Milling & Baking News - December 28, 2010 - 29

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House panel reviews progress
in setting position limits
WASHINGTON - The Subcommittee on General Farm Commodities of
the House Committee on Agriculture
heard testimony on Dec. 15 on progress toward implementing position
limits on futures, options on futures
and swaps as mandated by the Wall
Street Reform and Consumer Protection Act (the Dodd-Frank Act). The act
set Jan. 17, 2011, as the deadline for the
Commodity Futures Trading Commission to announce its proposed rule for
position limits. The hearing was called
amid concerns the commission may
not be able to meet the deadline.
"Today's hearing was important
to make sure that key position limits
outlined in the Dodd-Frank Act are
implemented during the rulemaking
process," said Representative Leonard Boswell
of Iowa, chairman of the
committee.
"Position
limits are essential to the
functioning of effective
and efficient markets
and necessary to protect Boswell
market end users who
rely on the marketplace to hedge their
risks in operating their businesses."
Representative Jerry Moran of Kansas, ranking minority member on the
subcommittee, said, "I hope the hearing allowed C.F.T.C. to learn that concern exists about whether sufficient
information is available
to allow the commission
to proceed with setting
position limits. It is important the commission
have adequate information before making any
further decisions, and Moran
today's hearing was an
important step in letting members of
Congress and members of the public
voice their opinions as this process
moves forward."
Gary Gensler, chairman of the
C.F.T.C., acknowledged the agency
faced a formidable task in gathering
necessary information from the huge,
opaque and previously unregulated
swaps market, especially in view of its
current limited resources.
"C.F.T.C. staff is considering options to phase in implementation of
the position limits rules as the agency
obtains the necessary data regarding
the swaps market," Mr. Gensler said.
"Staff is examining whether certain
elements of the rule for which the
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commission has substantial data can
proceed on a more expedited timeframe, while leaving those aspects of
the rule that depend upon additional
data for later implementation."
Commissioner Bart Chilton said
meeting the early implementation
deadline mandated by Dodd-Frank
was important, noting the act said
speculative position limits for energy
and metals are to be implemented
within 180 days of enactment (July 21,
2010) and for the agricultural complex
in 270 days.
"Large and small agribusinesses
and other commercial businesses rely
upon these markets to hedge their
risks," he said. "They are having an
increasingly difficult time doing so,
in part, I believe, because of large concentrations of speculators."
Mr. Chilton pointed out there are
larger speculative positions in commodity markets today than in 2008,
when prices surged to record levels.
He said while speculators didn't drive
prices in 2008, they "tagged along"
and helped push prices to levels, high
and then low, that otherwise would
not have been seen. The expansion in
speculative money in the commodities
markets since 2008 made the "implementation of position limits as mandated by Congress important."
Speaking on behalf of the National
Grain and Feed Association, Robert
Jones, senior vice-president, ABN
AMRO Clearing Chicago L.L.C., Chicago, said he believed current federal
position limits in place for agricultural commodities are at appropriate
levels. Mr. Jones said in the past, the
N.G.F.A. generally supported occasional requests by futures exchanges
to increase speculative position limits,
but dramatically expanded participation in agricultural futures by nontraditional participants like index funds
and pension funds played a role in igniting the 2008 price spike that roiled
the grain industry from producers to
processors and end users.
"Today, conditions exist that could
lead to a repeat of those conditions,"
Mr. Jones cautioned.
"The N.G.F.A. believes it would be
imprudent for the C.F.T.C. to change
current speculative position limits for
the enumerated agricultural commodities," Mr. Jones said. "In particular, we
have strong reservations about an approach that would create a combined

Washington

position limit for over-the-counter instruments and futures based on open
interest levels ... Instead, the N.G.F.A.
strongly urges the C.F.T.C. to use proper functioning of futures markets for
traditional commercial users and producers as the overriding consideration
in establishing position limits."
Terrence A. Duffy, executive chairman, C.M.E. Group, Inc., Chicago,
said futures markets cannot operate
without the participation of speculators and that denying or limiting the
access to futures markets to index
funds and swap dealers "will simply
impede hedging activity by commercial market participants."
Mr. Duffy asserted, "Position limits
are not a costless palliative. Position
limits, when improperly calibrated
and administered, can easily distort
markets, increase the cost to hedgers
and effectively increase the cost to
consumers. Unfortunately, many demands for speculative limitations assume that severe limits on speculation
will bring prices to some favored level. On the contrary, position limits on
futures contracts will not and do not
control cash market prices. There is a
complete disconnect between the implied promise to drive prices down or
up, whichever the most vocal constituency desires, and the ability of position limits to deliver on that promise."
Mr. Duffy said to the extent there are
legitimate concerns about the potential for excessive speculation to cause
unwarranted or unreasonable price
fluctuations, "C.M.E. Group believes
that futures exchanges effectively address such concerns through their existing market surveillance programs."
"Briefly stated, the exchanges independently have the ability to establish
position limits as warranted by the
characteristics of their traded contracts, and to employ accountability
provisions as appropriate given particular market contracts and market
conditions," Mr. Duffy said. "This
flexible regulation is a much more appropriate and effective means of addressing potentially manipulative and
disruptive positions than are blunt
position limits that fail to account for
variability in specific contract months,
market conditions and market participation. Insofar as the existing exchange programs are and have been
proven to be effective, C.M.E. Group
believes the commission would lack
the statutory basis for establishing
new federal position limits on certain
contracts involving exempt and agricultural commodities." MBN
Milling & Baking News December 28, 2010 / 29

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Milling & Baking News - December 28, 2010

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