A divided Commodity Futures Trading Commission on Thursday proposed new position limits for market speculators along with expanded exemptions that would benefit grain processors and other companies that hedge their risks in agricultural commodities and energy.
The CFTC has been struggling with setting new position limits and defining exemptions for commodity traders since the Dodd-Frank Act was passed a decade ago in the wake of the 2008-2009 financial crisis.
The commission, how controlled by Republican appointees, voted 3-2 on Thursday to move forward with the latest proposal. Chairman Heath Tarbert and commissioners Brian Quintenz and Dawn Stump voted in favor, while commissioners Rostin Behnam and Dan Berkovitz dissented.
Calling the development of the proposal “a complicated endeavor,” Tarbert said, “If there were a perfect solution I have no doubt we would already have found it.”
He said the proposal was “a pragmatic approach that will protect our agricultural, energy, and metals markets from excessive speculation. But just as importantly, it will ensure fair and easy access to these markets for businesses producing, consuming, and wholesaling commodities under our jurisdiction.”
The proposal, which was not immediately posted to the commission’s website, would increase the amount of speculative positions that can be held by producers, traders and others participating in the futures and derivatives markets, Tarbert said.
He said that Congress made clear that limits apply to speculative activity, not bona fide hedging practices.
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Todd Kemp, senior vice president of marketing at the National Grain and Feed Association, said the increase in recognized risk management strategies is “just as important” as the position limits, which “we’ve had in the grain and oilseed contracts for decades.”
“If a farmer cannot offset a risk on next year’s crop, if a refiner cannot offset a risk on crude oil for a new plant, or if a wholesaler cannot offset risks on inventory it is buying, those businesses will not expand their operations,” Tarbert said. The proposal, he said, “addresses those needs through a broad exemption for ‘bona fide’ hedging and a streamlined and non-intrusive process for recognizing those exemptions.”
One of the new hedging strategies that will not be subject to limits concerns anticipatory merchandising, which Tarbert said means that “wholesalers and middlemen connecting producers and consumers could more readily hedge their risks.”
The proposal would set limits on 25 “core physical commodity futures contracts and their ‘economically equivalent’ futures, options, and swaps,” including nine “legacy” ag contracts and seven new ag contracts covering rice, cocoa, coffee, frozen concentrated orange juice, sugar and live cattle.
Dan Berkovitz, one of the two dissenting commissioners, said the proposal “would abruptly increase position limits in many physical delivery agricultural, metals, and energy commodities, in some instances to multiples of their current levels [and] would provide no opportunity for the commission to monitor the effect of these increases, or to act if necessary to preserve market integrity.”
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