The Commodity Futures Trading Commission (CFTC) began hearings on Tuesday to discuss energy position limits and hedge exemptions.
Discuss may not be the proper term as it appears a foregone conclusion that hard positions limits will be applied to energy futures markets. CME Group CEO Craig Donohue stated in his testimony that the CME Group was prepared to accept such limits though he also warned of their danger. “We are prepared to respond to those concerns by adopting a hard limit regime for those products, including single-month and all-months combined limits in addition to the current limits that apply during the last three trading days of the expiration month,” noted Donohue, adding later, “position limits that are imprecise or wrongly administered will merely drive trading away from transparent markets and regulated clearing.”
CFTC Chairman Gary Gensler said he was happy to hear that the CME was prepared to accept spec limits indicating he had come to some conclusion on their necessity.
The deeper question is if they would be applied by the exchange or the CFTC — as is done in the agricultural markets — and what will happen with the hedge exemption that allows swap dealers and index traders to hedge their cash exposure in the futures markets. That discussion goes a little deeper and was discussed more in depth in the afternoon panel where mainly traditional commercial players in the futures markets complained about the affect of the growth of commodity index funds have had on energy prices.
The commercial participants agreed that the bona fide hedge exemptions should be limited to those commercial players involved in the physical market and should not apply to index traders hedging financial positions.
Prior to Tuesday’s hearings the Wall Street Journal and other media outlets, reported that the CFTC plans to issue a report next month that would place the cause for last summer’s run up in crude oil markets on speculators in contrast to previous reports by the agency.
In July of 2008 an interagency task force chaired by the CFTC issued preliminary findings showing that fundamental supply and demand factors provide the best explanation for the run up. In September the CFTC issued a staff report indicating the same and stating that aggregate long positions of commodity index participants actually declined during the spike.
CFTC Commissioner Bart Chilton is quoted in the Wall Street piece as saying that that analysis was based on deeply flawed data.
At the conclusion of Tuesday’s hearings Gensler responded to those reports stating, “I believe that it is inappropriate to speculate on data that the Commission will be releasing in the future – data that none of the Commissioners has seen. News reports that the CFTC will release a study reversing the agency’s position on energy speculation are both premature and inaccurate. The CFTC hearings and data will provide critical insight into the role of excessive speculation in energy price discovery."
