CFTC’s Chilton Calls for Appeal of Court Ruling on Position Limits & New Action

October 2, 2012 01:23 AM
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Commissioner says inflow of managed money has linked financial, ag futures markets

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The Commodity Futures Trading Commission (CFTC) should immediately appeal the recent court ruling on the agency’s position-limit plan and should move forward with a new regulation on an expedited schedule, CFTC Commissioner Bart Chilton said today in Europe. Link.

“I think the Court opinion is deeply flawed,” Chilton said in remarks to the G-20 Agricultural Market Information System (AMIS) Roundtable on Public-Private Dialogue. “I, for one, will continue to push hard for what Congress mandated—a position limits rule.”

That push for position limits arose from the Dodd-Frank Financial Reform law, and Chilton said he wholeheartedly backs such a concept given the large influx of managed money into US commodity markets. Over 2005 to 2008, Chilton detailed that more than $200 billion in managed money rolled into US commodity futures markets.

“There certainly isn’t anything wrong with folks putting their money in the futures markets, but these flows created an unprecedented link between financial markets and commodity markets,” Chilton stated. “Commodities became a new investment asset class.”

This flow of money is just one issue on this front, as Chilton noted the trading strategy linked to this increase in funds was different than typical speculators in that these dollars were simply “parked” in the market as these investors “went long, betting – yes betting – that the price would go up.” Their actions were centered on a view that they “didn’t care much if the price went up or down,” but rather had a view on “whatever was going on in several years. Their bets were similar to bets in stocks, not how speculators have traditionally invested in futures.”

Given their massive investment, Chilton said he views them as “Massive Passives” in the market and his major concern is they “have the ability to move markets just because of their sheer size.” The the drought situation in the US and crop downturns in Russia “are having an impact,” he acknowledged. “But, what’s also true is that when prices are poised to rise for whatever reasons, speculators get excited and they pour in the money.”

Despite being critical of this class of market participants, Chilton declared, “We need speculators in markets. We don’t have markets without them.” However, when they account for a high percentage of the market “that used to be dominated by farmers and commercial agricultural interests, it’s unfathomable to me that they don’t play a role in prices—unfathomable. I'm not suggesting they actually drive prices (certainly not all of the time), but the buy pressure they bring to markets creates a speculative premium on commodity prices—that's right a speculative premium. That shouldn't be allowed in my view.”

Chilton said the agency must “zealously guard” commodity markets to make sure they operate properly and speculative position limits “across all physical commodity derivatives” would be one step to make sure that happens.

The CFTC was mandated to impose position limits on commodity derivatives markets, Chilton said, but their effort which would have taken effect Oct. 12 was thwarted via a court challenge from international bankers. Chilton detailed that of the 13,000 comments the agency received on their proposal, “only a handful suggested our proposed levels (10 percent of a market as a limit) were too stringent.”

The court ruling last Friday was that the CFTC position limits rule be vacated, but Chilton pledged to keep pushing for action on this front.

“First—The Agency should immediately appeal the Court decision and seek a stay in order to allow us to go forward,” Chilton stated. “Second—We should start drafting yet another rule proposal to address any concerns the Court had, drafted in a way that satisfies the objections raised by the court.” And such a move should have an expedited timeline such as using an interim final rule with a short comment period, perhaps 15 days. “This would allow us to quickly do what we had planned, and the exchanges and market participants had already planned to do in 10 days,” he added.

And, Chilton further said there needs to be coordination at the international level and called on “international regulators to look into and address the issues raised by the massive influx of commodity investor money into commodity markets. This effort should begin with a thorough and sustained inquiry into the effect commodity index funds or Massive Passives have on food and energy commodity prices.”

While cost-benefit analyses should apply in devising the limits plan, Chilton said a new component to that is the cost of not doing the rules, or as he said “the human cost” of not implementing new position limits.

Chilton said the AMIS “can and should play an important role” on this matter since he maintains there is a link between the influx of funds and commodity prices and volatility. “It is time that the relevant regulators give this issue the serious attention it deserves and step one is a thorough investigation of the issue,” he stated. 

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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