Comment Text:
10-005
COMMENT
CL-02523
From:
Sent:
To:
Subject:
Mark
Thursday, March 25, 2010 1:27 PM
Metals Hearing
Public Commentary
To whom it may concern,
I would first like to thank the CFTC for allowing the public an opportunity to
comment on the subject matter covered in the public CFTC hearing held on Thurs.
March 25, 2010 regarding the integrity of futures and options trading in the metals
markets.
Regarding the commissions concern that enacting or enforcing position limits in the
precious metals markets would result in diverting a substantial amount of trading
into the opaque and or less regulated OTC market, I think those concerns are
misplaced. The OTC market is a derivative market and therefore it's pricing is a result
of the pricing set on the regulated exchanges. The risk in the OTC market is to the
participants who hold oversized positions relative to their ability to settle those
private contracts. If participants in the OTC market wish to take on the associated
increased risk then they should be liable for their losses without recourse to recovery
of those losses from the public in any way shape or form.
Any disputes in the OTC market which may arise from a participants inability to
settle a contract should, due to the unregulated nature of the OTC market, be the
responsibility of the participants through the legal system for contract law and not as
a burden to the public.
Regarding position limits, it should be clear that it is foolishness and a manipulative
practice to allow a total amount of contracts in any commodity to exceed the
verifiable annual production of that commodity. It is also a manipulative practice for
an entity to write sales contracts for a commodity they do not possess in an
unencumbered manner, have already produced, or are verifiably able to deliver. It is
therefore my view that in addition to a 5-10% enforced position limit on all metals
contracts determined by the verifiable production levels of those commodities, a
higher level of collateral requirement must also be imposed in order to avoid
excessive speculation and manipulation by non producers.
As regards position limits for investment and bullion banks, they must have
unencumbered possession of the underlying commodity and post 100% collateral for
any hedging position contract they may wish to offer into the physical market. In this
way a producer could not sell more than his verified annual production forward into
the market and a hedger could not sell that which he does not own free and clear of
all encumbrances.
A purchaser on the other side of a sales contract must also post a high level of
collateral and provide verifiable ability to purchase the underlying commodity of a
contract in order to also reduce speculation and manipulation of commodities on the
long side.
As regards the hedging of price risk for non commercial entities, the commodities
exchanges and futures markets are not the appropriate markets for such price risk10-005
COMMENT
CL-02523
management practices as such activity does not have an inherent interest in the
exchange of physical goods. They are only concerned with the price of the
underlying commodity for non commercial purposes and should be excluded from
participation in the physical commodities and futures markets.
Financial and speculative positions must be segregated from the physical market
and be dependent on the physical market fundamentals of supply and demand for
real world and economic price discovery. This financial oriented trading, hedging,
and speculation must not be an influencing factor in the physical markets but rather
must be dependent on the physical market conditions without being allowed to
influince them in any way, shape, or form.
One of the most disturbing situations that has been allowed to foster itself via lax
regulation, enforcement, and market oversight is the practice of allowing multiple
contracts to be written for the same quantity of a physical product which results in a
daisy chain of unbacked contracts which is tantamount to fraud and manipulation
according to numerous on the books laws and regulations.
It is my opinion and comment that an egregous situation has been allowed to
develop over the years that if not corrected will necessarily result, due to it's own
structural defects, in severe dislocations not only in the financial markets, but also
puts at unreasonable risk the free market and real world economy as a whole.
To the general public this is an untenable position and must be rectified post haste.
Thank you for your time and attention in this most serious matter.
Respectfully,
Mark Richardson
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