The Commodity Futures Trading Commission (CFTC) plans to hold a series of hearings this month and in August to seek input from the public on how the agency should use all of its existing authorities to protect the integrity of the futures markets, said Chairman Gary Gensler. The first hearing will focus on whether federal speculative limits should be set by the CFTC on all commodities of finite supply, particularly energy commodities such as crude oil, natural gas, heating oil and gasoline.
“The CFTC currently sets and ensures adherence to position limits with respect to certain agriculture products. This is not the case for energy markets. For energy commodities, futures exchanges set position limits and accountability levels to protect against manipulation and congestion,” but they “are not required to set and enforce position limits to prevent the burdens of excessive speculation,” Gensler said.
“This different regulatory approach to position limits for agriculture and other physically delivered commodities deserves thoughtful review. The [CFTC] will be seeking views on applying position limits consistently across all markets and participants, including index traders and managers of exchange traded funds; whether such limits would enhance market integrity and efficiency; whether the CFTC needs additional authority to fully accomplish these goals; and how the Commission should determine appropriate levels for each market,” he said.
“While the Commodity Exchange Act provides for exemptions from such limits for ‘bona fide hedging transactions or positions,’ the CFTC is currently reviewing the manner in which this exemption has been implemented.”
Gensler said the CFTC also seeks to increase the transparency of market data in the weekly Commitments of Traders (COT) report, which is released each Friday. The report includes the aggregated positions of noncommercial and commercial traders and has been an important tool for market participants and the public to track the changing positions and investments of important groups of market players.
“I have directed staff to improve our COT reports in four ways. First, we will disaggregate the current commercial category separating out and categorizing swaps dealers. Second, we will disaggregate the current noncommercial category by separating out and categorizing the professionally managed market positions, such as hedge funds. Third, we will incorporate data the CFTC receives for all foreign contracts linked to domestic contracts. [And] fourth, we will incorporate data of contracts determined to perform a significant price discovery function,” Gensler said.
In September 2008 “the CFTC published a Report on Swap Dealers and Index Traders based upon our special call authority. The Commission will continue this special call, enhance the information disseminated in this report and release it on a quarterly basis,” with a goal of moving it to monthly in the near term, he said.
CFTC Commissioner Bart Chilton called the hearings an “excellent starting point” to ensure that speculative activity in the marketplace does not distort prices. “First, we need to look at the issue of spec limits generally; we’ve got federally set spec limits in ags [agriculture] but not in other physically delivered commodities, like oils and metals, and we need to see if it’s appropriate for the CFTC to set limits in those commodities as well.”
Chilton noted that oil, for example, is certainly as important a commodity as wheat, “and, as we saw last summer when the price of oil skyrocketed out of control, federally set spec limits may have been able to provide some needed speed bumps.” He said the CFTC also needs to look at whether exemptions that have been granted to these limits are appropriate, which would involve a review of the fundamental concept of “bona fide hedging;” specifically, should that include entities that are primarily involved in financial hedging and not in the actual commercial dealings in underlying commodities?
Chilton applauded Gensler’s desire to revamp the commission’s COT reports, which he called “long overdue” in the effort to increase transparency. “I look forward to getting comment from the public as to what they think of this new report and whether additional improvements can be made,” Chilton said. “Lastly, until we have authority granted by Congress increasing our ability to look into ‘dark markets,’ I think we need to continue to improve our information gathering related to our swaps ‘special call;’ this information is only as useful and reliable as the data we receive, and I believe we must also continue to improve our scrutiny of this information to ensure its utility to us and to the marketplace.”
A CFTC spokesman said no dates for the July-August hearings have been set.
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