On October 18 the Commodity Futures Trading Commission (CFTC) will vote on a proposed rule to limit the percentage of contracts in a given commodity that any individual trader can own. The rule, mandated by the Dodd-Frank financial reform bill, could potentially be very important: If a trader or bank is allowed to own too high a share of any given market, financial reform advocates argue, that entity can control the price of the market for its own purposes; or, even if there is no manipulation, market prices may simply rocket higher, untethered to any real-world conception of supply and demand. Indeed, in the past few years, allegations of speculation and market manipulation have been thrown at grain markets, oil markets, and even commodities like silver and cocoa.
But if the logic behind regulating the size of traders' positions in a given market is sound, the process of bringing the necessary rules into existence has proven difficult, to say the least. The partisan nature of the CFTC and the active lobbying campaigns to influence the rule-making process are making it uncertain if the rule will pass the committee and, if so, whether the final version will be strong enough to live up to Dodd-Frank's original intent.
Proponents of tight position limits argue that excessive speculation in a market means prices will generally be both higher and more volatile. The consequences of higher prices are easy to understand-for example, a Goldman Sachs report in April estimated that the speculative premium on a barrel of oil was then between $21.40 and $26.75 a barrel, roughly a sixth of the total price at that time. As Marcus Stanley of Americans for Financial Reform told me, all sorts of people rely on predictable commodity markets for their business: gas stations, businesses that supply heating oil, enterprises that order food in bulk such as confectioners, and so on. Higher volatility often ends up being passed on to businesses as a higher cost on their balance sheet, with predictable consequences.
The rule has no chance of going into effect, however, unless it garners enough votes. At present, the CFTC is divided along partisan lines, with two presumed votes for the rule (Chairman Gary Gensler, appointed by Obama, and Bart Chilton, appointed by Bush and reappointed by Obama) and two votes against (Jill Sommers and Scott O'Malia, both former Republican Congressional aides). Meanwhile, Commissioner Michael Dunn, the swing vote who was appointed and re-appointed by Bush, appears to be leaning towards voting no, arguing the CFTC hasn't performed the proper cost-benefit analysis to back up the rule. An appeals court recently struck down an SEC rule on the basis that it lacked a cost-benefit analysis, which has led the opposed commissioners to argue that all of Dodd-Frank's proposed rules need such an analysis to be legally valid.