October 18, 2011
This will date me. I don’t know how many of you remember the television series Starsky and Hutch. Huggy Bear was the informant, the narc, who provided tips to the detectives. What Huggy Bear said to Starsky and Hutch was, “I’ll lay it out so you can play it out.”
Well, that’s sort of like what Congress does when it passes a law—it lays it out. As regulators, we take the law, and we play it out. Our role is to put meat on the bones of the law and do what Congress told us to do. It is a serious responsibility. Congress mandated these position limits and, finally and belatedly, we are putting them in place. I also want to note that we have been very careful to stay within the four corners of the law as Congress has laid it out. I’m convinced we are on solid legal footing with this rule.
This is an uncommon rule and there is no way it will please everyone. Not all of it pleases me. For example, I still want to ensure that appropriate anticipatory hedging is allowed for certain bona fide hedgers. While I'd have an even tougher rule in many respects if I were the only author, this is nonetheless a very strong, needed and imperative rule to ensure more efficient and effective markets devoid of fraud, abuse and importantly, manipulation. This rule balances the needs of consumers and market participants alike.
Here are the key take-aways: first, the rule sets federally enforced limits, for the first time ever, on the amount of concentration anyone may control in energies and metals. It mirrors similar limits that we’ve had in some agricultural markets for decades. In these other markets, we have seen cases where one trader holds 30, 35 and even 40-plus percent of a market. That can be, and I believe has been at times, manipulative. This rule will put a stop to that.
Second—and one of the most important aspects of this rule for me—the “Wild, Wild West” of exempting traders from any concentration levels whatsoever ends now. Exemptions to limits will from here on out be approved by the Agency, not the exchanges, and under strict guidelines. A bona fide hedge will truly be a bona fide hedge. Traders will have to continually prove their business need to this agency to receive an exemption, and—significantly—if we see that there is a deviation from a bona fide hedging strategy, we can immediately close that down.
Third, this rule will bring all derivatives within the Commission’s jurisdiction—futures and swaps—the formerly dark OTC markets—under the same position limits. This brings needed transparency and accountability to markets that were part and parcel to the economic meltdown in 2008.
While I would have preferred tighter limits for certain contracts—particularly precious metals—simply establishing a position limit regime is critically important. Initially, the limit levels will be identical. The Commission will, however, be required to periodically reassess those levels to ensure more appropriate recalibration as necessary.
So Congress laid this out in July 2010. We’ve been playing it out since then. I’m hopeful that we’ll finally pass the rule today. I thank the Chairman. I thank the staff, and I thank my colleagues. Most importantly, I thank all of those individuals who have taken the time to give us their views about what we should do as we “Play It Out.” Thank you.
Last Updated: October 18, 2011