CFTC to Limit Speculators Room for Maneuver

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The wheels of government turn slowly and the change in administration put the last few months of the previous administration into a holding pattern waiting for the new policy makers to arrive. So may be we should be impressed with the speed at which two new pieces have been put before the House and Senate although I suspect they have been in the making since much earlier last year.

Both bills going before the House are set to force the CFTC ” Commodities Futures Trading Commission to curb the effects of speculative money on commodity prices by imposing tougher limits on the size of positions investors can hold and requiring more disclosure, according to Reuters.

In much the same spirit, President Obama’s nominee to run the CFTC Gary Gensler, has run into opposition to his appointment as senators have claimed he is too de-regulatory orientated.   In a letter to one senator, Gensler stated that “excessive speculation” could cause “sudden or unreasonable fluctuations or unwarranted changes in commodity prices” (this has actually happened in recent years). Nothing new there most of us would say, sounds rather like common sense. But it is a far cry from the position the CFTC took a year ago when they stated there was no evidence of a link between speculative money and volatility.

Most consumers would probably welcome a reduction in futures markets volatility and if this can be achieved by greater regulation of the OTC market then so be it. In general terms we are not normally supporters of greater government regulation but we have seen first hand the damage metal price volatility can cause processors and consumers of metals. So if a light regulatory hand can calm that volatility by creating more visibility and managing speculative positions we would welcome greater CFTC involvement. The question remains if a democratic administration will be able to leave it at a light hand, only time will tell.

–Stuart Burns

Comments (3)

  1. LP says:

    Inefficiencies create opportunities. It’s easy for people to blame speculators. No one loved the speculators all those years when steel, oil and many food based commodities were dirt cheap.

    If people want to blame speculators, go blame the likes of Calpers. Much of the rise in 2008 was not because of individuals like you and me, it was because pension funds (who fund the hedge funds) saw equities returning a loss and they decided to put their money into commodities.

    Take a look at the City of Phila. The had a margin call of 1.6 billion. What did they invest in that brought on the margin call? Commodities, equities and Fixed Income. WTF are they doing trading hard earned pension money in risky assets and then leveraging it.

    If the regulatory authorities want to reduce volatility, force institutions to deleverage. The reason we are in this huge mess is because of leverage. PhD types created complex models without understanding the consequence of what may happen on the other side of the trade. They then take those models, created phony statistical metrics (like VaR) to justify how they should leverage 50 to 1 and still be safe. Hmm. 50 to 1. It’s great when things work out but destroys world economies when things start to fail. And they always do fail.

    Funny how we are all so tied to each other. I buy a house put 70% down, Bear Stearns quants screw up a model that brings the markets down, my house loses a lot of value and I’m under water, I then make a sound financial decision and mail the keys back to country wide, who goes bankrupt and gets bought out by BofA, who then uses what little cash CountryWide has to buy Merill Lynch, who then gives it’s employees 4 billion in bonuses for losing 95% of the firm’s value, which then causes BofA to teeter on extinction, who then asks the government for money, which will cause my taxes to rise and I’ll then I have less money to pay for food. Homeless and Hungry.

  2. stuart says:

    Hi Lloyd, glad the article struck a cord with you, even if you didn’t entirely agree with the sentiment.
    Thanks for the comments though, well put. I would agree with you 100% on the inappropriate investment behaviour of our pension funds and civic bodies.
    Good luck with the blog.

  3. LP says:

    Thanks Stuart…I really like what you guys have done here…it’s not to often you find a lot of purchasing professionals who understand the various markets…let alone weave the different markets together to form an opinion…I just wish more business professionals understood this coupling effect…most of them would have been prepared for this rut that we are in…keep up the good work…

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