Comment Text:
Dear Madams and Sirs,
I work for a German non-profit organisation which has been dealing with the regulation of commodity derivatives markets for some years and has done extensive advocacy work on the introduction of speculative position limits for these markets in the European Union.
In mid-January, a political compromise has been decided on the review of the EU's Markets in Financial Instruments Directive (MiFID): Position limits will be mandatory for every European trading venue and also all "economically equivalent" OTC contracts in the future.
In my advocacy work on the MiFID, the former strong position limits in the U.S. including the OTC coverage have been a model for European NGOs. I am thus writing to you to express my strong support for strong position limits in the U.S. commodity derivatives including energy futures, options and swaps.
In my view, the risk management function of commodity derivatives cannot be ensured if excessive speculation can take place. This does not only mean cornering but also the overall level of speculation compared to hedging.
Speculators might to a certain extent improve derivative markets by providing liquidity. However, single speculators as well as speculators as a whole group of traders should not be allowed to dominate these markets or take such large positions that they distort price discovery, exacerbate market volatility or manipulate prices. Attached, you will find a list with studies that support this view. Even though I am aware that there is an ongoing scientific debate about this issue, I ask you to take these studies into account.
As I understand, the proposed rule would set spot-month position limits at 25 percent of deliverable supply. In my view, this is much too high to stop all harmful trading activity. Only a lower limit would ensure market stability and prevent market manipulation.
The bad experiences within the US with the 2008 price bubble in my view make it necessary to address excessive speculation in the interest of commercial participants of the markets and US consumers. But also consumers all around are affected by this reform due to the leading role of US derivative markets for global price discovery.
The limits would be also important to ensure regulatory coherence with the EU which has, as mentioned above, introduced mandatory position limits. A difference to the US would create regulatory arbitrage which can be abused by speculators.
Thank you for your consideration.
Sincerely,
Markus Henn
