What we are looking for in terms of reforms are ways to avoid systemic risk, address excessive speculation in commodity markets, avoid fraud and manipulation, and remove or greatly reduce index speculation in commodities.
Position Limits
The Dodd-Frank financial reform bill instructed the CFTC to appropriately enforce regulations that would stabilize commodity futures markets. In October of 2011, the CFTC passed position limits (limits on how much of a commodity that any one speculator can own at one time)—a significant step forward given a hostile and inflexible Wall Street—but which are still woefully inadequate. The limits passed by the CFTC, which still allow a trader to hold up to but not more than 25% of contracts in a given spot market, are too cautious to have much real impact. To have a real impact position limits need to limit the percentage of the market speculators control as a class, rather than as individual traders. The current limits of 25 % would allow four speculators to dominate commodity markets that were created for commodity producers and consumers to protect themselves against risk. Some of our organizations have suggested 5% as a better limit.
CFTC funding
With the passage of Dodd-Frank the CFTC’s purview and responsibility increased dramatically, but under pressure from Republican lawmakers the CFTC’s requested budget for FY 2012 was cut by one third, from $308 million to $205 million, only $3 million more than the 2011 budget. Inadequate funding has already contributed to delays in implementing rules for the previously unregulated over-the-counter derivatives market, and it will take significant resources and staff to gather the information needed to regulate these previous “shadow markets” effectively. Without adequate funding, the CFTC will be unable to implement and regulate the risky financial speculation that led to the 2008 food and energy bubbles, and, more recently, the MF Global scandal.
We support Representative Rosa DeLauro (D-CT) bill to provide independent funding for the agency. While other regulatory agencies fund themselves through usage fees, the CFTC is not allowed to do so. Their bills would allow the CFTC to charge up to a penny for every $30,000 in commodities transactions – enough to raise necessary funding without interfering with market functioning.
Extraterritoriality – coordination between U.S. and International regulations
Commodity market regulations must be similar between countries to avoid arbitrage opportunities. The CFTC should work closely with other governments to assure similar rules everywhere.
Ending over-the-counter swaps; moving these onto exchanges
All commodity transactions should pass through an exchange or clearinghouse to assure transparency, adequate margin (collateral) and avoid market meltdowns.
Volker Rule/Stopping large banks from speculating in food and energy commodities
Banks that receive FDIC insurance should be banned from speculating in food and energy commodities.
Specific legislation relevant to commodity speculation
Federal Reserve should ban Wall Street Banks from trading in physical commodities, including physical infrastructure of these markets
The commodities investment strategy that Wall Street has developed over the past ten years is not restricted to commodity futures markets. The strategy depends on banks being active in the buying, storing and selling of physical commodities, including the infrastructures of these markets. That’s why large banks like JP Morgan Chase, Morgan Stanley, and Goldman Sachs own warehouses, storage tanks, and other hard assets to store metals, oil and grains. In addition to squeezing profits out of their physical commodity trading, this access to and control over physical commodity markets gives banks non-public information that helps them optimize their futures trading strategies—what would amount to the illegal practice of insider trading in capital markets.
This practice violates the integrity of these markets and allows Wall Street banks the ability to manipulate these markets to drive prices higher or lower in order to maximize their own trading profits.
Remove institutional investors from commodity markets/Ban “Index Speculators”
The dominant driver of excessive speculation in commodity markets has been the acceptance of commodities as an “asset class” and thus a legitimate “investment” for institutional investors. It is now a standard practice for endowments and pension funds to allocate a portion of their portfolios in commodities. While each fund invests only a small amount, cumulatively they have placed hundreds of billions into rather small commodity markets.
Despite the purported benefits of commodity investments as a hedge against inflation and securities—these benefits are increasingly being called into question—they are not legitimate investments, just pure speculative play. And we cannot afford this type of speculative play in such fundamental physical markets, which provide the basic building blocks—food and energy—for our world.
Currently proposed position limits will only reduce the ability for a speculator to manipulate prices, but does not address the problem of excessive speculation. The CFTC should also establish limits not just on individual speculators, but on speculators as a class. For many decades, speculators comprised 10-30 percent of commodity markets and these functioned well. After deregulation, speculators now comprise 60-80 percent, or even more, of different commodity markets and have negatively affected their functioning. The CFTC should explore ways to limit speculation to 30 percent of the market and consider banning passive investment tools that pension funds and other large investors use to speculate in commodities.