PMAA Comments On Commodity Futures Trading Commission’s New Position Limits Proposal

Friday, PMAA offered comments to the Commodity Futures Trading Commission (CFTC) proposed and long-delayed position limits rule mandated by the “Dodd-Frank Wall Street Reform Act” to curb excessive speculation in energy and other commodities futures contracts.

The new position limits proposal would impose limits at or below 25 percent of “deliverable supply” on 25 “core reference contracts,” instead of every contract.

It would also expand the list of CFTC-defined bona fide hedge exemptions and create a new process for bona fide hedges not on the CFTC’s list. Those “non-enumerated hedges” would be approved at the exchange level and then be subject to CFTC review.

The Democratic commissioners have expressed concerns that the new proposal is less sweeping than earlier versions and would impact trading on the soonest-expiring contracts, leaving intact traders’ abilities to make big wagers on longer-term contracts.

It is also likely to allow for bigger maximum positions than currently allowed in some physically settled futures contracts, and limits will likely be more permissive than those now allowed by exchanges. Exchanges would be free to maintain their current levels.

Unfortunately, the proposed position limits rule does not go far enough to limit excessive oil speculation especially passive investments such as exchange traded funds (ETFs) and index funds.

PMAA urged the CFTC to lower the stated spot month limit for energy futures and “economically equivalent” energy futures, options on futures, and swaps to a level that is more consistent with existing federal spot month limits for legacy agriculture contracts to prevent market manipulation as well as impose position limits on non-spot months to the energy futures contracts and “economically equivalent” contracts.

PMAA is also urged the CFTC to impose separate limits on passive traders (i.e., index funds, exchange traded funds, and other similar vehicles that generally buy without regard to price), and require that positions of passive long speculators who follow the same trading strategy be aggregated for purposes of applying spot and non-spot month position limits.

Excessive speculation helped contribute to the oil price run up in the mid-2000s only to see it dramatically plunge within a six-month period from approximately $147 per barrel in July 2008 to a December 2008 low of $32 per barrel.

It can be argued that excessive speculation helped contribute to the recent dramatic drop in oil prices which sent the West Texas Intermediate (WTI) contract into negative territory for the first time.

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