Washington, D.C. – Dennis M. Kelleher, Chief Executive Officer of Better Markets, issued the following statement with respect to recent trading activities in the oil markets:
“We applaud the Commodity Futures Trading Commission (CFTC) for announcing an investigation into the unprecedented disruption of the oil futures markets last week when West Texas Intermediate (WTI) grade crude oil futures traded at negative prices. We have long been concerned about the threat of excess speculation in the derivatives markets and the increased costs posed on non-financial firms involved in the production, merchandizing and consumption of actual physical commodities. That is why we called for the investigation that the CFTC announced.
“Yesterday’s WTI market events, however, require the CFTC to broaden its investigation into ongoing speculative activities that appear to be causing continued disruptions in the oil futures markets. We are concerned, moreover, about public statements made last week by at least one executive of the markets’ dominant exchange, which appear to be inconsistent with the exchange’s private concerns about excessive speculation and must be reviewed as the CFTC seeks to better understand the nature and cause of oil futures trading anomalies.
“Specifically, the Chicago Mercantile Exchange Group (CME) is a dominant U.S. exchange complex that includes NYMEX, the exchange listing the WTI oil futures contract. Terrence Duffy, CEO of CME Group, told the public on CNBC last week that the oil futures markets ‘worked to perfection,’ when WTI futures ‘plummeted roughly $40 per barrel in 30 minutes’ and as low as negative $37 before rallying to positive $10.01 the very next trading day. However, privately, NYMEX executives appear to have been extremely concerned about the size of certain speculative positions. The United States Oil Fund (USO), the largest U.S. ETF comprising a significant portion of open interest across the oil futures markets, for example, disclosed in its securities filings that NYMEX ordered it to limit positions to certain levels for fears about orderly trading. USO stated that ‘the exchange . . . became concerned about positions that USO had acquired in that contract, as well as subsequent months.’
“NYMEX’s decision to order USO to exit and structure their speculative positions to limit market impacts appears to have been appropriate and may have prevented more significant disruptions to the markets. However, the very fact that the exchange ‘became concerned’ demonstrates that large, passive, speculative derivatives traders, like commodity index funds and ETFs, pose significant risks to the commodities markets and must be significantly curtailed to maintain orderly trading that protects the price discovery process and risk management purposes of the markets.
“This is only further evidenced by the sharp drop in spot month oil futures prices earlier yesterday, which apparently was largely a result of an exchange order that USO perform an early, multi-day roll of its massive oil futures positions to later months along the futures curve. This is, again, a risk of such a concentrated speculative position, as we explicitly mentioned in our press release last week, and not the hallmark of a market ‘working to perfection.’
“There is little doubt that excess speculation has revealed itself, once again, to be a destabilizing force in setting commodities prices at the worst possible time. That, in turn, will continue to shake confidence in the derivatives markets and ultimately, have real-world effects on working Americans. That is why the announced investigation by the CFTC must be broadened to include yesterday’s market disruption and a review of the public and private statements and actions by NYMEX and executives of the CME. Furthermore, the CFTC should review the basis for the exchange’s permissive position accountability and limits framework that has long permitted ETFs, like USO, to build such massive and destabilizing positions in oil futures contracts in the first instance. That investigation must be conducted promptly, and the results must be fully disclosed to the public.”
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.com.
