Amid what is potentially the greatest bull market in cotton’s history, the Intercontinental Exchange (ICE) took steps to update their No. 2 cotton contract. While the official releases announcing the changes make no mention of speculators, some in the market suspect excessive speculation to be a driving force.
Changes to the contract have included increases in the daily price-limit range and an affirmative requirement for hedgers to apply and be granted an exemption from speculative trading limits. "What is new is that hedgers who want an exemption [from the lot 300-lot spot limit] must formally apply for it and have it granted before the first notice days," says an ICE spokesman.
Daily price-limits were expanded to as high as 7¢. Limits continue at a low of 3¢ with cotton below 80¢, 4¢ above 80¢ and incrementally goes higher, maxing out at 7¢. "When you have a market at $1.80 as opposed to 80¢, you’re never going to trade the markets [if you don’t expand the price limits]. That’s just a natural progression," says Shawn Hackett, president of Hackett Financial Advisors.
The move does not alter limits for speculators but puts a stronger burden on hedgers to justify their exemptions. "Information must be provided to demonstrate that the requested position limit is economically appropriate to the reduction of risks arising from the potential change in the value of assets owned by the applicant," the advisory states. "When you have a market that is as out of control as the cotton market, they want to make sure that only the people who really need to do something are the ones making the price," Hackett says. "ICE wants to make sure of, that in a market that is this frenzied, the opportunistic speculators who may have helped it along don’t create a greater undue harm than already has been caused by these astronomically high prices."
Hackett expects the changes to begin putting pressure on front-month prices once they are fully implemented.
In the fall Paul Tudor Jones had recommended placing hard daily price-limits on all futures markets, citing among other examples, volatility in the cotton market in 2008. Jones pointed out that the ability to use options to create synthetic futures trading beyond the limit price wreaked havoc on the markets. The ICE spokesman pointed out that ICE last summer instituted a daily halt on all options trading in cotton when the synthetic future, based on lead month options prices, reached 2X the daily futures limit.