CFTC Stuck on Position Limits

Posted on October 12th, 2012 by David Greenberg

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Earlier this week, Reuters published an article: CFTC staff recommends appeal of commodity limits ruling: source

CFTC web site fact:  The Energy and Environmental Markets Advisory Committee (formerly the Energy Markets Advisory Committee) has not met since September 16, 2009 and the only other meetings were May 13, 2009 and June 10, 2008.

While being a Board Member at the New York Mercantile Exchange (NYMEX), I remember the feeling of always banging my head against the wall when I knew the CFTC was looking into issues of trading improprieties. They always asked the wrong people the wrong questions. I often wondered whether they had their head in the sand for reasons we cannot talk about or if they were just always out-matched

I think it is a little of both.

The CFTC is definitely stuck on position limits when it comes to oil prices and speculation.

When oil was at $114 a barrel in July 2011, I spoke to Bart Chilton, one of the commissioners of the CFTC. I told him the position limits on WTI was not the major issue running the price of crude up. I explained to him there were also accountability limits that allowed traders to exceed their limits once they showed they had the excess money to trade.

However, that was also not the main reason why speculators could move the market to the high prices, I told him (and later also told Commissioner O’Malia) that the major factor in the oil markets was the ICE Brent Cash Settled Crude market.  At NYMEX, by expiration a trader needs to get out of their longs or shorts in the market and this brings a natural leveling off of the product.

ICE settles in cash. Meaning the trader would never have to be concerned about getting out of their longs (yes, this works in reverse in a down market).

Add to the fact that, unlike WTI Crude, there are no weekly reports of how much and where the Brent Crude oil is.  No one really understand their settlement procedure. Even when I was sent to London years ago to try to steal the Brent traders and bring them back to New York to trade – none of them could tell me how the market was settled!

NYMEX WTI Crude settles with the average of the last 20 minutes of trading the day of expiration.

I spoke to Chilton and O’Malia about the need to work together with the FSA, who is the London Equivalent of the CFTC and regulates the ICE exchange.  ICE is a London based Exchange that has their headquarters in Atlanta, and who bought a New York Clearing House that is regulated in London.

ICE only started a optional program to give the CFTC their large trader reports after the run up in crude to $147 a few years ago.

The CFTC was, once again, told a direct way to help stop the speculation in oil prices – they were told that position limits will not only not help but it will drive trading overseas – and the courts rule against it.

And they still can’t let it go.

Washington at its best right?

In time, I will go over conversations I had with them concerning the MF Global blow up and just how they didn’t look into leads that would have answered many questions that are still out there.  We will also be looking at the impending disaster that will come from new concept of the cleared swaps market due to the inability for the CFTC to regulate them properly since they have not even caught up to regulating the new electronic and HFT markets.  Stay tuned!

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