Letter to Timothy Massad, Chairman, Commodity Futures Trading Commission - Limit Speculators Bets on Commodities

Letter

The Commodity Futures Trading Commission (CFTC) rulemaking to establish position limits for futures, options, and swaps must be finalized immediately. Although we were encouraged when the CFTC approved the reproposed rule in November 2013, over two years have passed, and the final rules are long overdue.

We were troubled by the report presented by the CFTC's Energy and Environmental Markets Advisory Committee (EEMAC) on February 25 because its conclusions represented a biased perspective and appeared to be an effort to justify delaying and weakening the final rule. The withdrawal of the report last week confirmed its very serious flaws. Now that the distraction of the report is out of the way, we urge you to move forward and finalize CFTC's rules for speculative position limits, including aggregation position limits.

The position limits provision in the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act is a critical tool for promoting market integrity. In 2009, while working on reforms to the derivatives markets, then CFTC Chairman Gary Gensler testified before a subcommittee of the Senate Banking Committee and stated, "[t]he CFTC should have the ability to impose position limits, including aggregate position limits, on all persons trading OTC derivatives that perform or affect a significant price discovery function with respect to the regulated markets." He added, "position limit authority should clearly empower the CFTC to establish position limits across markets in order to ensure that traders are not able to avoid position limits in a market by moving to a related exchange or market, including international markets." Those two points -- the protection of regulated markets and the understanding that trading is linked across markets and products -- must guide your work to finish the final rule.

As we have seen in other areas of financial regulation, memories are short, and some regulators and members of Congress seem already to have forgotten major crises of the recent past. Over several years, the leaders of energy companies testified before Congress that normal market forces were being distorted by speculation and that oil prices were no longer reflecting supply and demand. In 2008, when crude oil was over $130 a barrel, the President of Shell Oil estimated the price should be between $35 and $65. Then in 2011, when oil was trading at almost $100, the CEO of Exxon Mobil stated the price should be closer the cost of production -- somewhere between $60 to $70.

Those energy market price spikes of just a few years ago touched individual and commercial consumers of commodities from crude oil to gasoline to natural gas. American drivers saw gasoline prices increase 35% from the end of 2010 to mid-2011, and an analysis of gasoline prices in May 2011 indicated an 83-cent-per-gallon premium baked into the average price of $3.96 a gallon.

As the price of oil fluctuated without regard to supply and demand, experts also testified before Congress that the prices of oil futures were linked to traditional financial instruments, such as the U.S. dollar and other currencies, interest rates, and macroeconomic fundamentals. These connections across markets persist today even as the price of oil sits at relatively low levels. In January 2016, oil and stock markets prices exhibited the highest level of correlation than any time since 1990. Current low oil prices and news of oversupply do not mean that the market for oil no longer moves in both directions and that the potential for significant volatility has been eliminated.

The importance of preventing excessive speculation becomes even clearer given the interconnection of the futures and physical energy markets. In addition to the CFTC's work to monitor the futures markets, the Federal Energy Regulatory Commission (FERC) oversees commodity transactions and watches for abusive behavior. In 2014, the then FERC Director of Enforcement testified before a subcommittee of the Senate Banking Committee that manipulation cases must be analyzed with the understanding that the financial and physical markets are interrelated. He described how a manipulator can trade in one market, even at a loss, to achieve a profitable outcome in another market. Because of such linkages and the potential for abuses, we expect the CFTC to employ every tool at its disposal to help protect consumers and the market from manipulation.

Through the Commodity Exchange Act and the Dodd-Frank Act, Congress has directed the CFTC over many decades to establish position limits with the goal of diminishing, eliminating, or preventing excessive speculation and to deter and prevent market manipulation. As the Commodity Exchange Act states, excessive speculation in commodity futures and swaps contracts "is an undue and unnecessary burden on interstate commerce in such commodity [emphasis added]." Excessive speculation in the commodity markets impacts consumers and the vital resources that consumers rely on. Commodity markets must be liquid and efficient, but also subject to effective rules that guard against manipulation, fraud, and abuse.

In its work on the position limits rule over the years, the CTFC has undertaken a thorough process, holding nine public meetings and sifting through tens of thousands of comments. The next step is to conclude work on the final rule, while ensuring it is strong enough to protect Americans consumers from the costs imposed by excessive speculation in important commodities.