Watch out speculators! The CFTC wants to clip your wings

Posted Jul 7th 2009 1:40PM by Connie Madon
Filed under: International Markets, Market Matters, Commodities, Oil, Agriculture, Financial Crisis

Who is going to crackdown on the speculators? The agency responsible for supervision of the commodities markets is the Commodity Futures Trading Commission (CFTC.)

If you remember, last year the spike in oil prices to $147.00 per barrel was done through speculation in oil futures contracts. A futures contract gives the trader to right to bet on the prices of various commodities, on whether they will go up or down. Contracts usually last for three months, at which time the longs and the shorts are paired down to zero, leaving the speculators out of the final trading. However, the speculators simply move their positions to another forward contract, keeping their positions in place.

The rub has been on the concept of "position limits." In most commodities the CFTC imposes a limit on the number of contracts that a single person or firm can hold. The real bone of contention is that the CFTC does not impose limits on oil or oil products contracts. That has been left up to the various exchanges.

Then there are the derivatives markets, which were the main culprit in the recent financial meltdown. The US Treasury Secretary, Timothy Geithner, wants a crackdown on the speculators in derivatives trading. He wants to impose trading limits on derivative contracts such as Credit Default Swaps, (CDSs) and other derivatives.

The CFTC is now seeking comments on applying trading limits on all commodities, including index funds and managers of exchange traded funds and the procedure for imposing limits on each market.

The CFTC will also change the Commitment of Traders report which shows a breakdown of open contracts to include the activities of swaps dealers and hedge funds.

Largely this move is an attempt to head off criticism of the rampant speculation that brought about the near collapse of our financial system.

A much better way to solve this problem would be to do away with derivatives trading completely and make the financial institutions return to sound fiscal procedures. There is no need to let the banks speculate in the derivatives markets. Even placing limits on trading positions is only a band aid, keeping the door open for another financial crisis.

Do you believe that derivatives trading should be abolished?

Tags: CFTC, derivative regulation, DerivativeRegulation, derivatives, inthenews, oil speculators, OilSpeculators, Tim Geithner, TimGeithner