SEC-CFTC Task Force Finds Speculation Did Not Contribute to Higher Energy Prices

Against the backdrop of bills moving through Congress to curb speculation on energy derivatives, a task force of federal financial regulators, including the SEC, the Fed and the CFTC, has reported that preliminary analysis does not support the proposition that speculative activity has systematically driven changes in oil prices. If a group of market participants has systematically driven prices, they reasoned, detailed daily position data should show that that group’s position changes preceded price changes.

But the task force’s preliminary analysis suggests that changes in futures market participation by speculators have not systematically preceded price changes. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information.

More specifically, the regulators found that there is no statistically significant evidence that the position changes of any category or sub-category of traders systematically affect prices. This is to be expected in well-functioning markets. On the contrary, there is evidence that non-commercial entities alter their position following price changes.

The task force’s preliminary analysis also suggests that changes in the positions of swap dealers and non-commercial traders most often followed price changes. This result does not support the hypothesis that the activity of these groups is driving prices higher. The task force found that the activity of market participants often described as speculators has not resulted in systematic changes in price over the last five and a half years. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information, just as one would expect in an efficiently operating market. In particular, the positions of hedge funds appear to have moved inversely with the preceding price changes, suggesting instead that their positions might have provided a buffer against volatility-inducing shocks.

Since this is an interim report, the task force intends to examine these findings further as it continues its work. Data from the CFTC’s Special Calls on the activities of commodity swap dealers and commodity index traders is expected to become available for review during this time.

Further, the financial agencies pointed out that the distinction between hedging and speculation in futures markets is less clear than it may appear. Traditionally, those with a commercial interest in or an exposure to a physical commodity have been called hedgers, while those without such an exposure have been called speculators. In practice, however, hedgers may be “taking a view” on the price of a commodity, and even those who are not participating in the futures market despite having an exposure to the commodity could be considered speculators.