Senators Release Proposals to Curb Commodity Market Speculation

Published on: 07:49AM Jun 19, 2008

By Jim Wiesemeyer
via a special arrangement with Informa Economics, Inc.

Proposals to serve as a discussion points for hearing next Tuesday

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The leaders of the Senate Homeland Security and Governmental Affairs Committee -- Chairman Joe Lieberman (I-Conn.) and ranking member Susan Collins (R-Maine) – on Wednesday circulated draft legislation (and thus subject to change) of three proposals to deal with that they termed “excessive” speculation in oil and other commodity markets. Lieberman said he wants the proposals to serve as discussion points for a hearing next Tuesday by his panel.

Details of the three proposals:

-- Have the Commodity Futures Trading Commission (CFTC) establish overall limits on the share of the commodity market that can be held by financial investors, including pension funds and other institutions. The limits would apply on a commodity-by-commodity basis. "Specifically, the limits would cap the combined net ‘long’ position, as a percentage of open interest on the futures markets, which may be held by all persons not engaged in bona fide hedging activities," according to the proposal.

-- Clarify that current CFTC rules limiting individual speculative positions in commodities would apply to any position not related to genuine hedging. This would be an attempt to corral certain "derivative" securities that big investors have been using to ride the commodity bull market, including so-called swap contracts with major investment banks. Under current rules, Lieberman’s proposal notes, "A bank may enter into an over-the-counter commodity swap agreement with a financial investor in which [the bank] agrees to provide a financial return based on the price appreciation of a commodity index, in exchange for a fixed payment from the investor." Current position limits don't apply to over-the-counter trading in commodities, "which has experienced dramatic growth in recent years."

-- Prohibit pension funds and university endowments with more than $500 million in assets from investing in agricultural and energy commodities, whether traded on a U.S. futures exchange, a foreign exchange, or over-the-counter.

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