Better Markets Legal Director and Securities Specialist Stephen Hall signed a letter to Acting Commodities Futures Trading Commission Chair Rostin Behnam urging the agency to revisit and repair its rule on position limits.
Speculators have become a dominant force in the physical commodities markets, and they cause distortions and volatility in the prices of derivatives on these commodities. The CFTC’s position limits rule, issued in January this year, was far too weak and the agency must move quickly to shore it up. If the rule isn’t strengthened, businesses and consumers will continue to suffer, in effect paying a ‘speculation tax’ on essential goods, from groceries to gas.
The rule set position limits that are far too high, created large loopholes, and established legal hurdles that Congress never intended in the Dodd-Frank Act, all of which does little to curb excessive speculation. We appreciate Acting Chair Behnam’s dissent from the Commission’s ill-considered framework and urge him to lead the agency forward to ensure that it takes the necessary steps to remedy the deficiencies we identify in our letter.
Why It Matters: The derivatives markets play a critical role for commodity producers, manufacturers, and ultimately consumers. They allow commercial market participants to hedge risk and they provide a critical price discovery mechanism. But speculators have become a dominant force in the commodity markets and they cause distortions and volatility in the prices of derivatives on physical commodities. That in turn directly impacts the prices of critical agricultural products, energy resources, and metals used in the production of virtually all goods and services across the U.S. economy. Ultimately, those distortions hurt working families who are forced to pay inflated prices. Given the damaging impact of excessive speculation on the price of everything from oil and gas to plastics and cereal, an effective position limits regime as required by the law is essential.
What We Said: The CFTC’s position limits rule, finalized rule in January 2021, set limits that are far too high, created large loopholes, and established legal hurdles that Congress never intended in the Dodd-Frank Act. In fact, the CFTC’s position limits framework institutes or permits position limits that are so high, or that are so narrowly applied, that they fail to prevent excessive speculation except in the most egregious and patently unlawful cases of disruptive trading or manipulation. Our letter explains that while speculators have an important but limited role in these markets, the dramatic influx of speculators—like Wall Street banks, exchange-traded funds, and commodity index speculators—has now brought us well past the tipping point and commodity futures markets have descended into a state of excessive speculation. When excess speculation damages the price discovery process, commodity futures prices do not correlate with the realities of the physical markets and the markets cannot serve their fundamental purposes. Our letter details six major deficiencies that the CFTC must correct, including gaps in the limits, excessively high limits, hard-to-police exemptions, and legal hurdles never intended by Congress as a precondition for position limits.
Bottom Line: The CFTC can and should move expeditiously to strengthen the position limits rule to protect the critical functions of the derivatives markets, the businesses that rely on them, and the consumers who pay the price when excessive speculation distorts the markets.