When a poker player has a weak hand, he needs to play a
blinder to win. And that’s what CME Group has
tried to do with its position paper on Excess Speculation and
Position Limits in Energy Derivatives.
The exchange has wheeled out all the arguments it can and
cranked up the eloquence to fight its case: that in energy
markets, the more speculation there is, the better for all
But CME knows it is late in the game. An awful lot of words
have been expended trying to persuade Gary Gensler, CFTC
chairman, of that view, and he doesn’t look
So it is time for Plan B. Position limits are coming for
energy derivatives, so let’s make them as painless
as possible. And while we’re at it,
let’s make sure those shady "dark pools" in the
OTC market and half-regulated exempt commercial markets feel
the pain too.
Hang on, are we going to actually recommend position
Well, yes, we have to or we can’t recommend
that they’re set the way we want – that
is, by us and very gently. (Oh, and the good guys like swap
dealers and index funds will get hedge exemptions.)
But if we recommend position limits, doesn’t
that mean we’re saying this stinker is a good
I’ve thought of that. We’ll
recommend it, not with an argument that it will actually change
anything, but "to increase confidence in the futures
Well, that’s a good thing, of course.
Naturally. Our scheme of position limits will reassure
everyone that speculation is being thoroughly controlled, but
it won’t have the detrimental effect of driving
valuable index funds and other vital liquidity providers out of
the market. Anyway, they’d have nowhere to go
because we’ll get the CFTC to put position limits
on all those shady markets too…
Of course this fantasised conversation is entirely unfair
and wide of the mark – but isn’t it a bit
odd to recommend a policy you have previously downplayed the
need for, and to recommend it without saying it will do any
CME is not the only player still in the game. Across the
table is ICE, for whom Gary Gensler is not necessarily the
worst threat. What if CME got its way and all the exchanges
were allowed to set position limits, proportionate to the size
of their markets?
Any firm wanting to hold a big position in the most liquid
oil contract would have to do it at Nymex, because it would
have the higher position limits. The limits could bind the
exchanges forever to their present day market shares. You can
see why it took only a day for ICE to come out calling
CME’s proposal anti-competitive.
But there’s one thing neither exchange
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