Lawmakers Say Proposal To Limit Oil Speculation Too Limited
The CFTC has proposed barriers against excessive speculative investment in heating oil and other energy commodities, but some member of Congress and regulators see it full of holes. (image: Orin Zebest via flickr.com)
Many lawmakers, including Democratic lawmakers, and even one member of the CFTC itself, are concerned about the Commission’s recent proposal to limit speculation, Reuters reported on Friday.
According to these critics, the CFTC’s proposed limits on oil futures positions have two significant problems. The first is the size of the limits—it’s not actually very “limiting” to allow a single investor to hold positions equal to more than a day’s oil consumption for the entire world. As the spokesperson for Senator Maria Cantwell said, “[W]e are concerned that the proposed limits may be too high to rein in damaging speculation in oil and gas markets.”
However, the second concern is actually more significant—the CFTC can’t regulate a significant portion of the market, meaning that their regulations may be as easily bypassed as a fence full of holes.
The problem is that while the Commission can unilaterally regulate commodities exchanges, it has no authority over the OTC, or “over-the-counter,” markets. These are off-exchange transactions, typically bilateral (directly between two parties) that occur off the regulatory radar screen. As Senator Jeff Bingaman, Chair of the Senate Energy and Natural Resources Committee said, “[w]hile over-the-counter markets remain invisible to regulators, we cannot expect the position limits to be effective.”
Indeed, the limits may be counterproductive: if they push speculators away from the exchanges to OTC transactions, they will reduce the ability to even track or be aware of dangerous—overly large—oil futures positions. That was a concern of the CFTC commissioner, Jill Sommers, who voted against the proposal. She did not want to implement limits on one trading arena (exchanges) while leaving another (OTC markets) unchecked, fearing that “forging ahead with federal limits in a piecemeal fashion is unwise.”
It would take federal legislation to give the CFTC the authority to regulate the OTC markets. Such legislation “may be enacted this year,” in Commissioner Sommer’s words, but “may” is a thin reed to hang a vital regulatory framework on.
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[...] in the US, and the Financial Services Authority in the UK, and it’s unclear whether the slow progress of the CFTC and the hands-off approach of the UK would be swayed even by a unified front of the majority of the [...]