By Suzanne Cosgrove
Members of the U.S. House of Representatives’ Agriculture Committee heard testimony Thursday from Dan Berkovitz, a former CFTC commissioner, as well as from speakers from derivative exchanges and the Futures Industry Association about the wide post-pandemic price swings of 2022 and 2023.
Questions posed by the congressmen put a particularly bright light on the CFTC as the legislators sought to make sense of the dramatic rise, then fall, of energy prices and other related products that have impacted farm producers. Several legislators asked if speculators were behind the volatility, and if current margins imposed on derivatives contracts by the exchanges were sufficient.
The last CFTC reauthorization was in 2008 and lapsed in 2013, an issue addressed by Chairman Rostin Behnam in testimony before the U.S. Senate Committee on Agriculture, Nutrition, & Forestry on Wednesday and reported by Securities Regulation Daily. At the Thursday hearing, U.S. House Rep. David Scott (D.-Georgia), chairman of the Agriculture Committee, indicated he supported a CFTC reauthorization push.
Confluence of events. Recent market volatility, Berkovitz said, was spurred by a number of factors, including increased demand for commodities as the U.S. and other economies recover from the shutdowns that took place during the pandemic, Russian’s invasion of Ukraine, central bank tightening of interest rates, China’s COVID policies, and extreme weather events.
He noted that in addition to the actual contracts available for trade, the exchanges have tools to help endure market prices, and volatility reflectS “the true forces of supply and demand.” Those tools include margin levels, speculative position limits, daily price limits and trading halts–all protections against manipulation, fraud and disruptive trading practices.
“None of these tools, however, can insulate market participants from price changes due to the basic forces of supply and demand,” Berkovitz said.
Nonetheless, through the market volatility related to the pandemic in March 2020, and the Russian invasion of Ukraine in 2022, “futures markets continued to function amid tremendous stress in the financial system,” said Alicia Crighton, co-head of Goldman Sachs’ global futures business and chair of the Futures Industry Association.
Exchanges chime in. Before the war, Russia and Ukraine contributed about 25 percent of total global wheat exports, noted Derek Sammann, senior managing director and global head of commodities at CME Group. Following Russia’s invasion of Ukraine, wheat market prices increased 70 percent from their January 2022 levels. He said in March 2022 the CME saw the largest daily price move in wheat, with implied prices rising 26 percent, compared with a 7.1 percent price limit in wheat futures, forcing the contract to temporarily stop trading.
At that point, CME worked with the CFTC to get expedited approval to increase price limits and later implement a “dynamic” price limit mechanism in wheat that allowed the price limit to adjust with volatility and restore trading more quickly following limit-trading events, Samman said.
Christopher Edmonds, chief development officer for Intercontinental Exchange (ICE), agreed that the combination of market events that took place in 2022 has been unique. In prepared remarks, he noted the Russian invasion of Ukraine significantly reconfigured global energy supply. But he added that while ICE recognizes energy markets remain volatile, the exchange does not support the recent imposition of a market correction mechanism, or price cap, by the European Union.
ICE does not believe the mechanism will achieve its primary objective of lowering energy prices, Edmonds said, because it undermines the ability of the commercial market to transfer and manage their risk.
“Clearing members are intermediaries,” Crighton said. “We act as the first and the last line of defense in fostering stability in cleared derivatives markets.”