The Commodity Futures Trading Commission's Position Limits Literature Review

Floor Speech

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Mr. CONAWAY. Mr. Speaker, I rise today to submit into the Congressional Record an important document related to the ongoing work to finalize a position limits rulemaking at the U.S. Commodity Futures Trading Commission (CFTC). The document, an unpublished draft literature review prepared by the CFTC's Office of the Chief Economist (OCE), is titled ``Analysis of the Various Economic Studies Cited in Comment Letters in the Position Limits Rulemaking.''

The House Committee on Agriculture (Committee) conducted oversight of research practices at OCE based on a report published by the CFTC's Office of Inspector General (CFTC OIG). As part of this oversight initiative, the Committee requested, obtained, and reviewed documents and information related to the CFTC OIG's report. As a result of its oversight efforts, the Committee obtained a literature review on position limits that was never finalized or circulated to the full commission.

Having reviewed the draft literature review prepared by the CFTC's own economists, I believe it presents a comprehensive overview of the current state of economic research on excessive speculation and an objective analysis of the potential utility of position limits. The document discusses in detail the ongoing and vigorous debate among economists about what constitutes excessive speculation and what, if any, impact it might have on prices and volatility in the commodity futures markets. In addition, the document summarizes and provides a brief analysis of many of the most important academic studies cited by commenters and utilized by CFTC staff in drafting the proposed rule.

On June 14, 2016, I requested that CFTC Chairman Massad make this document public because I believe the insights and information contained in this report will benefit the general public's understanding of and ability to comment on the proposed rule. On June 17, 2016, Chairman Massad declined on the grounds that (i) the document was a summary of studies submitted during the comment period and, (ii) it was never intended to be public.

The document, however, is much more than a summary of studies submitted during the comment period; it also is a wide-ranging examination of how to define excessive speculation, how to measure it, and how it may impact markets.

For reference, I have included the entirety of the conclusion section here:

Economists debate whether ``excessive speculation,'' meaning a link between large speculation positions and unwarranted price changes or price volatility, exists in these regulated markets, and if so to what degree. The question presented is a surprisingly difficult one to answer. All the empirical studies on this question have drawbacks, and none is conclusive. This inconclusivity is not surprising. It is inevitable, given the economic uncertainties that inhere in the data and the complexity of the question. There are many theoretical and empirical assumptions, and often multiple leaps of faith, that are needed to transform and interpret raw market data into meaningful and persuasive results. There is no decisive statistical method for establishing evidence for or against position limits in the commodity.

Those that use Granger causality methodology tend to conclude that there is no evidence of excessive speculation or its consequences on price returns and price volatility, and many industry commenters opposed to position limits used this methodology. But that methodology is peculiarly sensitive to model design choices, and above we have analyzed designed modelling decisions that may have affected the ultimate conclusions of these studies. Moreover, there are countervailing Granger studies showing a link between large speculative positions and price volatility. And studies such as Cheng, Kirilenko, and Xiong, Convective Risk Flows in Commodity Futures Markets (working paper 2012), indicate that some Granger studies may mask the impact of excessive speculation in times of financial stress.

Those that use comovement and cointegration methods tend to conclude there is evidence of deleterious effects of ``excessive speculation.'' Yet comovement just tests for correlation, not causation, and a correlation between large financial trading in the commodity markets and price changes and volatility could be driven by a common causal agent such as macroeconomic factors.

Those studies that use models of fundamental supply and demand reach a whole host of divergent opinions on the subject, each opinion only as strong as the many modelling choices.

In this way, the economic literature is inconclusive. Even clearly written, well-respected papers often contain nuances. It is telling that Hamilton, Causes and Consequences of the Oil Shock of 2007-2008, Brookings Paper on Economic Activity (2009), has been cited by both proponents and opponents of position limits.

What can be said with certainty is summarized in the Commission's NPRM: that large speculative positions and outsized market power pose risks to a well-functioning marketplace. These risks may very well differ depending on commodity market structure, but can in some markets cause real-world price impacts through a higher risk premium as a component of total price. There are also economic studies indicating some correlation between increased speculation and price volatility in times of financial stress, but this correlation does not imply causation. There are studies indicating that in certain markets, such as crude oil, or certain time periods, such as times of financial stress, the impact of excessive speculation may be greater. These findings are all exceptions to the general rule that increased participation of speculators should generally be expected to lead to better price discovery and less unwarranted price volatility.

Comment letters on either side declaring that the matter is settled in their favor among respectable economists are simply incorrect. The best economists on both sides of the debate concede that there is a legitimate debate afoot. This analysis paper documents that the academic debate amongst economists about the magnitude, prevalence, and pervasiveness of the risk of outsized market positions has reputable and legitimate standard-bearers for opposing positions.

While I have my own opinion about the utility of a position limits regime, my push to make this document public has nothing to do with a disagreement over the outcome of this specific policy debate. I believe that to make informed decisions it is important that lawmakers, policy makers, and the public have access to the best available information. This literature review, much like other whitepapers, studies, and analyses published by OCE, provides such information in a manner that is clear and understandable.

It is my hope that this information will be used to continue to improve our understanding of derivatives markets and the regulatory rules we enact to govern them. For this reason, I am making this report public prior to the July 13 closing date of the comment period for the CFTC's position limits rulemaking.

