Naughty or Nice?

We were hoping for a quiet holiday season, until we read this piece in The Observer (the Guardian’s sister publication, which is believed to be the oldest Sunday newspaper in the world). It’s about the debate over commodity prices, speculation and position limits (which limit positions that investors can hold in certain commodities). Here’s what it asserts: 

“The City is at it again… This time it’s about rules to check rampant speculation in commodity markets. Rules that could cut prices for food and raw materials in some of the poorest countries in the world… Financial speculation is widely acknowledged as contributing to a global food price crisis, as well as soaring commodity prices more generally… Position limits are essential to prevent the emergence of dominant traders who can distort the market; and to slow price increases.”

We scoured the article for evidence to support this thinking.  But like a disappointed child on Christmas Day, we found no such gifts. 

There is, though, plenty to support the opposite view. As then-US CFTC Commissioner Michael Dunn stated earlier this year, “To date, CFTC staff has been unable to find any reliable economic analysis to support either the contention that excessive speculation is affecting the markets we regulate or that position limits will prevent excessive speculation.”
Consider also the research that exists – by IOSCO, the IMF and the G20 Study Group on Commodities. They all point to market fundamentals and not speculation as the primary driver of commodity price increases. Similar conclusions were reached by the CFTC Inter-Agency Task Force on Commodity Markets, the European Commission and the US Government Accountability Office.

But wait, there’s another assertion to unwrap. 

The article states that the US is moving toward tighter regulation of commodity trading and uses this to buttress its arguments against speculation and for position limits. The truth is actually a little different. 

In its vote to approve position limits, the majority of the five Commissioners actually opposed the substance of the rule. Two – Commissioners O’Malia and Sommers – cast dissenting votes. And although he voted for them, Commissioner Dunn publicly stated: “Position limits, at best a cure for a disease that does not exist… may harm the very markets we’re trying to protect.” 

Despite all of this, we know that there will always be those who may prefer fiction and not fact. Especially now, during the Christmas season, when everyone wants to believe that there really is a Santa Claus. So in that spirit we wish all of our readers a very happy holiday season and look forward to writing on new topics next year.

Note: Last month, ISDA and SIFMA filed lawsuits challenging the CFTC’s Rule on Position Limits. Information regarding that action can be accessed here.