CFTC Closes Loophole to Regulate Commodity Position Limits

August 19, 2009 07:00 PM Editors

The U.S. Commodity Futures Trading Commission announced yesterday it would close a loophole that permitted certain types of highly speculative trades in agricultural commodities to occur.

CFTC is withdrawing two "no-action” letters that had resulted in Deutsche Bank and another investment firm exceeding speculative position limits on corn, soybeans and wheat.

"I believe that position limits should be consistently applied and vigorously enforced,” CFTC Chairman Gary Gensler said. "Position limits promote market integrity by guarding against concentrated positions.”

In CFTC Letter 06-09 (May 5, 2006), the agency's Division of Market Oversight (DMO) granted no-action relief to DB Commodity Services LLC, a commodity pool operator (CPO) and commodity trading advisor (CTA), permitting the DB Commodity Index Tracking Master Fund to take positions in corn and wheat futures that exceed federal speculative position limits set forth in CFTC Regulation 150.2. Subsequently, in CFTC Letter 06-19 (Sept. 6, 2006), DMO granted similar no-action relief to a CPO/CTA employing a proprietary commodity investment strategy that includes positions in Chicago Board of Trade corn, soybeans and wheat futures contracts. Among other things, DMO's no-action position in both cases stated that any change in circumstances or conditions could result in a different conclusion. DMO has previously stated that the trading strategies employed by these entities would not qualify for a bona fide hedge exemption under the Commission's regulations.

DMO will work with each of these entities as they transition to positions within current federal speculative limits. The withdrawal of these no-action positions is very specific and limited and does not affect any other no-action or regulatory positions taken by the CFTC or its staff with regard to these entities or other market participants.

The American Feed Industry Association (AFIA) says it is pleased to learn of the decision. The CFTC's action is a good first step toward ensuring that dramatic price increases will be less likely to occur in the future as a result of this particular type of trading, says Joel G. Newman, AFIA president and CEO.

"AFIA is encouraged by the CFTC's leadership on this issue,” Newman says, "and we look forward to continuing to work with the CFTC, the Obama administration and Congress to implement the remaining rulemaking and legislative corrections to ensure the commodity markets remain effective tools for customers in agriculture and other industries to establish market prices and hedge against the risk of long-term commodity purchases.” 

While additional legislation and rulemaking efforts may be needed to completely implement the necessary corrections, Congress also has taken some positive steps in the right direction, according to AFIA. An example is passage last year of CFTC reauthorization legislation, which returned to the agency some authority over exempt commercial markets that it had lost under the so-called "Enron loophole” in 2000. Congressional appropriators also have steadily increased CFTC funding levels in recent years to allow for investments in staff, resources and technology.



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