COMMODITY TRADING
References CFTC, 2011, “Final Regulations on Position Limits for
Futures and Swaps.” Cheng, I.-H., Kirilenko, A., and W. Xiong, 2012,
“Convective Risk Flows in Commodity Futures Markets,” University of Michigan, Commodity Futures Trading Commission, and Princeton University Working Paper, February.
Cootner, P., 1961, “Common Elements in Futures Markets
for Commodities and Bonds,” The American Economic Review, Vol. 51, No. 2, Papers and Proceedings of the Seventy-Third Annual Meeting of the American Economic Association, May, pp. 173-183.
Fattouh, B., L. Kilian, and L. Mahadeva, 2012, “The Role of Speculation in Oil Markets: What Have We Learned So Far?,” Oxford Institute for Energy Studies and University of Michigan Working Paper, 18 March.
Fischer, D., 1996, The Great Wave: Price Revolutions and
the Rhythm of History, New York: Oxford University Press. G20 Study Group on Commodities, 2011, “Report of the
G20 Study Group on Commodities under the chairmanship of Mr. Hiroshi NAKASO [of the Bank of Japan],” November.
Hickley, A., 2011, “Canada Doubts Over Price
Speculators,” Global Financial Strategy,
http://www.gfsnews. com, 11 February. [The article cites Deputy Governor of the Bank of Canada J. Murray during a speech at the Graduate School of Public Policy in Saskatchewan on 10 February 2011.]
International Swaps and Derivatives Association, et al.
v. United States Commodity Futures Trading Commission, 2012, 11-cv2146 (RLW), U.S. District Court, District of Columbia (Washington), September 28.
Irwin, S., 2012, “Futures Markets and Speculation: Lessons from the Past for Today,” Presentation at the Chicago Mercantile Exchange, October 23.
Kawamoto, T., Kimura, T., Morishita K., and M. Higashi,
2011, “What Has Caused the Surge in Global Commodity Prices and Strengthened Cross-Market Linkages?,” Bank of Japan Working Paper Series, No. 11-E-3, May.
Pringle, A. and T. Fernandes, 2007, “Relative-Value
Trading Opportunities in Energy and Agriculture,” in Hilary Till and Joseph Eagleeye (eds), Intelligent Commodity Investing, London: Risk Books, pp. 313-339.
Till, H. 2008, “Amaranth Lessons Thus Far,” Journal of Alternative Investments, Spring, pp. 82–98.
Till, H., 2012a, “‘Who Sank the Boat?’ Alternative Explanations to Popular Narratives Regarding Recent Commodity Price Spikes and the Implications This Has for European Derivatives Regulations,” EDHEC-Risk Institute Publication, June.
Till, H., 2012b, “‘Who Sank the Boat?’ Challenges to
Popular Narratives on Commodity Futures Speculation,” Alternative Investment Analyst Review, a publication of the Chartered Alternative Investment Analyst Association, Third Quarter, pp. 28-43.
Till, H. and J. Eagleeye, 2004, “How to Design a Commodity
Futures Trading Program,” in Greg Gregoriou, Vassilios Karavas, François-Serge Lhabitant, and Fabrice Rouah (eds), Commodity Trading Advisors: Risk, Performance Analysis, and Selection, Hoboken, NJ: Wiley, pp. 277–93.
Till, H. and J. Eagleeye, 2006, “Commodities – Active
Strategies for Enhanced Return,” in Robert Greer (ed), The Handbook of Inflation Hedging Investments, New York: McGraw Hill; also in Journal of Wealth Management, Fall 2005, pp. 42–61.
Williams, S., Fenn, D., and M. McDonald, 2012, “Risk On – Risk Off,” HSBC Global Research, April.
Young, M., Gagoomal, P., and T. Kearns, 2011, “CFTC
Adopts Final Position Limit Rules for Futures, Options, and Swaps on 28 Physical Commodities,” Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates, November 18.
36 March 2013
The federal court’s September 2012 decision on commodity position limits was a promising sign that economic logic may prevail
In September 2012, a US federal court overturned the
CFTC’s position limit rules. The court noted that in prior federal agency decisions to impose speculative position limits, dating back to 1938, the relevant agency had made “necessity findings in its rulemakings” of actual or potential harmful excessive speculation. The CFTC precisely did not so during the current iteration
earned substantial profits had they elected to realize their hedging windfall during the three months that followed the Amaranth debacle. That
said, what is new about the current risk
environment is that a price-risk-bearing specialist may not be able to assume diversification across individual commodities (and other financial instruments) when using portfolio theory to manage commodity risk. As a result, this type of risk specialist must reduce leverage in this activity. Assuming this conclusion is embraced in a widespread manner, the “higher risk of spillovers” resulting from the “financialization of commodities” may lessen.
US CFTC’s Commodity Position Limit Rule Commodity market participants are also facing a
new regulatory environment, one aspect of which is the prospect of position limits across US commodity derivatives markets. Specifically,
in CFTC (2011), the
commission announced that commodity position limits shall be as follows. “Spot-month position limits will be set generally at 25% of estimated deliverable supply. … Non- spot-month position limits … will be set using the 10/2.5 percent formula: 10 percent of the contract’s first 25,000 [contracts] of open interest and 2.5 percent thereafter.” Summarizing from Young et al. (2012), one should note
the following about the CFTC’s position limit rules: a. The CFTC did not “make a finding that its adopted position limits … [were] necessary.”
b. The “CFTC has not argued that position limits will be effective in lowering commodity prices.”
c. The “CFTC contends that it is imposing position limits because ‘Congress did not give it a choice.’”
d. The CFTC did “not provide empirical evidence to demonstrate that the position limits it is imposing are appropriate.”
e. A dissenting CFTC Commissioner stated that “whatever limits the Commission sets … [should be] supported by empirical evidence demonstrating those [limits] would diminish, eliminate, or prevent excessive speculation.”
f. The dissenting commissioner also stated that “without empirical data, we cannot assure Congress that the limits we set will not adversely affect the liquidity and price discovery functions of affected markets.”
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84