By Lene Powell, J.D.
In a letter, House Agriculture Committee Chairman Michael Conaway (R-Tex) asked CFTC Chairman Timothy Massad to release a draft report by the CFTC Office of the Chief Economist (OCE) on position limits. According to Conaway, staff economists completed a draft literature review examining the impact of excessive speculation on prices and volatility in the commodity futures markets, but the report was not finalized or circulated to the Commission.
Conaway said the report could help clarify what can and cannot be accomplished in position limits rules currently under consideration. He asked that the report be finalized and made public before continuing with the rulemaking, and requested a response from Chairman Massad by June 24, 2016.
Position limits rules. The CFTC is currently considering rules proposed in 2013 that would establish limits on speculative positions in 28 physical commodity futures contracts and economically equivalent swaps. The goal of the proposed rules is to prevent excessive speculation and market manipulation, while ensuring there is enough market liquidity for bona fide hedging and protection of the price discovery process. Portions of the proposed rules have been revised since the initial proposal. The proposal and revisions have received extensive comment and debate.
Inspector General report. In early 2016, the CFTC Office of the Inspector General issued a report following up a 2014 report on OCE issues. According to the inspector general, several staff economists said the chief economist declined to allow research on certain topics relevant to the CFTC mission, including position limits. Their impression was that OCE was censoring research topics that might conflict with the official positions of the CFTC.
In response, the chief economist agreed that he had initially rejected a research proposal on position limits on the basis that it was politically controversial. However, he said that research topic selection is a matter of discretion and he did not believe the CFTC had the data or in-house expertise to do this project. He added that OCE does allow research into politically controversial topics, giving examples of research on high-frequency trading and self-trading.
The inspector general recommended that CFTC give OCE economists protected research time and not prohibit research on topics relevant to the CFTC mission.
Conaway request. Noting that the Agriculture Committee is the principal authorizing committee for matters relating to agriculture and commodity exchanges, Conaway said the committee received a draft literature review summarizing and analyzing economic studies cited in comment letters on the position limits rulemaking. The review was sent to Massad’s office on June 30, 2015, but did not appear to have been submitted for final review within OCE afterward.
Conaway said he had reviewed the document and found it a comprehensive overview of the current state of economic research on excessive speculation and an objective analysis of the potential usefulness of position limits. The report authors raised important questions about whether position limits are an effective tool for limiting the effects of excessive speculation. The authors also reported that speculative activity has market stabilizing effects and suppressing it could have undesirable risks like disruptions to liquidity and price discovery, Conaway said.
“Given the sweeping nature of this rulemaking and the intense debate it has provoked since its inception, this even-handed report prepared by the Commission’s own economists should serve as an invaluable resource for the Commission and the public,” wrote Conaway. “Therefore, the Committee requests that you finalize this report before continuing with the next steps in the rulemaking process.”