The Commodity Futures Trading Commission on Thursday, December 16, 2010, released a proposal that aims to curb speculative trading in commodities such as oil and precious metals. The proposal is part of the effort to increase oversight of the over-the-counter derivatives market as required of the CFTC under the Dodd-Frank bill passed in July. Specifically, the Dodd-Frank Act amended the Commodity Exchange Act to require, among other things, the Commission to limit the amount of positions, other than bona fide hedge positions, that may be held by any person with respect to commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of a designated contract market.
The draft plan would set a cap on spot-month positions (the month when a contract expires) to 25% of deliverable supply for a given commodity. Non-spot-month position limits will be set for each referenced contract at 10 percent of open interest in that contract up to the first 25,000 contracts, and 2.5 percent thereafter. The proposal is on position limits in 28 different commodities, among which are included gold, silver and platinum. The Commission estimates that at most seventy traders in referenced agricultural contracts, six traders in referenced base metals contracts, eight traders in referenced precious metals contracts, and forty traders in referenced energy contracts may be affected by the proposed spot-month position limits.
"Spot-month" limits are based on estimates of deliverable supply, which information is currently available from designated contract markets. On the other hand, the CFTC currently does not have the data available for the proposed formula to be used for position limits outside of the spot-month, which is based on the overall size of the physical commodity swap markets.
According to the CFTC, the proposed position limits would enable the Commission to combat excessive speculation and manipulation. However, there was some skepticism among the commissioners of the CFTC as to whether this proposal will be effective. Voting on making the proposal formal for public comment was postponed so that further deliberation can take place.
A copy of a Wall Street Journal article discussing the CFTC proposal can be found here. A CFTC fact sheet on the proposal can be found here, and a CFTC Q&A on the proposal can be found here.