December 14, 2010
Thanks for the opportunity to be with you today to talk about something I know has been on your minds for a long time—and mine too—speculative position limits in commodities.
In the last decade, we saw the U.S. futures industry grow five-fold when the rest of the world grew three-fold. In several years we saw over $200 billion come into regulated U.S. futures markets. This new money was primarily from speculators, much of which was held by speculators I call "massive passives," those with a known, fairly price-insensitive trading strategy. Then, in 2008, we saw a huge commodity bubble. Wheat was at $24. Today it is around $8. Crude oil spiked to $147.27 and gas was at $4 per gallon. Then the economy and commodity prices all fell off a cliff. Did the new speculators, including the massive passives, contribute to that price volatility—volatility that had large and small businesses alike all paying higher prices than they should?
If you ask a lot of farmers, they say "yes." The airlines would say for sure "yes." Ask metals investors and they'd say "yes," too.
Researchers at Oxford, MIT, Princeton and Rice all say speculative interests had an impact on prices. Some have said the speculators drove prices. In fairness, some on the other side of the issue say there was no impact whatsoever.
My take on all of this is somewhere in the middle. Speculators didn't drive prices, but they tagged along and helped to push them to levels, high and then low, that we would not have seen without them.
Futures prices should, by and large, be based upon the fundamentals of supply and demand. We saw delinked commodity prices in 2008, and some of us are concerned that we see that taking place this year.
Congress passed the Wall Street Reform and Consumer Protection Act in July. With more than 40 rules to be promulgated by our agency, Congress gave us expedited implementation dates for only nine regulations. For example, speculative position limits for energy and metals are to be implemented within 180 days and for the agricultural complex within 270 days.
As someone who has been calling for these limits, the early implementation deadline is important. Commercial businesses rely upon these markets to hedge their risks. They are having an increasingly difficult time doing so, in part I believe, because of large position concentrations of speculators.
Don't get me wrong, without speculators there isn't a market. We need them. We want them. Too much concentration, however, can be problematic and has the possibility of contorting markets.
Now today, we see even larger speculative positions than in 2008. In total, there is $149 billion of speculative money in these markets, representing an increase since June of 2008 of 47% in the energy complex, 20% in metals and, in the agricultural complex, speculative interests grew by 18% since 2008. All of this makes the implementation of position limits as Congress mandated important.
Some have suggested, however, that we not implement the limits on time because we don't have all the swaps data we need. There is a point there. Congress didn't require that we promulgate the swaps data rule until next July, so how do we come up with a reasonable limit, particularly an aggregate limit, without that data?
Like I said, there’s a point there. But, there’s a problem. Back in the Old West, outlaws like Billy the Kid and Jesse James were romanticized but they clearly broke the law. Speculators aren’t breaking the law. Right now, there are no limits except in some agricultural commodities. But, there soon will be.
Some, however, inside and outside the agency have suggested we simply find a way around the law's implementation deadline. It’s not the outlaws but the in-laws—people in and around government—who are trying to throw us off track. They suggest, for example, that we "implement" the position limit rule, but not make it "effective" until sometime much later. First, we have no such legal authority to do so. Second, that is exactly the type of dancing on the head of a legal pin Washington-speak that folks in the country are tired of—and they should be.
Furthermore, there are ways we can get the job done. For example, we could implement spot month position limits now, and then shortly thereafter move to the all-month limits. We could grandfather existing swaps and start implementation of any proposed limits only as of the date of enactment of our new rules. There is also my current favorite which would be to use our authority to identify the largest longs and shorts listed in our Commitments of Traders reports, issue weekly special calls to each of these traders for their swaps data and require that netted futures, options and economically-equivalent swaps positions are at or below current accountability levels for each commodity. We could also establish other levels. For example, I think the idea of 5000 crude contracts, which Delta Airlines has suggested, and 1500 silver contracts which hundreds of individuals have suggested are levels we should ask questions about as part of our proposal.
So, there are just a few ideas about how to do what Congress mandated. We shouldn't be about getting around the law. We should be about working to do what we were instructed to do. Congress passed the new law. We must implement it in a thoughtful manner. End of story in my book.
Thanks again for the opportunity to be with you. Be careful of the outlaws, but keep an eye on the in-laws as well.
Last Updated: January 18, 2011