The Commodity Futures Trading Commission (CFTC) has postponed for the second time a vote on a controversial final rule aimed at curbing excessive speculation in the multi-trillion-dollar derivatives market.
The vote, which was originally scheduled for Sept. 22, was initially postponed to Oct. 4 and now has been pushed back to Oct. 18. But there’s no guarantee that the Commission will consider the so-called position limit rule even then. “Our expectation and hope is that position limits will be on that agenda,” said an agency insider.
The Commission is extremely divided over the rule. “It [the CFTC] felt it needed more time to dot the i’s and cross the t’s” before bringing the rule up for a vote, he said.
It’s not clear if the Commission will have the votes to adopt the position limit rule. While Commissioner Jill Sommers was the only CFTC member to vote against the proposed rule in January, Commissioner Scott O’Malia and departing Commissioner Michael Dunn expressed serious reservations at the time (see Daily GPI, Jan. 14). O’Malia and Dunn may vote down the final rule next month unless their concerns are met, leaving only Chairman Gary Gensler and Commission Bart Chilton to support the rule.
In casting her opposing vote on the proposed rule, Sommers said, “Without data on swap market positions, the spot month limits we are proposing are not enforceable. I think it is bad policy to propose regulations that the agency does not have the capacity to enforce.”
Although he tentatively voted for the proposed position limit rule, Dunn said the “CFTC staff has been unable to find any reliable economic analysis to support either the contention that excessive speculation is affecting the markets we regulate or that position limits will prevent excessive speculation…With such a lack of concrete economic evidence, my fear is that, at best, position limits are a cure for a disease that does not exist, or at worst, a placebo for one that does.”
O’Malia said the proposed rule “remains flawed by its complexity and unenforceability due to technological hurdles and a lack of reliable data in the near term.”
To break a potential vote logjam, the CFTC could wait to hold the vote on the position limit rule until Mark P. Wetjen, who has been nominated to succeed Dunn, joins the five-member Commission. Wetjen is a senior policy adviser to Senate Majority Leader Harry Reid (D-NV), who recommended him for the seat on the CFTC.
The CFTC’s proposed rule on hard position limits, which was adopted in mid-January, would limit the amount of positions in futures and options contracts and economically equivalent swaps, other than bona fide hedge positions, that may be held by any entity in one of 28 covered commodities, including crude oil, natural gas, heating oil and gasoline.
It would set spot or front-month position limits at 25% of deliverable supply for a commodity, with a conditional spot-month limit of five times that amount for entities with positions exclusively in cash-settled contracts.
In comments filed at the Commission, trade groups representing producers, municipal gas utilities, corn growers and other interests have called on the agency to make a number of changes to the proposed rule (see Daily GPI, March 29). Some associations, such as the Natural Gas Supply Association, believe the rule on position limits for derivatives would have the unintended consequence of needlessly limiting commodity trading and harming liquidity and price discovery in the derivatives markets.
Last week it was reported that the Commission has relaxed its proposed rule on position limits in response to the outcry from industry, expanding the types of swaps that could be exempt from position limits..
An avid critic of the CFTC, Sen. Bernard Sanders (I-VT), believes the position limit rule is “very weak” as a result of the changes made by the CFTC, a spokesman said.
The head of the House Agriculture Committee, which has jurisdiction over the CFTC, also had reservations about the changes. “These changes still don’t address the overall question: how will this rule impact liquidity and price discovery in these markets? As I’ve said before and [it] remains true, the CFTC simply doesn’t have the data to answer that question, and it shouldn’t move forward until it does,” said Committee Chairman Frank Lucas (R-OK).
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