Comment Text:
Dear Mr. Kirkpatrick,
WEED is a German NGO which has worked on the issue of excessive commodity speculation for years, particularly on its regulation in the European Union. We thus appreciate the opportunity to comment on the CFTC’s proposed position limits regime and would like to urge you from a European point of view to implement a strong regime.
Commodity price volatility has severe consequences. We assume it to be likely that the increased volatility during the last years was partly caused by excessive speculation in commodity markets , mainly driven by investment funds as well as U.S. and European banks such as Deutsche Bank.
The EU has decided to apply position limits in its revision of the “Markets in Financial Instruments Directive” (MiFID) which was adopted in summer 2014. The introduction of position limits was, amongst others, inspired by the fact that the United States also has long-term experience with position limits as an important means to tackle excessive speculation. The U.S. role model for European regulation also includes the introduction of “aggregate” position limits in the U.S. sense which also cover OTC contracts “economically equivalent” to futures.
Currently, the technical standards to implement the MiFID are being discussed, and we, together with other NGOs, have also urged your European counterpart, the European Securities and Markets Authority (ESMA), to apply standards as strong as possible under the MiFID framework.
We are very concerned that the position limits foreseen in the Dodd-Frank Act are under heavy lobby pressure by the financial industry. We were already concerned when the lawsuit by this industry was successful and the CFTC had to restart its process. We hope that the CFTC will not reign-in to the lobby pressure in its new proposals.
It would be a real danger for the stability of commodity and financial markets if the United States would not re-establish or enforce its position limits regime thoroughly. The United States are still by far the leading commodity derivative market, with impact all around the world, including Europe and all other continents.
We thus urge the CFTC to do the following to finalize the position limit rule:
1. set position limits low enough to prevent excessive speculation. This actually means to go back to levels of speculation as they were usual before the financialisation process after 2000.
2. cover commodity index funds’ contracts with the limits, i.e. not let them profit from any “bona fide” hedge exemption as it was the case formerly. Index funds do not help the markets with more liquidity as they primarily enter markets that are already liquid. They also built up a position that is insensitive to market conditions which puts the price discovery function of the markets at risk.
3. apply equal position limits equally for physically deliverable contracts and cash-settled only contracts, in order to prevent regulatory arbitrage.
We thank you again for the opportunity to comment.
Yours sincerely
Markus Henn
(Policy officer financial markets)
