is named for its primary authors, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and House Financial Services Chairman Barney Frank, a Massachusetts Democrat. It aims to stem systemic risk by requiring most interest-rate, credit-default and other swaps be processed by clearinghouses after being traded on exchanges or swap-execution facilities.
Congress took aim at the industry after soured trades on mortgage and credit derivatives tipped the U.S. economy into the deepest recession since the 1930s.
The panel included Richard Robb, an economics professor at Columbia University and chief executive officer of Christofferson, Robb and Co., a New York- and London-based investment management firm; Mari Kooi, chief executive officer of Santa Fe, New Mexico-based Wolf Asset Management International LLC; and Tim Flannery, founder and chief investment officer of Copia Capital LLC, a Chicago-based hedge fund.
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