After a cruel summer for speculators, Congress rejected two bills that would have limited speculation in the commodity markets before it left for August recess. On July 25, the Stop Excessive Energy Speculation Act of 2008 failed to receive the required votes for continued consideration by the Senate. The bill came under fire from the Coalition to Protect Competitive Markets, an organization made up of exchanges and industry advocates. The coalition said that the bill would have “drive[n] commodity trading overseas, rather than providing long-term solutions to our energy needs.”
On July 30, the Commodity Markets Transparency and Accountability Act, a bill that would have required foreign boards of trade to adopt speculative position limits,
was rejected by the House of Representatives. That bill would have required the Commodity Futures Trading Commission (CFTC) to set trading limits for agricultural and energy commodities and would have limited eligibility for hedge exemptions to “bona-fide” hedgers, required more detailed reporting from index traders and swap dealers and increased staffing at the CFTC. Because it was brought up under suspension of House rules and was not amendable, the bill needed two-thirds of those present and voting to pass, and failed narrowly with a vote of 276-151.
After the vote, the bill’s sponsor, House Agriculture Committee Chairman Collin Peterson (D-MN), said that the bill “was well on its way to being passed…then Republican leadership demanded that members change their votes in order to protect President Bush.” Before the vote, the White House released a statement saying the bill “offer[ed] poorly targeted short-term measures that [did] nothing to address the fundamentals of supply and demand that bear the primary responsibility for current high energy prices.”
William Adams, managing director at JKV Global, says, “Any additional [government imposed] measures would probably increase risk because the open interest and liquidity would be pushed to other exchanges or markets.” John Hummel, president and CIO of AIS Futures Management LLC, agrees, saying, “I’m concerned about the trend [where lawmakers] keep piling on more regulation. It never really catches the crooks beforehand. Politicians don’t appreciate the importance of deep, liquid markets and anything you do to drive away certain potential participants thins the markets out and ultimately [makes them] more volatile and erratic.”
The Intercontinental Exchange (ICE) is glad that many of the extreme proposals seen earlier in the debate that included increased margins and dual regulation of foreign markets have not gained traction in Congress. “It appears that the debate has now turned to more practical market proposals, combined with laws that will address underlying energy supply and demand fundamentals,” an ICE spokesperson says, adding that the two failed proposals were modest in terms of their direct impact on ICE’s markets, largely codifying previously announced regulatory changes that already were required by the CFTC for trading in ICE’s WTI futures contract. ICE expects little impact on the business model from legislation in its OTC markets. Adams says that new regulations could give foreign exchanges the opportunity to be considered as the first option for new products.
The Futures Industry Association (FIA) cheered the rejection of the two bills in a statement, but the Congressional melee is not over, as Peterson said he would “continue to pursue meaningful steps to address the conditions that have thrown some futures markets into disorder.”
The ICE representative is optimistic about Congress revisiting the speculation question, saying, “As a result of the lengthy debate that took place this summer, we anticipate that legislative efforts upon Congress’s return in September will be bipartisan in nature, and will seek to bring effective and real solutions to long-term supply and demand fundamentals.” Adams expects Congressional action to hinge on market conditions. “The consensus has been that if the market conditions become more favorable there probably will not be any new legislation,” he says.
