Limiting the Speculators

As oil, wheat, and other commodity prices surge, the Commodity Futures Trading Commission is trying to find a way to clamp down on speculators. The commission voted on Jan. 13 to seek comment on a proposal to limit the number of contracts that speculators can own, whether traded on an exchange or in the over-the-counter swaps market.

There are two kinds of oil contracts: Futures are exchange-traded contracts for 1,000 barrels of light, sweet crude. They settle financially or with physical delivery of oil.

Swaps are unregulated contracts tied to the futures price of oil and settle financially.

Spot Months

The CFTC proposal would limit a firm's speculative holdings in spot month contracts—those nearest to expiration—which for oil is currently the March contract expiring Feb. 22. In the last three trading days before expiration, a firm would be capped at 25 percent of "deliverable supply," which the agency will determine. Aim: Discourage big market positions that can cause price gyrations.

Non-Spot Months

A firm with contracts for April and beyond could hold far more than in the spot month. How much depends on the total number of outstanding contracts, known as "open interest."

The First 25,000: For the first 25,000 outstanding contracts, a firm could own up to 2,500, or 10 percent of open interest.

Beyond 25,000: A firm could hold 2.5 percent of the remaining open interest. So if that were 750,000 contracts, it could hold 18,750 of them, or about 19 million barrels of oil.

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