Speculation adjudication

The CFTC, the US commodities market regulator, has been signalling its intent to impose tighter regulation on energy commodities markets for a few months now. Back in July, after initial hearings on whether to impose limits on the number of energy commodity positions that certain traders can hold, CFTC chairman Gary Gensler said there was no longer a question of whether to set position limits – only a question of who should set them, who should be exempted, and at what level they should be set.

But not everyone agrees that speculators are to blame for soaring energy prices. CME, which owns the world’s biggest commodities exchange Nymex, published its response yesterday.

While CME says it will support more extensive position limits, it believes the exchanges themselves should administer them. In a paper released yesterday, it came out with some sharp criticism that “attempting to increase confidence that speculators are not unduly influencing prices by means of imposing hard limits solely on exchange-traded energy commodities will be a wasted effort — and, in fact, damaging to the futures market.”

The paper took several well-aimed kicks at those requesting harder position limits, saying that studies finding evidence that speculators, such as swaps dealers and index funds, are indeed pushing up prices are flawed and demonstrate ” unfamiliarity with industry fundamentals resulting in misinterpretation of petroleum statistics”.

They added:

Proponents of hard limits on speculative trading and the elimination of risk management exemptions believe that such limits will bring commodity prices to some favored level — in the case of energy commodities – down; in the case of cattle – up. Not only is there a complete disconnect between the implied promise to drive prices down or up (whichever the most vocal constituency desires) and the ability of position limits to deliver on that promise, but improperly calibrated and administered position limits can easily distort markets and increase costs to hedgers, which in turn increases costs to consumers.

However this is all pretty much in line with the CME’s views, as expressed by chief executive Craig Donahoe at CFTC hearings on the matter in July.

But Michael Dunn, one of the CFTC’s commissioners who is more sceptical of the need for crackdown on speculators, has raised the prospect that the US would be disadvantaged by imposing hard limits. From the FT:

“I find no other regulator in the world that is sympathetic to setting position limits,” Michael Dunn, one of four CFTC commissioners, said. He raised concerns about impacts “this will have on our markets here in the United States if we do this unilaterally”.

Fears about regulatory arbitrage between countries have been around for years – particularly the ‘London loophole’ theory which postulated that speculators could take advantage of looser restrictions on the London-based ICE exchange to trade WTI clone contracts, thereby driving up the price of real WTI contracts.  Even though recent data suggests this fear is unfounded, and collaboration between the CFTC and the UK’s Financial Services Authority is strengthening somewhat, Dunn’s remarks are certainly a blow to those hoping for a tougher regime.

Related links:

Speculation crackdown: Is regulatory arbitrage a threat? (FT Energy Source, 05/08/09)
Trans-Atlantic commodities get co-op-tastic (FT Energy Source, 20/08/09)

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