CFTC Position Limits on Oil Speculation Will Not Take Effect Until 2012, Agency Announces
After more than a year of debate and uncertainty, the Commodity Futures Trading Commission (CFTC) has announced a clear time line for implementation of position limits on speculative investors in oil and other products. Reuters reported on Tuesday that the CFTC’s latest filing sets early 2012 as the goal for application of the position limits intended to reign in volatile prices for crude oil, heating oil, and other energy and metal commodities. The announcement follows a CFTC vote last week to move forward with the proposed position limits, and precedes the 60-day public comment period on the proposal, which will begin when it is published in the government’s Federal Register. The target date for implementation is almost exactly one year later than the deadline set by Congress in the Dodd-Frank financial reform bill that became law in July of last year.
But after declaring its legal authority to bypass the deadline set by the Dodd-Frank law and receiving numerous and repeated objections to the limits from investment banks and other major speculators, the CFTC is drawing out the implementation process considerably. The extra year to consider the proposed position limits will give the commission ample time to collect data on major speculators, gauge the sizes of their positions, determine how speculation affects prices, and determine how effective the proposed limits would be in reducing volatility. However, the rule proposal published by the CFTC specifies that it will not need to find a conclusive link between speculation and prices before enacting the new rules, in effect sidestepping the heated debate over whether or not excessive speculation drives up prices, as Reuters explains:
In the draft rule, the CFTC said it does not need to find that price-distorting speculation is happening — an important comment given the large volume of both analyst research and academic work questioning the popular assumption that financial speculators caused the surge in commodity prices in 2008.
Under the commission’s latest proposal, the limits on commodities contracts for front or spot month delivery (the nearest month in which contracts are available—February 2011 is the current spot month for both crude and heating oil contracts, for example) will be set in a preliminary manner some time during the first quarter of 2011. Over the course of this year, the CFTC plans to collect data with those limits in mind, and use that data to set limits for contracts beyond the spot month. The CFTC filing acknowledged that the first round of limits are very high, as Reuters quoted, to maintain liquidity in affected markets, “’The resultant limits are purposely designed to be high in order to ensure sufficient liquidity,’ [the filing] said.”
The definitive but unsurprising announcement from the CFTC that hard and fast position limits will not take effect for another full year will likely be greeted with a collective groan from heating oil dealers, airlines, and other businesses that rely on energy commodities and have been forcefully advocating for limits. It appears as of now that any soothing effects the proposed position limits may have on heating oil prices will not be seen until the first few months of 2012.