CFTC approves speculative positions rule with vote along partisan lines
The Commodity Futures Trading Commission today approved a rule aimed at trying to prevent speculators – as opposed to producers or the users of commodities – from causing dramatic price swings that could hurt consumers.
The rule, which limits the size of positions on 25 mineral, oil and agricultural commodities at 25% of the deliverable supply, passed on a 3-2 vote, with Republicans favoring it and Democrats opposed. It will be subject to a comment period.
The CFTC has been struggling to write the rule since it was mandated under the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act that was passed in the wake of the 2008-9 financial crisis.
CFTC Chairman Heath Tarbert said, “Today’s proposal is a pragmatic approach that will protect our agricultural, energy, and metals markets from excessive speculation. But just as importantly, it will ensure fair and easy access to these markets for businesses producing, consuming, and wholesaling commodities under our jurisdiction.
“For the nine grain futures contracts currently subject to position limits, revising non-spot limits required the commission to consider an additional complication,” Tarbert said. “Eliminating the risk management exemption could potentially take away a source of liquidity further out the curve. For a farmer who needs to hedge the price risk on crops that are still in the ground, a bank with a risk management exemption may be the only willing buyer. To mitigate the impact of eliminating the risk management exemption, we have raised the non-spot month limits for the grain contracts. This should allow a broader set of market participants to provide liquidity and help farmers hedge their crop risk as far in advance as they need.”
Commissioner Brian Quintenz, a Republican, said in a statement that the proposal is “by far the strongest” of the position limit proposals the commission has considered over the years, and praised it for taking into account “many of the serious concerns that end-users voiced.”
Commissioner Dawn Stump, also a Republican, told The Hagstrom Report in an email, “Overall, today’s proposal is reasonable in design, balanced in approach, and workable for both market participants and the commission. I am particularly pleased that, at my request, the proposal recognizes anticipatory merchandising as an enumerated bona fide hedge – this is of tremendous importance to our agricultural end users.” She added that, in the context of agricultural commodities, anticipatory merchandising is defined as “hedges for legitimate commercial users to hedge unfilled storage and positions ahead of anticipated processing.”
Dan Berkovitz, a Democratic commissioner, said in a statement, “The proposal would create an uncertain and unwieldy process, with the commission demoted from head coach over the hedge exemption process to Monday-morning quarterback for exchange determinations. The proposal would abruptly increase position limits in many physical delivery agricultural, metals, and energy commodities, in some instances to multiples of their current levels. It would provide no opportunity for the commission to monitor the effect of these increases, or to act if necessary to preserve market integrity.”
Rostin Behnam, the other Democrat on the commission, in a statement compared the process to the limits of “machinery” in a car race. “While I would like to be in a position to say that today’s proposed rule addressing Position Limits for Derivatives (the ‘proposal’) is leading us towards that ‘perfect lap,’ I cannot,” Behnam said. “While the proposal purports to respect congressional intent and the purpose and language of CEA section 4a, in reality, it pushes the bounds of reasonable interpretation by deferring to the exchanges and setting the commission on a course where it will remain perpetually in the draft, unable to acquire the necessary experience to retake the lead in administering a position limits regime.”
House Agriculture Committee ranking member Michael Conaway, R-Texas, said, “I appreciate the hard work that Chairman Tarbert, his fellow commissioners, and the commission staff did to re-propose this rule. I am encouraged that it offers a robust process for hedgers to access the risk management tools they need and that it is grounded in limiting harm from real market disruptions.
“Our derivatives markets need certainty, and a reasonable position limits rule can offer that. I am cautiously optimistic that this rule can accomplish that.”
Senate Agriculture Committee ranking member Debbie Stabenow, D-Mich., said, “When Wall Street speculators meddle in our markets, consumers pay the price. Almost 10 years have passed since Congress directed the CFTC to curb excessive speculation that has caused Americans to pay too much at the pump. Unfortunately, this proposal fails to add necessary protections for consumers and our markets. I urge the commission to strengthen the rule.”