Hedge exemption debated

At the Dow Jones Indexes’ mid-year economic outlook held on the agricultural floor of the Chicago Board of Trade, analysts discussed the potential affect on commodities markets if the hedge exemption afforded swap dealers where taken away as has been recommended in the Levin Report and is currently being debated by the Commodity Futures Trading Commission (CFTC).

Phil Flynn, senior energy analyst for PFGBest Research, who provided an outlook on crude oil at the panel, said it would be a mistake to restrict participation in commodity markets. “Liquidity always lowers volatility,” Flynn said, “[markets] have gotten more volatile because of the economy, not because of more participants.”

Stephan Platt, commodity futures strategist for Archer Financial Services, took a different view, noting that the size of the various commodity indexes has created big problems as various commodity futures markets rolled from month to month. “Commodities are finite and need to be treated differently,” Platt said.

Jack Scoville, vice president at Price Futures Group, said that the spike in wheat prices in 2008 was a “Cash market led rally, not a spec index funds rally.”

This goes counter to the report (Levin Report) recently released by the U.S. Senate Permanent Subcommittee on investigations regarding the wheat market. CFTC Chairman Gary Gensler in testimony before that subcommittee today noted, “The Subcommittee’s wheat report found that index traders were one of the primary causes for the large price spreads that inhibited convergence [in the wheat market]. The report recommended that the CFTC limit the positions of index traders to the standard speculative position limits for wheat futures. The CFTC is seriously considering this recommendation and will examine it in its upcoming hearings.”

Scoville said, “I am waiting for someone to show me how the funds have done this,” adding that if prices get to a level they should be reach, they will not remain there very long.

Flynn added that restrictions on participation in the oil futures market could do damage to the market as large traders would hedge in the physical market. “They would be buying product and taking it off of the market...it would make trading less transparent,” Flynn says.

The Dow Jones-UBS Commodity Index is up 3.74% in 2009 and there was approximately $27.5 billion tracking their group of indexes as of the end of the first quarter.

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