Our heart goes out to the FSA, who seem to have been caught rather off-guard by the outbreak of regulatory zeal in the US, where the CFTC is promising to run oil speculators out of town – or at least be seen to run the speculators out of town.
Britain’s financial regulator has now called a snap meeting with major oil companies, banks, hedge funds and oil brokers to review regulation in the oil and commodity markets – set for August 5.
But what’s this – from the FT’s commodities correspondent, Javier Blas:
Industry executives said the London meeting was unlikely to result in significant new initiatives, but added that the gathering would discuss “whether the current arrangements [in the oil market] remain appropriate”.
They said the FSA appeared to be taking a “proactive” role following scrutiny in the US about the role of investors in oil and other commodities prices. The FSA confirmed the meeting, describing it as part of its “regular process of engagement with market participants in these markets”.
You can almost hear the shuffling of regulatory feet.
As John Kemp points out, the UK meeting has been timed (on purpose, or otherwise) to coincide with the final CFTC hearing in the US.
But the Reuters columnist is not expecting anything radical, on either side of the Atlantic:
…None of the issues being examined at this week’s (CFTC) hearings is new. Policymakers have been struggling with the question of how much “speculative” influence should be allowed in commodity markets since the Commodity Exchange Act was passed in 1936, and how to limit it so the activities of investors do not distort pricing for everyone else.
He harks back to the last major review, prompted by the Hunt Brothers’ attempts to corner silver at the back end of the 70s, when the CFTC reached the following shattering conclusion:
The capacity of any contract market to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions, i.e., the capacity of the market is not unlimited. Recent events in the silver market would support a finding that the capacity of a liquid futures market to absorb large speculative positions is not unlimited” (46 Fed Reg. 50938, 509040, October 16, 1981).
The solution at the time was a series of position limits – regulatory requirements that have been gradually chipped away over the past 30 years or so as government intervention gave way to market discipline. Position limits are now set for a comeback, but Kemp is convinced that changes themselves will be limited since there is no real appetite in the CFTC or Congress to take action that would block investors or large institutions such as pension funds from accessing commodities as an “asset class”.
Here’s Kemp’s forecast changes to the system:
(a) The CFTC rather than exchanges will set position limits for all contracts in future and be responsible for granting exemptions. This would bring the energy markets into line with current practice for agricultural contracts, which are already subject to federal rather than exchange limits.
(b) Position limits will apply on an aggregate basis across all markets (exchanges and OTC). To enforce this system, the CFTC will demand data on OTC positions and on contracts which are “near to” those it regulates already. The Commission has already begun this process by demanding information on previously exempt contracts which it deems are “significant price discovery contracts”.
(c) Position limits on contracts close to expiry may be “hardened” to become fully binding (with few or no exemptions other than for physical hedgers intending to make or take delivery).
(d) Position accountability levels on contracts further from delivery may be hardened somewhat but are unlikely to be made absolutely binding. Exemptions will remain available. But the Commission will almost certainly demand more documentation to back up claims that they are being held for “bona fide hedging” purposes.
(e) The Commission will almost certainly revisit the crude classification of traders as either commercial or non-commercial. At the moment, all of a trader’s positions are classified in one category, depending on its primary business interest, which is often unclear. In future, for firms with both hedging and trading/investment operations, it may require the two to be separated out for reporting and regulating purposes.
In short, nothing radical.
Related links:
What prompted the FSA oil meeting? (FT Energy Source)
Presenting, the ‘physical loophole’ – FT Alphaville
Evil commodities speculators in the dock – FT-Alphaville