Commodity Futures Trading Commission (the “CFTC”) Chairman Gary Gensler announced on July 7 several initiatives which are directed at fostering market integrity and improving market transparency in response to Congressional concern about excessive speculation in the futures markets and recent volatility in commodity prices. These include (i) imposing speculative position limits for all commodities of finite supply, in particular energy commodities; (ii) applying speculative position limits across all markets and participants; (iii) reviewing the appropriateness of existing position limit exemptions; and (iv) changes to the CFTC’s weekly Commitments of Traders report to enhance the quality of information available to the public about the futures positions of swap dealers and professional money managers including hedge funds and also to incorporate data for foreign futures contracts linked to domestic futures contracts and for over-the-counter contracts determined to perform a significant price discovery function.
According to Chairman Gensler, the CFTC will conduct a series of hearings during July and August to determine how the agency should use its existing authority to accomplish its mission of ensuring the “fair, open and efficient functioning” of the futures markets and to consider whether the CFTC needs additional authority to fulfill its statutory mandate. The first hearing will focus on whether federal speculative position limits should be set by the CFTC for futures contracts on all commodities of finite supply, in particular energy commodities, as are currently applicable to futures contracts on certain domestic agricultural commodities such as corn, soybeans, and wheat.
This announcement is not surprising in view of other pending CFTC and Congressional initiatives. In this regard, the CFTC is already considering whether to eliminate the bona fide hedge exemption for swap dealers and to replace it with a new limited risk management exemption from speculative position limits. 74 Fed. Reg. 12282 (March 24, 2009). However, these latest initiatives pose significant additional legal and policy issues. For example, imposing speculative position limits on futures contracts in more distant months which tend to be less liquid may impair the ability of those contracts to perform their intended functioning as a price discovery and hedging mechanism.
We will continue to monitor and report on developments in this area.