Market manipulation, excessive speculation and price fixing in commodities
Dr. Steve Suppan, 26 October 2020
On October 15, by a 3-to-2 vote, the Commodity Futures Trading Commission (CFTC) approved a woefully inadequate final rule to prevent market manipulation and excessive speculation in physical commodity derivatives contracts. The rulemaking process had begun in 2010, but a successful Wall Street lawsuit in 2012 concerning a few words in the Dodd Frank Wall Street Reform and Consumer Financial Protection Act of 2010, prevented its finalization while there was a Democratic majority of commissioners. This final rule is based on a May 15, 2020 proposal, following the majority’s vote to withdraw 2013 and 2016 proposals and supplements to proposals. IATP has commented on all the proposed rules, beginning in 2010 and up to the May proposal.
Commissioner Rostin Behnam noted in his dissent to the 899-page voting draft of the rule that the CFTC was still investigating an unprecedently large April 20-21 price swing in the West Texas Intermediate (WTI) crude oil contract. Why rush to finalize the rule before the completion of the WTI investigation? The majority needed to vote before Commissioner Brian Quintenz departs the CFTC at the end of October.
Viewed less opportunistically, the majority stated their sincere belief that trading exchanges were best equipped to prevent market manipulation and excessive speculation and that the rule did not surrender CFTC authority to the exchanges. Commissioner Dan Berkovitiz rejected this belief, stating, “the proposed rule demoted the Commission from head coach to Monday-morning quarterback. The Final Rule declares that the players on the field are the referees. In this arena, the public interest loses.” Exchanges suffer no CFTC penalty when they fail to enforce the CFTC authority delegated to them in this and other rules.
The final rule puts no position limits on contracts held in commodity index funds (CIFs) whose speculators have no commercial interest in the contracts in the CIF. CIF trading creates price booms and busts that benefit CIF investors, usually to the detriment of those who produce, process and trade physical commodities. The approved rule would allow a financial speculator with no commercial interest in 25 “core referenced” physical derivatives contracts, including nine agricultural contracts previously subject to position limits plus seven new agricultural contracts, to hold up to 25% of all positions in each of the referenced contracts. This is an unreasonably large allocation for any one investor to control.
