CME Group has intervened in the debate about controlling
energy speculation by publishing a detailed paper on the merits
of imposing position limits. The 14 page document is at once a
tactical retreat and a vigorous defence of CME’s
view that speculation is entirely beneficial to markets.
A large part of the paper is devoted to arguing that there
is no evidence "excessive speculation" led to the boom and bust
in commodity prices in recent years.
Since crude oil soared to $147 a barrel in 2008, political
momentum has been building in the US for action to control the
burgeoning "commodity investment" industry. CME and many other
futures market organisations believe this is an ill-considered
kneejerk reaction that would only drain liquidity from
But CME appears to have given up hope that it can win this
argument completely and prevent politicians and regulators from
clamping down in some way on speculators. The exchange has
therefore put forward its own suggestion for how to impose
energy position limits, hoping that this will be done in the
way that it believes will least harm the markets.
CME wants each exchange itself to set position limits for
trading on its own market, and to administer its own programme
of hedge exemptions, allowing bona fide hedgers to exceed
normal limits. This is basically the status quo, which the CME
calls an "effective framework".
The Commodity Futures Trading Commission, it argues, should
for the first time set aggregate cross-market position limits,
so that no firm could hold too big a position, once all its
interests in different trading venues were added together.
At the same time, CME argues, the less-regulated markets in
the US and preferably abroad should be brought as much as
possible into line with the designated contract markets or DCMs
– the fully regulated exchanges like CME and its
subsidiary the New York Mercantile Exchange.
The status of exempt commercial market (ECM) – a
kind of unregulated exchange permitted in the US –
should be abolished, CME says. Such exchanges should have to
become DCMs or derivatives transaction execution facilities
(DTEFs), an intermediate kind of market.
And the rules for DTEFs should be strengthened to oblige
them to comply with Core Principle 5 of the Commodity Exchange
Act, which says: "To reduce the potential threat of market
manipulation or congestion, especially during trading in the
delivery month, the board of trade shall adopt position
limitations or position accountability for speculators, where
necessary and appropriate."
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