From the January 01, 2010 issue of Futures Magazine • Subscribe!

Speculative position limits: How hard will they be?

Click here for CME Group's white paper on position limits in the energy markets.

Click here for EDHEC's study on excessive speculation in the oil futures markets.

Gary Gensler sat quietly while the Futures Industry Association Expo whirled around him. His seemingly calm disposition remained passive when asked about position limits, a hot button topic in Washington D.C. “As it relates to current authority we are taking a serious look at position limits and related exemptions in the energy markets,” said the Commodity Futures Trading Commission (CFTC) chairman, who, it appears, has spent a majority of his time since coming on board at the CFTC eight months ago testifying at Congressional and internal hearings.

Gensler’s stance has been clear regarding hard position limits in energy futures since last summer when he testified before Congress. In fact, the CME Group and the Intercontinental Exchange (ICE) — while both weary of the possible unintended consequences of such limits — seemed so resigned to that fate that they decided to shape the changes rather than fight them.

CME Group CEO Craig Donohue said they were prepared to accept hard limits after providing a detailed warning as to possible negative consequences.

ICE Chairman and CEO Jeff Sprecher stated, “During times that unpopular price signals are being sent by markets, it is often tempting for policy makers to take pro-active steps to address what they perceive to be structural problems in the market. While well intentioned, these measures often fail to achieve their desired objectives.”

This echoed the comments from CME Group, but that is where the two competitors split company. CME Group wants to continue to set position limits and accountability levels and ICE wants the CFTC to have that authority. “Only the CFTC has the placement to view a trader’s positions across all venues to observe true position size — no single exchange or venue is in such a position,” Sprecher said.

During the hearing, Gensler noted that there was a significant distinction between the current position accountability levels and hard position limits (both exchanges administer hard limits on the last three trading days), and has said on several occasions that the current freedom from hard limits is a relatively recent development.

“We have been mandated by Congress to set position limits — this is something that the [CFTC] did with the exchanges in the energy markets through the summer of 2001,” he testified. “It is just eight years ago that this changed. We are taking a serious look whether it is appropriate to protect the public to promote fair and orderly markets to bring position limits in the energy markets as they existed until eight years ago, and as they exist in the agricultural markets.”

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