Last week, Democrats in the House and Senate introduced matching bills entitled “Anti-Excessive Speculation Act of 2011.” H.R. 3006 and S. 1598 seek to override the position limits rule currently being drafted by the CFTC. Senator Bill Nelson of Florida and Representative Peter Welch of Vermont are spearheading the effort to “bring down the price of oil to bring down the price of gas” by taking “some of the gamblers out of the oil markets.”
The Speculation Act would cap position limits at 5 percent of deliverable supply in the spot month and 5 percent of open interest in the out-months, though it still exempts legitimate hedging transactions. These apply to over-the-counter and on-exchange trades. The bill creates an aggregate speculative position limit for energy contracts, to be applied to speculators as a class of traders. It also codifies a duty to ensure commodity markets “accurately reflect the fundamental supply and demand for commodities” as a fundamental principle of the Commodities Exchange Act.
Altogether, the Speculation Act is much more aggressive than its CFTC counterpart. The Dodd-Frank Act authorized the CFTC to write position limits for the commodity futures market as a way to curb speculation. However, since the bill was passed last year, progress has been frustratingly slow for many advocates of market reform, and the final draft is shaping up to be gentler on market participants than first thought. According to the latest reports, position limits will hover around 25%, and aggregation policies and class limits will be relaxed.
More generally, the position limits debate has been riven with partisan bickering. According to two anonymous whistle-blower complaints, the rule revision process has been poorly managed. “Gutting out the intent of the position limits as required by Dodd-Frank, wasting taxpayer monies, steamrolling over other staff, proposing a rule that cannot be implemented, is wasteful,” said one. At its heart, the controversy is linked to fundamentally different views about the commodity futures market. In one camp are those who insist that the trading of futures contracts encourages speculation and drives up prices for consumers. Conversely, there are those who believe that the unfettered trade of futures contracts counteracts retail price volatility and stabilizes prices. Both point to a host of conflicting studies to support their respective positions.
After the spike in energy prices in 2008, some politicians began to call for increased regulation in the commodity markets, and position limits were included in the Dodd-Frank Act. This year’s rise in energy and food prices brought speculation back to national attention, and Democrats in particular have been eager to impose tough position limits as soon as possible. Across the aisle, many Republicans have derided the CFTC’s position limits proposal (and Dodd-Frank in general) as anti-job and economically unaffordable.
The Speculation Act, at this time endorsed only by a handful of Democratic lawmakers, is unlikely to gain traction. It is in many ways the inverse of several Republican measures to repeal parts of Dodd-Frank earlier this year. Rather, the bill was probably introduced in an attempt to influence the CFTC, as well as a way to grandstand for disgruntled voters at home.