As those in favor and against financial market reform laws in the Congress were mustering their troops in Washington (moving in as the health care legions left town), some of those same forces also were weighing in on a separate regulatory action, a proposal by the Commodity Futures Trading Commission (CFTC) to install hard position limits on the futures markets for natural gas, oil and oil products (see Daily GPI, Jan. 15).

The deadline for comments on the CFTC’s proposed rule isn’t until April 26, but more than 5,000 comments in support of the rule have already been filed, many of them individually filed copies of a form letter posted on the website of the New England Fuel Institute, a member of the Commodity Markets Oversight Coalition (CMOC).

The proposed CFTC rule to install hard position limits on energy markets “will be addressing the main cause of recent market instability — excessive speculation,” the coalition letter said. This excessive speculation, engaged in by financial investors, including banks, hedge funds and index funds seeking to make a profit on trading, contributes to “excessive market volatility and extreme price shocks” that are harmful to commercial businesses and end-users seeking to manage the risk on physical commodities.

Another filing by the Petroleum Marketers Association of America (PMAA) gets into the details, advising the CFTC that its proposed position limits are “overly generous. As the Commission has noted, the proposed limits are ‘at the outer bounds of the largest position held by market participants,’ and the standards for calculating positions are lenient.” This would do little to restrain excessive speculation in the market, especially since “omitting positions in certain pooled vehicles where a trader has a less than 25% interest would allow some parties, including sovereign wealth funds and other large investors to skirt position limits by spreading energy-related investments among multiple pools over which they can still wield substantial influence.”

PMAA proposes three changes, including lowering the proposed position limits, possibly to points in line with historical positions before the market expansion of recent years. Second the CFTC should limit large passive long positions, including those associated with commodity indexes. The group blames commodity-based, exchange-traded funds for injecting a massive flow of money into energy markets resulting in market price spikes. Index participants, including diversified indexes that include energy components, should be limited to a certain amount of the market or they should be subject to position limits.

The American Feed Industry Association (AFIA), also a member of the CMOC, agrees that passive long traders should be included in the new position limits. AFIA noted “S&P Goldman Sachs, Dow Jones UBS and Rogers International Commodity Funds represent 88% of the total dollars invested in Commodity Index funds. S&P Goldman Sachs alone represents 66% of total Commodity Index Funds investment dollars. This definitely represents a concentration of this market segment.”

Coming in on the other side, IntercontinentalExchange (ICE) filed comments arguing in favor of “deep liquid markets with broad speculative participation,” saying there is no investigation or quantitative study that shows speculation as the cause of increased energy commodity prices in 2008. ICE also advises the CFTC to wait on its proposed position limit regime until the Congress concludes action on new reform laws for the financial market. Because the CFTC now can only install the position limits on regulated futures markets, the action may drive business off the regulated exchanges and transparent electronic platforms and into the over-the-counter (OTC) markets. This migration could be avoided if the CFTC delays action and Congress ultimately brings OTC markets under regulation.

If the agency should decide to go ahead with the rule, ICE had a number of suggestions as to how it could be set up. Among other things, the company supports aggregate position limits across trading venues for similar products, and the rules should be administered by the CFTC. And the exchange advises that the entire size of the energy market in question — across futures and OTC markets — should be considered in setting the limits. Also, ICE suggests that hard limits only be imposed on front months, up through the first 18 contract months, with an accountability regime in force for longer dated portions of the trading curve.

The lobby for financial reform, aimed both at the CFTC and in the Congress, has been developing since 2007, and is gaining traction. CMOC, which boasts more than 450 organizations as members, is an informal alliance of industry groups, consumer advocates, agricultural interests and academics, representing commodity producers, processors, distributors, retailers, and residential, commercial and industrial end-users. It is one of several large coalitions calling for sweeping reform. Another large coalition, the Americans for Financial Reform (AFI) with more than 200 organization members, includes most labor unions and consumer advocacy organizations including the Consumer Federation of America and the American Association of Retired Persons. Another large group, S.O.S., or Stop Oil Speculation Now is mainly backed by the aviation industry.

The groups have been operating under the radar, but are stepping up activities this month as the Congress moves toward a decision. Possible evidence of their work at the grass roots level was seen in reports coming out of the Senate Agriculture Committee, chaired by moderate Democrat Sen. Blanche Lincoln of Arkansas, that the committee’s bill due out Friday may be tougher on financial interests than had been expected. Lincoln faces a strong liberal challenger in the upcoming election and could be vulnerable if she is seen as soft on Wall Street.

AFI is coordinating meetings on financial reform in public forums across the country. It has scheduled “Showdowns” or demonstrations in several cities later in the month when Bank of America and Wells Fargo hold their annual meetings. On April 29 AFL-CIO President Richard Trumka will lead a rally and march in New York City’s Financial District. “Wall Street tanked America’s economy. We’re 11 million jobs in the hole, and it’s time for Wall Street to pay up to create them,” the union maintains.

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