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Comment for General CFTC CFTC and SEC Staff Public Roundtable on International Issues relating to Dodd-Frank Title VII

  • From: John W Gavin
    Concerned citizen

    Comment No: 48153
    Date: 9/7/2011

    Comment Text:

    I'm sure you have been receiving numberous complaints from various investors who have lost in the commodities markets and ask that you fix something to help them win the gains they desire.
    There are also those who want us to believe that these markets are under the control of speculators who can force profits into their pockets using some magical scheme that only they understand.
    Many of the complaints seem to be asking for some kind of social justice to prevent "rich" people from gaining profits. All of these opinions must, of course be considered, although the evidence that their claims are actually based on factual evidence is yet to be seen and so, highly doubtful.

    The goals of these hearing should be to maintain a fair marketplace in which both hedgers and speculators are able to enter positions that have little effect on the actual fair pricing mechanisms in the markets.

    In order to accomplish such a goal, the interventions by oversight authorities must not interfere with the actions of the participants except to establish simple rules that can be followed and monitored to assure compliance. There must be a mechanism to assure payment and delivery must be assured on a timely basis.

    The suppliers of products traded on these markets should not be forced to utilize the exchanges if they desire to trade privately. But such private trading should not include speculative or hedging trades, of which both should be conducted solely on regulated exchanges.

    To prevent the undue price effects in the markets related to the hedging and speculative trading, all of the derivatives should be done against actual product that has been presented to the market for trade. In this way, all derivatives will have assets to back them and excessive speculation can be avoided.
    All derivatives should therefore be traded on an exchange where both buyers and sellers can enter desired trade prices to find acceptable trades. Thus, every buyer will have a seller or no trade will be possible. Therefore the derivative markets will only be a zero-sum game and have no substantial effect on the actual commodity pricing. Speculation will always have a neutral effect on the outcome for the market. There would have to be a market-maker or specialist to facilitate trades and a clearinghouse to ensure that trades are associated with the proper payment echanged by speculators or that producers receive payment from hedgers wanting a price guarantee.

    It seems that by always limiting speculation to the availability of product that would have to be borrowed before the trade is made, there will be a protection against market manipulation. The market should not be allowed to enter trades that have no such product available to back the trade. And product must therefore always be identified and tracked throughout the entire market process until delivery is completed. Limiting the trading of commodities this way will not eliminate the ability to speculate using the options markets where different rules would apply.

    In the equity options markets borrowing is required to create short equity positions. Please remember that synthetic positions are often created using options that aid in the management of risk in the equity markets. Similar options trading in the commodities markets should be allowed to continue as a risk management tool that also improves price stability.

    When trades are always initiated using available product on the exchanges, the monitoring of off-market communications that concern only private sales will only need to be undertaken by police investigating fraudulent business practices, something that the commission should have little involvement with. We should not be imposing government regulatory bodies into private business matters as the legal system has done all the work needed in this area.
    Let's try to keep the system as simple and efficient as possible.

    Good luck!

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