John Kemp at Reuters reminded us that the Commodity Futures Trading Commission is due to unveil a raft at new rules, with lots of new tricky details on position limits and exemption guidelines for a whole range of market participants.
Indeed, next Thursday the CFTC will hold an open meeting to discuss the proposals in Washington, along with a webcast and a listen-only conference call.
Wherein lies a clue to what this is all about: PR.
Taken at face value, the CFTC stance on how it should do its own job — i.e regulating the markets nominally under its control — is utterly bemusing.
One minute the public are being lectured on how foreign speculators are running up the price of gas so ordinary Americans can’t enjoy the Driving Season; next minute the CFTC’s chief economist Jeffery Harris is telling the Senate’s energy committee:
Looking at the trends in the marketplace, combined with studies on herding behavior and the impact of speculators in the markets, there is little evidence that changes in speculative positions are systematically driving up crude oil prices.
Indeed, in early December Harris & Co published a 56-page explanation of how the oil market in particular has been working just fine.
We identify and explain a structural change in the relation between crude oil futures prices across contract maturities. As recently as 2001, near- and long-dated futures were priced as though traded in segmented markets. In 2002, however, the prices of one-year futures started to move more in sync with the price of the nearby contract. Since mid-2004, the prices of both the one-year-out and the two-year-out futures have been cointegrated with the nearby price. We link this transformation to changes in fundamentals, as well as to sea changes in the maturity structure and trader composition of futures market activity. In particular, we utilize a unique dataset of individual trader positions in exchange-traded crude oil options and futures to show that increased market activity by commodity swap dealers, and by hedge funds and other financial traders, has helped link crude oil futures prices at different maturities.
Then, suddenly, at the end of December we got news that Harris was leaving the regulator — returning to academia — which sparked understandable speculation that CFTC chairman Gary Gensler is keen to ignore the findings of his chief economist, and pursue action against evil speculators instead.
Contrast that with the views of the FSA in London, which has rejected the whole notion of position limits. The British regulator is in the Harris camp, arguing that there is no evidence of financial speculation impacting prices.
But as Reuters’ Kemp pointed out, most of the academic studies are based on rather shallow public data; the CFTC does have the data, which it uses for monitoring and enforcement, but that remains confidential:
Without access to the detailed data, the vast majority of academic studies have little value. But the few studies which have benefited from access are impossible to verify or critically review because the data on which they are based remain confidential. The evidentiary basis for the “no impact” argument is therefore much thinner than many people suppose.
Here’s Kemp conclusion, with tongue in cheek:
Crucially, MMTs appear to be entirely passive, reacting dumbly to changes price and position changes initiated by underlying demand from physical producers and consumers. If they really were this passive, it is hard to see how they earn their fees or returns. While this may describe the trading behaviour of technical funds it is not an accurate description of the big strategic macro funds or institutional investors such as pension funds.
Moreover, the commodity markets, unlike housing, equities or fixed income, would appear to be the only ones in the world where prices are determined entirely by a series of “exogenous” shocks appearing from nowhere, and where a sudden inrush of funds does not disturb prices for an extended period while the market searches for a new equilibrium.
In a world where policymakers, including Fed Chairman Ben Bernanke, now accept bubbles can and do occur, the characterisation of investors as passive providers of liquidity with no impact on outright price is implausible. More recent research confirms that commodity indexation has indeed changed the way raw materials prices behave.
(NOTE: We’ve spent the best part of half an hour trying to locate Kemp’s recent work on the new-fangled Reuters site – in vain. If anyone finds a link, please post below.)
CFTC sets date for vote on energy trading limits – FT
More evidence speculators are not to blame for commodity moves – FT Alphaville
Quick! We’re supposed to be regulating this energy stuff… – FT Alphaville
Evil commodities speculators in the dock – FT Alphaville