The CFTC hearings into the evil commodity speculators have got under way in Washington. Those testifying on Tuesday include:
Panel One: Jeff Sprecher, Intercontinental Exchange and Terry Duffy, Chicago Mercantile Exchange Panel Two: Todd Petzel, Futures Industry Association; Ben Hirst, Delta Airlines; Laura Campbell, American Public Gas Association; and Sean Cota, Petroleum Marketers Association of America.
We’re listening via the live web feed. And some key weapons in CFTC chairman Gary Gensler’s aresenal for proving that speculators are unreasonably influencing commodity prices have already appeared: position limits.
Note the following charts taken from the live web feed:
And what the slides show is very interesting. The first one reflects how many times market participants were above accountability limits in given commodity contracts in the last year, while the second shows how many parties are currently exempt from position limits in the spot month.
In the case of accountability limits for natural gas the chart shows players breached accountability limits by 10 per cent at least 14 times and by 20 per cent at least 4 times. We believe there is an entry there for 30 per cent too, but didn’t quite catch the figure in the audio.
Overall, Gensler said that a quarter of the time those breaches will have been triggered by commercial players, but roughly 75 per cent will have been triggered by funds. It’s important to remember, however, that accountability limits are not position limits — meaning the only consequences are warnings rather fines.
This is presumably why the likes of the United Natural Gas fund — known to be breaching accountability limits — have now headed into the unregulated OTC bilateral market.
Outright position limits, meanwhile, do apply to spot-month contracts in the days leading up to delivery. The Gensler slide shows there are currently 43 players exempt from such limits in natural gas. Overall, Gensler stated exemptions were granted automatically to commercial players with inventory hedges and these accounted for about half of the numbers. But, he added, risk management exemptions were also given to swap dealers.
As previously stated here, Goldman Sachs is an example of a financial player which believes it should — via its physical position — be exempt from position limits. Physicality, therefore, appears to be the potential future loop-hole.
Should we be surprised hedge fund managers like GLG Partners are turning physical?