Slapping position limits on traders in OTC energy markets would be punishing the innocent, argues Michael Cosgrove of GFI Group. Markets do need to operate under rules, but rules must be based on understanding.
Slapping position limits on traders in OTC energy
markets would be punishing the innocent, argues
Michael Cosgrove of GFI Group. Markets do need to
operate under rules, but rules must be based on understanding,
he contends – in an article responding to the
editorial published in the last issue of FOW.
I read the editorial in FOW’s July/August number
with some interest and was struck by two things. First, the
thoughtfulness of the consideration and second, the anonymity
of the apparent culprit: "markets".
As I have earned my living in the energy markets for the
past 28 years it seemed to me that this message was targeted to
me as much as anyone and so I would like to join this
I am a wealthy American, inasmuch as my family and I do not
want for the basic necessities of life. Having said this, there
is no disputing that price rises in the past few years in many
basic commodities have created hardship for many people
A day does not go by when I do not think that I could have
been born elsewhere under very different conditions –
a Tutsi in Rwanda, a black man in apartheid South Africa or the
son of a white farmer in Zimbabwe. So while I have not changed
my diet in response to rising food prices I believe that many
For any decent, ethical person the question is not whether
action should be taken but what kind of action should be
Whatever action we take must be based upon a firm
understanding of the reality of the condition we seek to
confront. We need to understand what is happening and (as best
we can) why it is happening.
I have read numerous statements in the press by our elected
officials that are either statements of ignorance or a
conscious act to inflame voters in an attempt to enhance their
political status as saviours of the people. These self-serving
statements are not helpful and only serve to distract us from a
meaningful consideration of the issues.
Judge, jury and hangman
It is true that in regard to the Commodity Futures Trading
Commission the gloves have come off, perhaps even more than the
author of the editorial realised.
While the CFTC is holding hearings to gather information
upon which to consider implementing new or more restricted
position limits, it has already sent messages to Nymex/CME that
resulted in Nymex/CME deciding that it had no other practical
course of action but to implement position limits on
cash-settled natural gas swaps.
Upon receiving this instruction, on June 5 and June 12
Nymex/CME issued two market regulation advisories to members,
implementing strict new limits on these swaps.
Nymex/CME’s actions in turn will force ICE to
adopt the same limits.
To draw a simple analogy, it is as if the CFTC, as judge,
has publicly proclaimed that the accused will be given a fair
hearing in the coming months, without bothering to tell us that
it hanged the accused last month.
I guess that I do not really blame the CFTC for this. They
are just under terrible pressure to be seen as the new sheriff
in town – cleaning up the bad guys – whether
the bad guys exist or not.
At this point I have to make a disclosure. I run the
commodities business for GFI Group, a global interdealer
broker. While we do not do any business with index funds and I
am unable to detect any financial benefit to my company by the
activity of any index fund, I do earn more money when the
businesses that I run earn more money – and that tends
to happen when market volumes are higher. So I have a biased
desire to see higher volumes of trading in the wholesale
markets that we serve.
Notwithstanding this, I think I can be pretty fair in
identifying some issues that we need to understand before we
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