The Commodity Futures Trading Commission on Thursday released a long-awaited proposal to set position limits in commodity markets.
The agency took heed of fierce objections raised by Wall Street since it first put forward a plan to cap the influx of investor capital that some blamed for driving oil and grain prices to record highs in 2008.
But the core principle remained unchanged: restricting the number of swaps and futures contracts that speculators can hold in energy, metals and agricultural derivative markets, a rule it estimated could affect nearly 80 agricultural traders and dozens of metals and energy players.
The new rules are subject to a 60-day public comment period.
ANALYST AND TRADER COMMENTS:
JOHN HYLAND, CEO, U.S. COMMODITIES FUND:
What do we know this afternoon that we didn't know last night? I'm not sure we know a great deal different. There are still just as many questions as we had before.
The one thing we know for sure is that come January 17, we are still not going to have any rules.
There was a lot more about the swap execution facilities -- there were things there that definitely moved forward -- but as a whole, we didn't get much out of it yet.
I don't think there was the support to go ahead with a vote. The three moderate commissioners are not interested in moving out a formal proposal.
I am not sure that there is any part of it that there is unanimous agreement on. There are commissioners who do not want to put position limits on futures until they know what the size of the swap market is. And there are concerns about putting position limits on while Europe is still at best six months behind us.
TOM LYDON, PRESIDENT OF GLOBAL TRENDS INVESTMENTS IN IRVINE, CALIFORNIA, AND EDITOR OF THE WEBSITE ETFTRENDS.COM:.
We all knew that this was coming and there don't appear to be any surprises.
Lydon expects it will apply to ETFs. If that's the case, many ETFs may soon see limits on not only what futures they can own, but any swaps that some funds have used to maintain exposure. Some ETFs already have position limits. DBA, for example, used to be a four-commodity fund before agricultural commodity limits were put in place.
ETFs will adapt to the changes. They always have and that shouldn't change now. The industry has been aware of this possibility, so it's likely that they've come up with a game plan in case the rules did get implemented.
PETER BEUTEL, PRESIDENT AT CAMERON HANOVER IN STAMFORD, CONNECTICUT:
The overwhelming feeling I have is that these are hands groping in the dark for a solution and I'm not sure it's going to address the problem. There almost needs to be a bona fide speculative category.
Some of these funds are only buying grains and oil to hedge against currency losses and inflation, and that is what currency markets and gold markets are for, or they could buy the underlying stocks, like an Exxon or a Cargill. College foundations, unions and pension funds ought to know they are hurting their own constituents by helping push prices for food and fuel higher.
But it's going to be difficult (for the CFTC) to address the issue with a mathematical formula because there is no 'one size fits all' and you don't want to keep a producer that needs to hedge from doing so.
It really requires a change in attitude, a 'mirror rule', where some of these institutions look at themselves in the mirror.
Banks also need to understand that they may be trying to shear the sheep they ate last night for mutton. They need to take into account that final demand is finite and realize that if consumers are spending more money on gasoline and fuel they aren't going to be buying Kindles or computers or other consumer goods.
TIM EVANS, ENERGY ANALYST, CITI FUTURES PERSPECTIVE, NEW YORK:
The general framework for basing position limits on the size of the market makes sense, but it's difficult to gauge whether the proposed levels are the right ones. And I guess that it's also safe to assume that the levels will be adjusted in the light of actual experience going forward in real time.
JOHN DAMGARD, PRESIDENT OF THE FUTURES INDUSTRY ASSOCIATION:
It's better to get this right than to get it done quickly. Even people on both sides of the aisle have indicated that some of these deadlines aren't realistic, and the next Congress may very well take a good, long look at the implementation issues.
I know (CFTC Chairman Gary) Gensler's got to be stressed, and I know the agency's stressed, but from our standpoint we're trying to get a broad consensus in order to be helpful. What with people not being around over the holidays, it's going to be impossible for us to get our comment letters in.
Some consideration of a little extra time would perhaps serve everybody, on a number of these rulemakings. We would hope that Mr. Gensler would agree with that.
MICHAEL GREENBERGER, LAW PROFESSOR AT THE UNIVERSITY OF MARYLAND AND FORMER HIGH-RANKING CFTC OFFICIAL:
It's encouraging that they got the proposal out because there had been rumors they wouldn't have the votes. The rules themselves mirror the proposal from January but apply to a broader base because of Dodd-Frank obligations on aggregation.
The CFTC is taking a reasonable step here designed to stabilize economic function and keep past failures of commodities markets from occurring again. It's a complex proposal but it's in the ballpark of imposing restraints that industrial companies want.
If there are excessive loopholes, I think those will be addressed as time goes on. The delays to impose new rules are not something that give me too much concern. The voices we have heard sounding off about this are often of traders or banks, but remember that industrial companies who wanted these reforms will keep pushing hard for them.
There are signs everywhere that commodities markets are heating up again, and that speculators have enormous positions adding a speculative premium to prices. I think these rules will eventually restrain the growth of exchange-traded funds and notes and commodity index swaps.
Although the crowding-out provision has been removed, that is something that may still be contested.