In a flurry of announcements, congressional testimony and speeches in early summer, the CFTC let it be known that they are not your father’s futures regulator. Despite a regulatory structure that appeared up to the task in the recent credit market turmoil, new CFTC Chairman Gary Gensler stated, “We must aggressively use all existing authorities to ensure market integrity.”
On July 7, Gensler announced that the CFTC would hold hearings to study imposing position limits in the energy markets similar to those in agricultural markets. He also promised to continue the review of what qualifies as “bona fide hedging transactions or positions.”
The announcements, while not promising definitive action, caught the attention of mainstream media and appeared to facilitate sharp declines in CME Group and Intercontinental Exchange (ICE) stock prices.
In a statement, Futures Industry Association (FIA) President John Damgard said, “FIA would be concerned by any measures to bar legitimate participants from these markets or that would make it less efficient for U.S. corporations to use futures as a tool for managing price risk.”
Paul Zubulake, senior analyst at Aite Group, says similar position limits should be applied to OTC markets. “Without anything on the OTC side at the same time, it doesn’t make any sense,” he says.
In a speech before the Managed Funds Association on June 24, Gensler said, “OTC derivatives should be fungible and able to be transferred between one exchange or electronic trading system to another.” Gensler did not elaborate further but fungibility has long been a bone of contention between established exchanges and certain clearing members.
While only referring to cleared OTC products, the topic of fungibility is sensitive especially as it came a few weeks before the launch of ELX Futures, which will compete with CME Group’s Treasury complex. A large amount of OTC trading involves fixed income products that are traded against Treasury futures.
ELX CEO Neal Wolkoff in response to Gensler’s comments said, “To the extent any OTC business moves to an exchange, competition among marketplaces will be key to preserve its best characteristics. We welcome the Chairman’s remarks, and look forward to his bringing a fresh perspective to the futures markets.”
CME Group CEO Craig Donohue says his understanding of Gensler’s remark is that “[counterparties] have the ability to establish and extinguish positions through a multiplicity of platforms or execution environments if those platforms and participants clear through the same clearing platform.” Donohue adds that that is consistent with the CME business model though not what is commonly understood as fungibility.
Regarding whether excess speculation is to blame energy market volatility, Donohue says, “The CFTC has already done a very thorough, very comprehensive and non-political economic analysis of the data and concluded that there is no evidence whatsoever [linking excessive speculation with the 2008 spike] so that will be part of the discussion.” He adds, “Most research analysts have concluded that it is primarily supply and demand fundamentals, macro economic issues and currency fluctuations that have impacted pricing. I haven’t yet seen a true empirically based study or economic analysis that has concluded anything other than there is no correlation.”
Gensler also said the CFTC would make enhancements to its weekly Commitments of Traders (COT) report.
