By Lene Powell, J.D.
A group of Democrat senators led by Sen. Sherrod Brown (D-Ohio), ranking member of the Senate Banking Committee, pressed the CFTC to finalize proposed rules on position limits for commodity futures and related derivatives contracts. The senators said the rules, proposed in 2013, are “long overdue” and are needed to prevent excessive speculation and manipulation in commodities markets.
The letter keeps pressure on the controversial position limits proposal, which recently came to a head when a CFTC advisory committee report was withdrawn by Commissioner J. Christopher Giancarlo, the committee’s sponsor. The report largely opposed the proposed rules and recommended scrapping them or making major changes. Senator Elizabeth Warren (D-Mass) criticized the report, saying it was drafted by committee members with conflicts of interest and was “nothing more than a recitation of industry talking points.” On withdrawing the report, Giancarlo said it was not meant to be a distraction from the committee’s work.
Brown was joined in the letter by Sens. Dianne Feinstein (D-Cal), Maria Cantwell (D-Wash), and Joe Donnelly (D-Ind). Donnelly is the ranking member of the Commodities, Risk Management, and Trade Subcommittee of the Senate Agriculture Committee, of which Brown is also a member.
Proposed position limits rules. As amended by the Dodd-Frank Act, the Commodity Exchange Act requires the CFTC to set position limits for physical commodities “as appropriate” to prevent excessive speculation and market manipulation, while protecting price discovery and liquidity for hedgers. The CFTC issued final rules on position limits in 2011, which were vacated in 2012 after a successful court challenge by the Securities Industry and Financial Markets Association (SIFMA) and International Swaps and Derivatives Association (ISDA). The CFTC proposed new rules in 2013.
Senators urge action. The senators called on the CFTC to complete the rulemaking “without any further delay.” They said they had been troubled by the report of the Energy and Environmental Advisory Committee (EEMAC), which they viewed as a biased attempt to delay and weaken the rule. Now that the “distraction” of the report is out of the way, the rules should be finalized, they said.
According to the senators, position limits are a critical tool for market integrity. They observed that despite current low prices and oversupply, oil prices in particular have in the past been significantly distorted by speculation, causing a premium of 83 cents per gallon of gasoline in 2011. And because futures and physical markets are linked, position limits are important to protect against manipulation. In 2014, the then FERC Director of Enforcement told the Senate Banking Committee that a manipulator can trade at a loss in one market to profit in another market. Former CFTC Chairman Gary Gensler told the Committee in 2009 that CFTC should be empowered to establish position limits across markets, so traders can’t avoid position limits in a market by moving to a related exchange or market.
The senators noted that in the public comment process over the past few years, the CFTC has held nine public meetings and reviewed tens of thousands of comments regarding position limits. The next step is to finish the rule, they said.
“As we have seen in other areas of financial regulation, memories are short, and some regulators and members of Congress seem already to have forgotten major crises of the recent past,” the senators wrote.