GLOBAL - Proposals unveiled yesterday by the Commodity Futures Trading Commission in Washington, DC for position limits in energy market derivatives fall far short of the Draconian measures feared by traders.
The CFTC estimates that the proposals, which would extend current practice in agricultural commodity markets to derivatives on natural gas, WTI crude oil, heating oil and gasoline, will affect just 10 of the largest traders (which could then seek exemption as "bona fide" hedgers or swap dealers under the new rules).
Testimony earlier this year - which followed concerns that futures trading was creating a bubble in commodities pricing - created "high expectations that any Commission proposal would impose limitations on passive index and speculative investors", noted commissioner Scott O'Malia at the open meeting called to release the new proposals.
This had been of particular worry to some investors as many pension funds invest in commodities via passive index funds.
"Few, if any, passive index and speculative investors will be significantly impacted by the proposed position limits," he said. "The proposed position limits will not change the investing behavior of passive index investors, so long as they remain under the limits or utilise the over-the-counter markets over which the Commission has limited authority."
He continued: "The Commission would benefit from receiving information on the impact, if any, the proposed position limits might have on the trading strategies of passive index investors going forward. In addition, the Commission should endeavor to improve its understanding of the impacts of passive index investors rolling over their position on a monthly basis to determine what, if any, action is required."
The proposals do not recommend regulations that would categorise large, passive index positions for the purpose of applying different regulatory standards, but treats them "as other investors that would be subject to the proposed speculative position limits".
Those limits - an all-months combined (AMC) limit of 10% of the first 25,000 open interest contracts and 2.5% of open interest beyond 25,000, and a single-month limit of two-thirds of the AMC limit - are unlikely to trip-up any index traders.
"By quietly relaxing the rules on single-month concentration of market positions, the CFTC has left the backdoor wide open for the commodity index funds to continue to operate freely in the market," said Ahmad Al Abdallah, head of commodity research at GaveKal.
"While I have been a staunch advocate for strong position limits, the levels set for the limits, in my opinion, actually err on the high side," said commissioner Bart Chilton. "There is certainly no consensus about the potential and net impact of new non-traditional speculators on commodity markets. Did the massive passives—very large traders who have no interest in the underlying physical commodity and have, in general, a fairly inactive long trading strategy—contribute to $147 barrel oil in 2008? Some say there is no impact on markets, others (like researchers at MIT, Rice and Princeton—and a new study out this week from Lincoln University of Missouri) absolutely disagree. Regardless, what is important to remember is that having an impact is not equivalent to manipulation (or other abuse) under current law, rule or regulation; it is not per se negative."
One of five commissioners voted against the proposals, while two others expressed concerns that even these generous limits could drive traders to other markets.
Opening the proposals up for 90 days of public comment, CFTC chairman Gary Gensler said: "Position limits help to protect the markets both in times of clear skies and when there is a storm on the horizon."
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