CFTC to curb oil speculators

The Commodity Futures Trading Commission is proposing a new rule to limit energy speculation.

(everyone applaud)

The proposed caps announced on Thursday will have limited market impact affecting only a small handful of traders – about 10, by the CFTC’s own estimates – on crude oil, natural gas, gasoline and heating oil markets. The new limits are largely higher than the so-called “accountability levels” set by exchanges and which, if exceeded, trigger heightened surveillance.

Here is the actual proposed position limits rule where comments can be received up to 90 days.

This is the basics of the proposed rule:

The new position limits only affect energy commodities: crude oil, natural gas, gasoline and heating oil, writes Javier Blas.

But the US regulator could extend them at a late stage to metals such as copper, gold and silver.

The aggregate limits are set by a formula based on open interest, or the number of outstanding contracts.

The all-months-combined position limit would be 10 per cent of the first 25,000 contracts of open interest and 2.5 per cent of open interest beyond 25,000 contracts. The proposed limits maintain exemptions for entities using the futures markets to hedge commercial risks, such as airlines locking in oil prices.

If anyone has any more insight into the effectiveness of this new proposed rule, please post in a comment to enlighten us.

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Feint, thrust and parry

Superficially, it sounds great. Assuming they don't move all their trading overseas. The mention in that CFTC .pdf of the first major hedging exemption granted to J. Aron, later borged into Goldman Sachs, was the beginning of the grand speculator's strategy.

Sounds like a bit of misdirection to this cynic.

ICE (or those specific speculators trading on them) can simply shift their trading overseas, through one of their many subsidiaries (they purchased the International Petroleum Exchange, renamed it ICE Futures Europe, and I believe it is based in London, also own ICE Clear Canada and ICE Clear Europe, as well as others).

There was no mention of TradeSpark, which might also be used in a more convoluted method in speculation, and if that cap-and-trade legislation ends up passing congress, this may actually benefit the speculator side of it by moving the bulk of the speculative trading offshore anyway.