One of the overriding goals of the Dodd-Frank Act, particularly as it addresses the over-the-counter swaps markets, is to get much of it standardized and under the regulatory authority of the Commodity Futures Trading Commission (CFTC). But how the CFTC is addressing hedging exemptions to spec limits may do the opposite, at least temporarily.
Position limits that have been proposed in the energy and metals sectors set a specific limit based on an open interest formula. This formula was used to expand agricultural limits in 2005, but the Commission has decided to leave agricultural futures limits frozen at those 2005 levels instead of applying the same metrics to the most recent open interest figures. The difference is significant (see "Chartview: Setting the bar low"). Gresham Investment Management founder Henry Jarecki says the end result encourages the development of the swap market.
Gresham, in a comment letter to the CFTC, has asked the Commission to apply the same metrics to agricultural markets. "We want the formula to be applied across markets, the ags should not be singled out for special and illogical treatment," says Jason Ungar, managing director at Gresham. "We are being put at a significant disadvantage to the swap providers who are taking advantage of the delay [and] who continue to write billions of dollars [of swaps]."
Gresham also has asked the CFTC to restore its exemption, first granted in 2006 and withdrawn in 2009, that allowed them to trade beyond spec limits in executing their long-only commodity strategy.
While Gresham no longer has its exemption, certain swap dealers still do and Gresham is forced to execute its strategy through swaps rather than the more transparent futures markets. "They have forced us into the hands of our competitors; forced us out of the exchanges," Jarecki says. "How can they come and take our exemption away when they left the other people’s exemption in place?" he asks.
Futures will speak to Jarecki, a legendary figure in the metals market, for our May cover interview on metals.