Commodity Speculation Limits Divide CFTC With Dodd-Frank Deadline Looming
Curbing speculation in raw materials including oil, gold and wheat has touched off a battle at the top U.S. commodities regulator with a legal deadline to rein in traders just four days away.
The Commodity Futures Trading Commission is divided over how to meet the requirements of the Dodd-Frank financial overhaul that became law last year. A lack of data on the $583 trillion global over-the-counter derivatives market has complicated the agency’s efforts to limit speculation this month, as directed by the law.
Commissioner Scott O’Malia said today fellow commissioners are attempting a “Trojan horse” move that would impose limits without proper debate. Chairman Gary Gensler last month directed the agency’s staff to gather data from firms that exceed certain thresholds, while Commissioner Bart Chilton advocated “position points” beyond which the agency might push traders to reduce or freeze their holdings.
“Much of the pressure to immediately implement position limits/’position points’ comes from those who advocate the need for price controls,” O’Malia, a Republican, said in a statement. “It is not the role of the commission to control prices.”
The CFTC today voted 4-1 to propose rules that would limit the number of contracts a single firm can hold. The public has 60 days to critique the caps. O’Malia said he’s “very skeptical” about the proposal, though he voted to put it out for comment. No date is for a final vote on the rules.
The Dodd-Frank Act gave the CFTC until Jan. 17 to curb speculation in the energy and metals markets and until April in agricultural commodities. Last month, Gensler, a Democrat, said the commission wouldn’t meet the deadline because it doesn’t yet have sufficient data. The commission delayed a vote on the proposal at a Dec. 16 public meeting.
Today he responded to O’Malia’s statement, disputing the notion that he and Chilton, also a Democrat, were trying to regulate prices.
“The CFTC does not set or regulate prices,” Gensler said in a statement. “Rather, the commission is directed to ensure that commodity markets are fair and orderly to protect the American public.”
He said gathering additional information will help the commission understand the role of large traders in the market and how proposed limits may affect them. “These levels, or points, are the positions at which CFTC staff will brief the commission under its existing authority,” he said.
The plan under discussion would limit traders to 25 percent of deliverable supply in the contract nearest to expiration, followed by an all-month ceiling of 10 percent of open interest up to the first 25,000 contracts and 2.5 percent thereafter.
Chilton said the commission “should have proposed much earlier in a way that would have implemented the provision as Congress intended. That’s not happening.”
Regulators and lawmakers are attempting to rein in commodity speculation amid concern that investors contributed to oil reaching the record high of $147.27 a barrel in 2008. The CFTC received hundreds of public comments on position limits and held at least 75 meetings on the subject since July, according to its website.
“I do not believe that the absence of position limits has had any impact on prices in the past,” O’Malia said. “And I do not believe that setting them now will be effective in preventing a barrel of oil from going over $100 per barrel.”
The financial overhaul expanded the CFTC’s authority to the over-the-counter derivatives market for the first time since swaps were introduced 30 years ago. Before the law passed, traders could buy futures on regulated exchanges or they could privately negotiate for unregulated, look-alike contracts.
The commission in October proposed a rule to gather information on the previously unregulated swaps. The 60-day public comment period closed in December, and the agency hasn’t approved the rule.
Without that data, the agency can’t impose or enforce aggregate position limits across exchange-traded futures and economically equivalent derivatives, Gensler said last month.
The CFTC limits would impose a uniform set of rules across exchanges and the over-the-counter market, replacing a patchwork of inconsistent restrictions for different venues and commodities. Trading in some agricultural contracts is already capped, while there are few controls on speculation in energy and precious metals.
“To date, CFTC staff has been unable to find any reliable economic analysis to support either the contention that excessive speculation is affecting the markets we regulate, or that position limits will prevent excessive speculation,” said Commissioner Michael Dunn.
At the Dec. 16 meeting, Gensler directed commission staff to gather information on the derivatives positions of any trader that exceeded 10 percent of open interest in exchange-traded futures or similarly regulated contracts up to 25,000 contracts, and 2.5 percent thereafter.
Commissioner Jill Sommers, who cast the only vote against publishing the proposal, said the commission should wait for a complete analysis of the swaps market before moving ahead on limits.
Chilton’s proposal is similar to accountability levels now policed by regulated exchanges like the New York Mercantile Exchange and the Chicago Board of Trade. Traders that exceed those levels may come under increased scrutiny, and be asked to freeze or reduce their bets. The exchanges also impose restrictions in the last few days before a contract expires.
O’Malia said those actions will create uncertainty about limits, chase traders off of the transparent exchanges and open the CFTC up to legal challenge because the public wasn’t given proper notice or opportunity to comment.
The financial overhaul, named for its primary authors, Democratic former Senator Christopher Dodd of Connecticut and Congressman Barney Frank of Massachusetts, 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.
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