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CFTC proposes position limits

by Alexandra Harris
Jan 14, 2010

The Commodity Futures Trading Commission proposed a rule Thursday that would create position limits on futures and options contracts in specific energy markets. The move is intended to curb excessive speculation.

“A transparent and consistent playing field for all physical commodity futures should be the foundation of our regulations,” CFTC Chairman Gary Gensler said.“Thus, position limits should be applied consistently to all markets and trading platforms and exemptions to them also should be consistent and well-defined.”

A position limit is the amount of contracts a market participant can trade at one time.

The CFTC’s proposition is based upon its experience setting position limits in the agriculture markets, such as grains. It includes the establishment of energy limits responsive to the size of the market and an annual resetting of those limits.

Hedgers, speculators and the public will have 90 days to respond to the proposed rule.

The Washinton, D.C.-based commission’s proposed rules would apply to futures and options for four energy products: natural gas, crude oil, heating oil and gasoline.

CME Group Inc., the world’s largest and most diverse marketplace for futures and options said in a statement it “supports equitable application of aggregate position limits across CFTC-regulated designated contract markets and exempt commercial markets, CFTC-recognized foreign boards of trade, and OTC energy market participants.”

Energy markets have been under intense scrutiny for wild price swings, especially in July 2008 when crude oil prices soared to more than $147 a barrel.

Despite guarantees that the proposed rule would be flexible with position limits, there are those who believe that position limits will hinder more than help curb excessive speculation.

“[Position limits] can impede the ability of markets to perform,” said Craig Pirrong, a professor and director of Energy Markets for the Global Energy Management Institute at the University of Houston’s Bauer College of Business.

“Speculation would be excessive when it distorted prices in some way, but there is little if any evidence that it has, and even less to show that a particular position limit would be ‘just right’ a la Goldilocks in eliminating distortion without unduly burdening the ability of the markets to perform their risk transfer and price discovery functions,” Pirrong said. 

In his statement, CFTC Commissioner Michael Dunn said in order for the CFTC to rein in excessive speculation the commission needs to have the authority to regulate the over-the-counter derivatives market.  He warned that futures market participants will flock to the opaque market for limitless trading positions.

“I am concerned that the adoption of this proposed regulation, without the corresponding regulatory authority and similar undertakings by other nations’ regulators, may result in less transparency in the futures markets if those presently trading on exchange move to OTC and other opaque markets to circumvent these proposed position limits,” Dunn said.