Kate Mackenzie CFTC position limits: The single month loophole

Another criticism  of the CFTC’s proposed new position limits on energy speculators – this from Reuters columnist John Kemp. He says the Commission was wise to avoid furthering the debate about whether speculation is to blame for previous price spikes, and focus on its mandate to be proactive about preventing future market problems.

As we’ve written before, trying to determine the real impact of speculators is very controversial – and as Kemp pointed out last week, most of us can’t take a deeply informed view, because the CFTC has not released data for the fully detailed categories of traders.

Kemp is less impressed, however, with the relatively generous limits proposed for positions in an individual month.

The new rules, if passed, applies limits in two ways, the first covering ‘all months combined’ , or AMC. The AMC limit for any single speculator is 10 per cent of all open interest in the first 25,000 contracts, plus 2.5 per cent of subsequent open interest over 25,000.

But the limit on positions for any single month contract, is two-thirds that of the AMC limit. As Kemp writes:

Concentration in one or two months has created problems in the past. Amaranth’s positions gave  it as much as 50 percent of the open interest in certain contract months, even though its share of the overall natural gas market was much lower. Similarly, the Commission last year withdrew  position limit exemptions given to Deutsche Bank and another index operator for CBOT wheat and corn, in part because of the build up of massive positions in specific forward months with limited  liquidity.

The Commission needs to ensure the market remains free from excessive concentration  throughout the length of the curve, and that requires tougher, not laxer, limits at the  single-month level. Coupling a rise in the all-months limit with a rise in the share that can be  held in a single month is courting disaster. If swap dealers want to run very large positions in  excess of the normal speculative limits, they should be obliged to spread those positions more  evenly along the curve to ensure they do not create distortions at any point along it.

But Kemp says it’s understandable the CFTC went this way on single month limits:

The Commission has come under pressure from swap dealers — many of whom operate commodity indices that concentrate positions in just one or two forward months. But it should rethink this area.

The CFTC has published a short guide and an FAQ on its proposed new position limits. The full extravaganza (92 pages,  PDF) is here.

Related links:
CFTC targets funds in position limit crackdown (FT Alphaville, 14/01/10)
Comment: Why commodities regulation is different (FT Energy Source, 30/07/09)