Subcommittee Chairman Carl Levin, D-Mich., held the hearing to examine whether new position limits issued by the Commodity Futures Trading Commission would have an effect on curbing speculation in commodity markets such as oil and wheat. Levin said he feared the rule would not fulfill its congressional mandate to diminish, eliminate or prevent excessive speculation. Levin was especially concerned about commodity investing with exchange-trade products (ETP) and mutual funds.
Ranking Republican Tom Coburn of Oklahoma said he thought the new rule had been rushed through without enough analysis.
Wallace Turbeville, a derivatives specialist for Better Markets, told lawmakers today that the CFTC took a good first step in curbing excessive commodity speculation, but its position-limit rule must be strengthened to protect American families and farmers. Research has shown these funds have provided poor returns to investors. In fact, these funds are forced to continually trade out of an expiring month contract and into a new future month (referred to as the “roll”).
He spoke of a recent analysis by Better Markets that found since 2005 that this roll period has triggered an upward price curve in the futures market, sending misleading price signals that have disrupted the futures and physical commodity markets. The research found that during this “roll” period, the price spread increases between the expiring contract and the new longer-dated contract, creating an upward price curve.
The data shows that this price curve is generally absent during the rest of the trading month. The analysis went back 27 years and found that this upward-price trend did not exist prior to the rapid expansion of commodity index funds in 2004.
Paul Cicio of the Industrial Energy Consumers of America testified that his group has long supported responsible speculative position limits in the commodities market. Cicio said the final regulation, allowing each speculator to control as much as 25 percent of the deliverable supply of a commodity, is too large and will do nothing to reduce excessive speculation.
Tyson Slocum, director of Public Citizen’s Energy Program, said the new rule does not go far enough to protect consumers. Slocum said he supports legislation by Sen. Bill Nelson that establishes a 5-percent position limit level for any investor.
CFTC Chairman Gary Gensler defended the rule, arguing that it would ensure sufficient market liquidity for commercial hedgers and protect commodity price discovery. Gensler also stressed the CFTC does not have price setting authority.