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CFTC to curb commodities speculation

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The Washington Post reported today that the CFTC plans to implement policies restricting speculation on commodities:

The Commodity Futures Trading Commission will consider new measures to curb speculation in the markets for energy and other commodities, the agency is set to announce today.

The move aims to reduce the volatility of prices but faces resistance from top Wall Street firms, which fear the efforts could cut into profits. Regulators and lawmakers increasingly worry that these firms have used their size and power to inflate the prices of commodities, booking profits in the process.

Concern over such deal-making reached a fever pitch last summer, when oil prices were sky high and people were feeling pain at the gas pump. CFTC data showed last year that a significant amount of trading in oil was concentrated in the hands of just a few speculators. These worries have waned since then, as gas prices have moderated from last year’s highs, though a recent run-up in fuel prices may prompt new questions.

As said before, allowing a handful of speculators with too much money in their hands to do as they wish would inevitably have dire effects on the economy and the middle-class.  The pure libertarian ideal that there is nothing wrong with wealth inequality is clearly borne by someone who obviously does not live in the 21st century or whose financial position is well insulated from unreasonable price hikes.  We saw what happened in the Asian financial crisis of 1997, and who can forget the price of $147 per barrel last year?

Of course, like many planned rules and regulatory oversight, the proof of the pudding is in the eating.  Exactly what does the CFTC have in mind?  The following offers a rough preview:

The CFTC is planning to announce today that it will consider new curbs, according to an agency statement scheduled to be released today. It would do so by limiting the size of an investment any single firm could make in a particular commodity. The agency is planning a series of hearings on the issue to examine whether such limits would reduce harmful speculation, what the limits should be and whether the agency needs new legal powers to do this.

Adopting new curbs would require a vote by the CFTC’s commissioners.

The CFTC already has established position limits for some commodities, such as wheat. But it has also granted exemptions to these limits, which congressional investigators have in part blamed for fueling speculation. The CFTC plans to review its policy on exemptions.

The CFTC is also planning to require more public disclosure about the holdings of commodities traders. For many years, the agency has issued weekly reports about these holdings. The new reports will provide more detailed information about the types of firms, such as banks and hedge funds, that hold significant positions. In addition, the reports will provide more information about trading in derivatives linked to commodities.

It would be interesting to see how much of this planned regulation would actually make it through both houses of Congress and the White House.

Update: Also see these articles by the NYT and WSJ.

Written by defennder

July 7, 2009 at 3:28 PM

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