WASHINGTON (CN) - At its fifth open meeting to consider regulations mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, a divided Commodity Futures Trading Commission adopted two new sets of regulations to limit speculation on futures trading and increase the agency's oversight on derivatives clearing organizations.
In both 3-2 decisions, the majority argued that they were following the mandates of Dodd-Frank, while the dissenters, Commissioners Scott O'Mallia and Jill E. Sommers, said that the agency was being over zealous and had adopted rules that would have a negative economic impact on the commodities futures market.
Dodd-Frank requires that the agency adopt position limits to prevent excessive speculation and manipulation by making it harder for any one trader or entity to corner markets. The rule limits the speculative positions market players can take for 28 physical commodity futures contracts ranging from agricultural products to fossil fuels and precious metals.
The limits are divided in to two types, the spot-month limit and the non-spot month limit. The first applies to positions taken in a specific futures contracts and is applied separately to contracts which require physical delivery and those that are cash settled. The position limit is set at 25 percent of the deliverable supply of the future contract being traded.
The agency placed a separate limit on the cash-settled NYMEX Henry Hub Natural Gas contracts which is equal to five-times the limit on the NYMEX Henry Hub Natural Gas physical-delivery contract.
The non-spot month position limits apply to positions a trader may have in all contract months combined or in a single month and are set at 10 percent of the open interest in the first 25,000 contracts and 2.5 percent after the initial threshold has been sold.
Both dissenters on the position limits rule, Commissioners Scott O'Malia and Jill E. Sommers said that the rules would limit the ability of institutional investors to engage in effective hedging strategies which usually include a futures component.
In an opening statement titled "Does the Commission Always Know Best," Commissioner O'Malia expressed his concern that the cost of compliance will drive investors out of the markets. "If the commercial entities who use futures and swaps markets for hedging commercial risk feel like we are waging war on them, I don't blame them. According to the Commission's cost-benefit analysis, legitimate hedgers will pay close to 1/3 of the total annual $100 million cost of this proposal for reporting alone."
O'Malia also said that while he agreed that Dodd-Frank mandated that the CFTC must create position limits to curb excessive speculation he said the agency should have presented empirical evidence showing excessive speculation for each category of commodities.
"The Commission voted on this multifaceted rule package without the benefit of performing an objective factual analysis based on the necessary data to determine whether these particular limits and limit formulas will effectively prevent or deter excessive speculation."
In her opening statement, Commissioner Sommers said that the agency was "setting itself up for an enormous failure" by succumbing to a campaign for position limits which was based on the false assumption that the limits would reduce the prices of commodities.
"This latest campaign exemplifies my ongoing concern and may result in damaging the credibility of this agency. I do not believe position limits will control prices or market volatility, and I fear that this Commission will be blamed when this final rule does not lower food and energy costs."