WASHINGTON -- In a move that could have long-term implications for farm energy costs and the cotton market, the Commodity Futures Trading Commission voted 4 to 1 Jan. 14 to propose a controversial rule to put limits on the size of positions that traders can take on futures and options contracts on four energy commodities.
The rule will not go into effect anytime soon, but it could have an effect on energy prices in the long run by preventing big traders from having too big an effect on the market. The commissioners' action provides for a 90-day comment period after which the commission would consider the comments and then vote on whether to put the rule in place. A CFTC official declined to speculate on how long the rulemaking process would take.
The rule responds to charges in 2008 that investors' involvement in the futures and options contracts played a role in pushing up energy prices, although researchers differ on what role, if any, the speculators played in the rising prices. Congressional committees held hearings on the price rise, and senators questioned now-CFTC Chairman Gary Gensler, a former Goldman Sachs executive, on the subject before agreeing to confirm him. Gensler agreed to take action.
Cotton futures
Cotton farmers also complained that investors' purchases of cotton futures had made their market volatile and unusable for price discovery. The rule passed Jan. 14 would not affect cotton, but a CFTC official told reporters the concept pushed forward by the commission later could be applied to cotton and other "soft" agricultural commodities including coffee and sugar. Gensler noted, however, that the purpose of the rule is to make the market function properly, not to reduce prices. The CFTC has no role in price setting, he noted.
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The rule would affect four commodities -- Henry Hub natural gas, light sweet crude oil also known as West Texas Intermediate, New York Harbor No. 2 heating oil and New York harbor blendstock -- that are traded on New York Mercantile Exchange and the Intercontinental Exchange in Atlanta. The proposal would establish four different hard cap mandatory speculative position limits -- an exchange-specific spot-month limit; a single month limit; an all-months-combined limit; and an all-encompassing, cumulative U.S. exchange position limit for substantially similar-traded contracts. The energy position limits would differ from position limits on agriculture because they would apply in the aggregate rather than to individual exchanges. The rule also includes two exemptions -- one traders with inventory or anticipatory purchase or sale transactions in the physical commodity and one for swap dealers.
Possible consequences
During the debate over the rule, CFTC Commissioner Michael Dunn, a former National Farmers Union official and a Democrat, said he had reservations about the rule because it may encourage traders to move to overseas or over-the-counter markets over which the CFTC does not have jurisdiction. Dunn voted for the rule, but Jill Sommers, a Republican commissioner, did not vote for it, citing, in part, the same concerns as Dunn.
CFTC Commissioner Bart Chilton, another former National Farmers Union official who is one of the toughest critics of the traders, said that proposed limits "err on the high side," but that he planned to vote for moving ahead with the proposal because the agency could "recalibrate to ratchet them down or even increase them as deemed appropriate." Chilton also noted that there were concerns that if the limits were set too low, traders might take their business overseas or to the over-the-counter markets. The CFTC does not have authority to regulate over-the-counter markets, although that is part of the discussion about increasing the agency's powers in the financial services bills now moving through Congress.
Chilton said he was "extremely disappointed" that the proposal did not cover metals such as gold and silver, but a CFTC official said that the CFTC plans to hold a public meeting in March to consider whether the same concept could be applied to the metals market.
