Comment Text:
24 March 2011
David A. Stawick
Secretary of the Commission
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581
Dear Secretary Stawick:
On behalf of the National Council of Chain restaurants, a national trade association representing the chain restaurant industry, I write to express our support for immediate adoption of the proposed rule on speculative position limits for commodities (RIN 3038–AD15 and 3038–AD16 Position Limits for Derivatives), published January 26, 2011 in the Federal Register.
Chain restaurants are obviously large purchasers of a variety of agricultural commodities. As such, industry participants have often used the agricultural commodity futures markets to bring about, to the extent possible, stable, predictable pricing of our food and energy costs. Unlike speculators in these markets, we are legitimate commercial end users of the food commodities against which we hedge pricing risk. As commercial end users, we rely on well-functioning, efficient futures markets.
Over the past few years, however, explosive growth in passive, long-only speculative positions has interfered with the ability of commercial users such as ourselves to effectively hedge risk. The positions held by these speculators have strongly increased the demand for financial derivatives, and are disconnected from the actual supply and demand for the underlying physical commodities. The recent lack of convergence between physical product prices and futures prices for Chicago and Kansas City wheat provides an excellent example of how excessive speculation is distorting these markets.
In Title VII of the Financial Services Regulatory Reform Act of 2010, Congress acknowledged the potential harm of excessive speculation by requiring that the Commission impose speculation limits on currently unregulated markets. We believe the Commission understands its responsibility under existing law to prevent excessive speculation as an undue and unnecessary burden on interstate commerce.
The extraordinary volatility in many commodity futures markets continues as prices this month reached their second historical high in the past three years. Dozens of studies by industry experts, economists, academics, and Congressional committees have warned of the harmful effects of excessive speculation. These studies reinforce the need for meaningful position limits in the commodity markets. We encourage the Commission to strengthen the proposed rule and, in light of the growing commodities bubbles that threaten our economic recovery and security, we urge its immediate passage and enforcement.
As the Commission considers its final rule, it should ensure that the rule addresses these specific points:
1. Ensure that definition of bona fide hedges, as used to apply to both individual and aggregate position limits, properly includes commercial end-users who use physical goods and excludes speculative index funds or other entities that allegedly manage “portfolio” or “financial” risk. Under no circumstance should index funds qualify for the bona fide hedge exemption by hedging “general inflation risk.”
2. Ensure that position limits, either individual or aggregate, be set at levels that are effective in limiting speculative influences on commodity prices. In particular, stringent limits must be placed on long-only index fund positions.
3. Ensure that any increased margin requirements are strictly limited to non-commercial users and not applied to farmers, manufacturers and end users of physical goods.
4. Ensure that all swap dealers fully disclose the category of their customer (end user, farmer, traditional speculator, index fund) and that multiple entities cannot be used by speculative long-only index funds to circumvent speculative limits.
The position limits rule will play a crucial role in returning stability and confidence to the commodity futures markets and we urge the Commission to strengthen and adopt it.
Thank you for your consideration.
Sincerely,
Rob Green
Executive Director
National Council of Chain Restaurants
