Position limits pass, now for something important

There was a surreal exchange between Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and Commissioner Michael Dunn during Tuesday’s open meeting of the Commission where final rules for position limits and Derivatives Clearing Organization (DCO) core principles were approved. 

It was no secret that the two Republican members of the commission, Jill Sommers and Scott O’Malia, would oppose the position limit rule and Commissioner Dunn was highly skeptical of its efficacy. Speaking to me at the Futures Industry Association Expo last week, Dunn acknowledged that lack of position limits where not impactful on the financial crisis and the agency needed to concentrate its efforts on things that would make the industry safer.

In several stories he has called positions limits a sideshow and his comment from a previous hearing — “With such a lack of concrete economic evidence, my fear is that, at best, position limits are a cure for a disease that does not exist or at worst, a placebo for one that does,”  — has gone viral.  

Dunn addressed Gensler directly asking him to give assurances that the agency would examine the impact of the rules after it became effective. You almost expected Dunn to ask Gensler to put his hand on a bible before responding to direct questions on the purpose of the rule and the role of the Commission. It made you wonder why he didn’t just vote against it. Perhaps approving a rule was the easiest way to move forward.

Dunn also expressed publicly and privately his frustration that they are still waiting on further definitions of swaps, which must be set before the rule becomes active.

What was clear from Tuesday’s meeting is that there was a myriad of compromises on the initial proposal to get the measure passed. What wasn’t so clear was why it was necessary. Those who believe speculation caused the run-up in energy prices in 2007 will not be satisfied nor will those opposed who will bear the cost of compliance, which is expected to run over $100 million.

The chairman and each of the commissioners separately made the point that the Commission was not a price setting agency. In fact, that was one of the questions Dunn asked directly to Gensler and he waited for the chairman to affirm that the agency was not in the business of setting price. The problem is that those advocates who most passionately have been pushing for positions limits believe that that is the role of the Commission or at least believe that if limits were in place the price of many commodities would have been lower in recent years.  

In fact U.S. Senator Bernie Sanders (I-Vt.) may have committed a crime in his fervor to castigate speculators by leaking non-public crude oil position data to the press and a  recent United Nations report flat out recommended affirmative government action in the markets to “correct” price.

Several panelists at the recent FIA Expo in Chicago made the point that often the loudest supporters of certain reforms be it transaction taxes or position limits are the most ill informed.

So we have a rule the necessity and value of whch three commissioners are uncertain of though there seems to be certainty on the cost, at least $100 million to the industry according to the CFTC, making it a major rule.

Dunn asked Gensler, “How will this rule impact disruptive trading practices and market manipulation and the resources at the Commission’s expense to combat them.”

Gensler said, “this rule is another tool to protect price discovery and promote fair and open and competitive markets, it helps protect against parties having excessive market powers therefore protects against corners squeezes and other manipulative schemes.”

There was more regarding large position reporting, information the Commission already receives, but $100 million seems like a large burden for just another tool. The cost estimate would seem to require the Commission to make a stronger case for the necessity of this rule.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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