Comment Text:
Comments on “Position Limits for Derivatives” to the U.S. Commodity Futures Trading Commission
RIN 3038-AD15 and 3038-AD 16
International Working Group on Trade and Finance Linkages (IWG)
March 28, 2011
The undersigned members of the International Working Group on Trade and Finance Linkages (IWG) and other civil society organizations are pleased to submit comments on the proposed rulemaking for position limits on derivatives. IWG members work with governmental and intergovernmental agencies on trade, finance and development issues. The IWG is in the initial stages of developing a commodity regulation platform for which this is our initial submission to the Commodity Futures Trading Commission.
The position limit rule is one measure to implement Title VI of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank), which amends the Commodity Exchange Act (CEA). Part of the following short comment concerns the proposed rule itself, rather than some of the consequences of the failure of “position accountability” to prevent excessive speculation. However, the public interest provisions of CEA requires the CFTC to take into account the consequences of rule definition, implementation and enforcement for Foreign Boards of Trade in which futures exchange prices have historically functioned as benchmarks for forward contracting commodity imports and exports.
The United Nations Conference on Trade and Development (UNCTAD) secretariat stated in 2010 that “highly volatile commodity prices act as a serious distortion on the development process.” One consequence of what UNCTAD calls the “financialization of commodity markets,” is that many developing country importers and exporters have been unable to use futures market prices as reliable benchmarks for forward contracting. This loss of risk management capacity has resulted in high agricultural and energy import bills and volatile commodity export revenues. Decreased risk management capacity has disrupted developing country strategies to use trade for development and to implement investment strategies. Furthermore, some developing countries use agricultural commodity futures prices as reference prices in their agricultural investments planning and policy design. Highly volatile prices often lead to bad investment and policy decisions that damage small producers and rural communities.
Import bill spikes have further depleted many developing country hard currency reserves, already drained by Great Recession capital flight, leaving scarce public sources for essential services and investments.
Short term export revenue spikes from the commodity price bubble have distorted investment patterns that would enable economic diversification in value-added products, thus deepening the “resource curse” of commodity export dependency. Most developing countries have no influence over the commodity market regulations or deregulations that affect prices in futures and options exchanges that are now dwarfed by the unregulated universe of Over the Counter swaps.
The IWG is pleased that the CFTC has proposed position limit formulas for exchange traded instruments, and eventually for OTC swaps, once sufficient data on swaps trading reported to the CFTC, under Dodd-Frank authority, provides the CFTC with sufficient basis to set both spot month and aggregate position limits for both exchange and OTC commodity contracts. We would like a more stringent limit formula to reduce per trading entity market share concentration, but believe it is imperative now to accustom market participants to conforming to proposed position limits that the Commission can approve. We agree with CFTC Chairman Gary Gensler that these position limits, when effectively enforced by an adequately resourced CFTC, will ensure fair and transparent markets for all participants (Appendix 2 to the Proposed Rule).
Unfortunately, resistance to Dodd-Frank and to CFTC enforced position limits by the beneficiaries of exchange self-regulated “position accountability,” whose failure triggered global economic damage, has delayed and curtailed the publication of the proposed position limit rule. Commissioner Bart Chilton is right to note that “We need to address excessive speculation in these markets now” (Appendix 3). CFTC trade data in a recent Federal Reserve Bank of St. Louis Review article show that exchange traded and OTC index funds traded long only were approaching in September 2010 the peak of the index driven price spikes of June 2008. Unhappily, as Commissioner Chilton notes, these long only positions have now exceeded the June 2008 peak and are a major driver of excessive speculation.
We do not fault the CFTC for exceeding the statutory time limit in Dodd-Frank for publishing position limit and other rules. The financial and non-financial industry beneficiaries of “dark market” trading have a short-term profit incentive to continue their opposition to Dodd-Frank and to the market transparency and fairness that position limits would help bring. Nor are the current high food and energy prices in many import dependent developing countries due simply or only to excessive speculation enabled by regulatory failure or negligence that results from myriad exemptions, waivers and exclusions. Nevertheless, we urge the CFTC to move expeditiously to implement rulemaking on the proposed position limits to cover both exchange traded contracts and OTC swaps,
Furthermore, we request the CFTC to discuss with members of the commodity markets technical committee of the International Organization of Securities Commissions (IOSCO) about how to harmonize position limit rules to prevent regulatory circumvention in less rigorous jurisdictions. We further request that the CFTC propose that IOSCO invite UNCTAD, the UN Food and Agriculture Organization and other relevant intergovernmental agencies to become observers at IOSCO. Finally, we believe that IOSCO should develop procedures to enable the participation of accredited international non-governmental organizations in the development of its best practice guidelines. IWG members would be pleased to meet with your international office to discuss these ideas.
Thank you for your consideration of these comments.
Sincerely,
Campaign for Reform of the World Bank (Italy)
Center of Concern (U.S.A.)
Comision Nacional de Enlace (CNE - Costa Rica)
Coordinadora Andina de Organizaciones Indigenas (Andean Region)
Development Alternatives with Women for a New Era
Ecuador Decide (Ecuador)
IBON International (The Phillipines)
Institute for Agriculture and Trade Policy (U.S.A.)
K.U.L.U.-Women and Development (Denmark)
New Rules for Global Finance (U.S.A.)
Red Mexicana de Accion frente al Libre Comercio (RMALC)
Resist IFIs (Pakistan)
Third World Network Africa
Uganda Manufacturers Association
