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Bart Chilton

Review of Commodity Rulemaking
By Chidem Kurdas

A massive increase in financial regulation is in process in the United States. One question is how this might affect the roughly sixty-six thousand professionals in the futures industry (Table 1), not to mention numerous markets and the countless people who rely on those markets in various ways.

The Commodity Futures Trading Commission is making at least 40 rules to implement the requirements of the Dodd-Frank Act Congress passed in the summer. Many of the new rules have to do with swaps. Another area is "speculative" position limits for certain commodities. In addition, the Commission and other parties have made proposals not mandated by Dodd-Frank.
 

Source: CFTC

Most of the proposals have little direct bearing on managed futures. But futures markets may be affected by the regulation of swaps, one of the main goals of the Dodd-Frank Act. Swaps can be economically equivalent to futures. The price of a swap can refer to a futures contract settlement price or the swap can be priced on the same commodity as a covered futures contract.

A significant number of proposed rules are currently open to public comment (Table 2). These include proposals for the clearing of swaps, requirements for swap dealers, protection of customers in broker bankruptcies and the reporting of swap transaction data.
 

Futures commission merchants and introducing brokers face additional requirements for setting up policies and procedures, for instance regarding potential conflicts of interest. If regulation causes an increase in brokerage costs, there could be a rise in fees. But there is not much information about the cost of the new rules.

Massive Passives
Position limits have been proposed as a means of curbing speculation in key commodities. These limits may be relevant for commodity index investments. The latter have grown fast in recent years and deploy much more capital in futures markets than active managers do.

CFTC Commissioner Bart Chilton says more than $200 billion came into US futures markets in the past several years, primarily from speculators he calls "massive passives," that is, the long-only index investments that roll over contracts regardless of price. Commissioner Chilton argues that while these big investors may not have not caused the 2008 price spikes - such as the $147 crude price - they did generate greater market volatility, both on the upside and downside.
"Futures prices should, by and large, be based upon the fundamentals of supply and demand. We saw delinked commodity prices in 2008, and some of us are concerned that we see that taking place this year," he said in a testimony to the House Agriculture Committee of the US Congress.
Speculative positions are even larger today, he says, arguing for the imposition of position limits without delay. Single traders had positions as high as 20% in energy and 40% in the silver market during 2010, according to Mr. Chilton.

By all evidence most CTAs will not be affected by position limits because they don't take positions of such magnitude. The CFTC estimates that relatively few traders have positions large enough to hit the proposed ceilings (Table 3).
 

In summary, new CFTC rules will affect brokers, dealers and very large futures traders, but not the average CTA-at least not directly.

Possible changes related to commodity pools, exchange-traded funds and mutual funds have received less attention than proposed rules on position limits and the clearing of swaps. But some of the changes may matter to commodity trading advisors interested in managing funds. See Regulators for a discussion of this topic.