Another interesting snippet for the debate over the role of speculators in driving oil prices.
Sixteen cocoa companies and trade groups are up in arms over the operation of the London cocoa market, protesting that the lack of transparency and position limits are partly to blame for pushing spot prices to a 33-year record high.
In a letter to Euronext Liffe’s parent company, they question three specific movements in the market in recent weeks, and ask why Liffe is not publishing a commitment of traders report showing the aggregate positions of different categories of traders – namely, financial traders and physical – as the US ICE cocoa contract does.
The FT notes that the biggest cocoa traders are not signatories to the letter. But John Kemp at Reuters suggests the uproar could indicate something about the appetite for better transparency on commodities. And this in turn might have implications for controversial proposals in the US to impose limits on the size of positions that speculative traders can take in energy futures. Opponents argue that the limits are unnecessary and create the risk of sending traders to foreign markets, or to over-the-counter deals.
But as Kemp writes, the assumption that market participants prefer less regulation to more may not be true for everyone:
In the past year, swap dealers and commentators have issued dire warnings about the threat to U.S. dominance if the CFTC presses ahead with proposals to impose strict position limits on major energy contracts. But the cocoa letter indicates tough regulations are not necessarily a competitive disadvantage.
Physical hedgers and merchants in particular may opt to conduct their business on a more regulated and transparent market if that convinces them gains and especially losses are “fair” and they will not be unwitting victims of a squeeze or other distortions.
Kemp also notes that it is impossible to know whether the cocoa traders’ complaint is valid:
Besides data on time and sales, as well as some highly aggregated numbers on open interest and turnover, most FSA-regulated exchanges publish little information that would enable participants or researchers to understand why prices move in the way they do.
But for the same reason, he says it’s also impossible to know whether the FSA and exchanges operating under its regulation are correct in saying that there is no manipulation going on, either.