Better Markets applauded today the Commodity Futures Trading Commission (CFTC) for taking the first step in curbing excessive commodity speculation, but added that much more needs to be done so American farmers and families will find relief from the grocery aisle to the gas pump.
Against relentless Wall Street lobbying, the CFTC adopted a rule that finally establishes a ceiling on speculation across the physical commodities markets. Congress gave a specific mandate in Dodd-Frank to “diminish, eliminate, or prevent excessive speculation.”
“The facts are clear: excess speculation is causing market distortions, disrupting price discovery, increasing the costs for commercial hedgers and pushing up food and fuel prices,” said Dennis Kelleher, president and chief executive officer of Better Markets. “That is what the recent financial reform law ordered the CFTC to stop.”
“This rule begins the process of doing that, but much more needs to be done. Lower market-wide position limits are essential to restore these markets to their intended purpose of allowing commercial producers and purchasers to hedge. Speculators’ casino mentality brings them big profits, but hurts everyone else from the kitchen table to the gas pump. The CFTC must take much stronger actions as soon as possible to eliminate this, including a prohibition on commodity index funds which are causing many of the problems,” Mr. Kelleher said.
The CFTC focused this rule at the specific speculator level, limiting a given entity’s position to roughly 2.5 percent of each market. Though it’s not clear yet what impact these limits will have, the rule will establish better transparency in commodities markets, as well as providing a beachhead for more reform.
The rule will directly provide the CFTC with the ability to receive and monitor additional market data that will allow regulators to better understand the opaque over-the-counter market. Additionally, the commission helped match speculative limits applied to cash-settled contracts in line with those for physical-delivery contracts.
But much more needs to be done to fulfill the congressional mandate, specifically eliminating so-called commodity index funds peddled by Wall Street.
Better Markets last week published new research showing these funds since 2005 have triggered an upward price curve in the futures markets when they trade out of an expiring month contract and into a new future month (referred to as the “roll”). This has resulted in rising prices and costs, as well as a boom-and-bust cycle by changing the incentives of producers and consumers of commodities.
The data and analysis shows commodity index funds’ speculative trading is causing market distortions, disrupting price discovery, increasing the costs for commercial hedgers and pushing prices needlessly higher.
Better Markets urges the commission to consider this new research and enact specific restrictions on index funds as a “group or class” of traders in a new rule. The commission also should be able to adjust the limits more frequently, as the rule states that many key limits will only be reset on a two-year basis. Finally, regulators should be able to adjust individual limits based on overall speculation in the market.