The cover memo, full literature review, and all of the correspondence between the CFTC and the Committee regarding this document are available on the Committee's website at http://agriculture.house.gov/ uploadedfiles/position_limits_analysis.pdf.

I would like to also submit the following letters: House of Representatives, Committee on Agriculture, Washington, DC, June 14, 2016. Hon. Timothy G. Massad, Chairman, U.S. Commodity Futures Trading Commission, Washington, DC.

Dear Chairman Massad: The House Committee on Agriculture is conducting oversight of research practices at the U.S. Commodity Futures Trading Commission's (CFTC) Office of the Chief Economist (OCE) based on a report published by the agency's Office of Inspector General (OIG). As part of this oversight initiative, the Committee requested documents and information related to the OIG's report and discovered the existence of a draft literature review on position limits that was never finalized or circulated to the full commission. I write to request that you direct CFTC staff to finalize and make public this report for use in the Commission's ongoing work on the position limits rulemaking.

On February 18, 2016, the OIG published a report following up on a 2014 review of OCE research programs. After interviewing OCE economists, the OIG decided to expand its review of OCE to include research topic selection due to allegations that the Chief Economist has refused to permit research on topics relevant to the agency's mission, including position limits, and economists have begun limiting their research proposals to non-controversial topics based on a perception that the Chief Economist will not permit research that may conflict with the official positions of the CFTC.

The OIG's findings were deeply troubling, and the Committee requested documents and communications related to the OIG's investigation for additional oversight. Among the documents the Committee received was a draft literature review summarizing and analyzing economic studies cited in comment letters on the position limits rulemaking that was sent to your office on June 30, 2015. The version we have seen is labeled draft number 20, but does not appear to have been submitted for final review within OCE after it was shared with your office.

I have reviewed the document, and I believe it presents a comprehensive overview of the current state of economic research on excessive speculation and an objective analysis of the potential utility of position limits. The report discusses in detail the ongoing and vigorous debate among economists about what constitutes excessive speculation and what, if any, impact it might have on prices and volatility in the commodity futures markets. The authors of this report raise important questions about whether position limits are an effective tool for limiting the effects of excessive speculation. They also highlight the market stabilizing effects of speculative activity and suggest that suppressing such activity may carry unintended risks, such as disruptions to liquidity and price discovery.

I appreciate your work on the recent supplement to the proposed position limits rulemaking. Your proposal takes steps towards addressing several of the concerns that have been raised before both this Committee and your agency. As stakeholders and market participants review the new language and file their comments, this report, which puts the best economic literature in context, may help clarify what can and cannot be accomplished in the final rule.

Position limits are a complex regulatory tool and their impact on markets is uncertain. Given the sweeping nature of this rulemaking and the intense debate it has provoked since its inception, this even-handed report prepared by the Commission's own economists should serve as an invaluable resource for the Commission and the public. Therefore, the Committee requests that you finalize this report before continuing with the next steps in the rulemaking process.

The Committee on Agriculture is the principal authorizing committee for all matters related to agriculture and commodity exchanges in the House of Representatives and ``shall have general oversight responsibilities'' as set forth in House Rule X.

Please respond to this request in writing on or before June 24, 2016. Your response should specify the date by which the literature review will be finalized and made public. If you have any questions about this request, please contact Emily Wong or Paul Balzano of the majority staff. Sincerely, K. Michael Conaway, Chairman. ____ U.S. Commodity Futures Trading Commission, Washington, DC, June 17, 2016. Hon. K. Michael Conaway, Chairman, Committee on Agriculture, House of Representatives, Washington, DC.

Dear Mr. Chairman: I am writing in response to your letter of June 14, 2016 regarding the U.S. Commodity Futures Trading Commission's (``CFTC'' or ``Commission'') rulemaking concerning position limits on derivatives.

As you note in your letter, the position limits rulemaking (``proposal'' or ``rule'') is a very important one. As with all rulemakings, the Commission is following a transparent and thorough process. No current Commissioner was in office when the initial position limits rule was proposed, and therefore we have taken the time to listen to market participants and consider the proposal very carefully. The Commission has made extensive efforts to ensure the public has ample opportunity to comment on the proposal and has extended the public comment period multiple times.

As part of any rulemaking process, all comment letters are made publicly available on the Commission's website. Commission staff routinely summarize these comments, which can be helpful to Commissioners and staff because comments are often voluminous in detail. In the case of this rule, some of the comment letters referenced studies regarding position limits or related matters conducted by third parties, including academic researchers, economists and trade organizations. The draft document you mention in your letter is a summary of studies submitted during the rulemaking comment periods. A majority of these studies were submitted prior to the publication of the proposed rule in December 2013 and were summarized and listed in that 2013 proposal.

While staff summaries of public comments (or material referred to in the comments) are internal Commission documents and not themselves published as part of the final rule, I can assure you that, consistent with normal practice, any final rule will summarize the comments we receive, including those comments that refer to third party studies, just as was done for the proposed rule published in December 2013.

I appreciate the complexity of the issues surrounding the position limits rule, and the importance of thoroughly and fully considering public comments. I have made it a priority to finalize a position limits rule this calendar year and believe we are making good progress toward that goal.

If you have further questions, please contact me or Cory Claussen. Sincerely, Timothy G. Massad, Chairman.

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