In a contentious 3-2 vote yesterday, the CFTC approved new position limits on 28 core commodities contracts. The measure is intended to curb speculation in the trading of grains, metals, and energies. In reality, it's going to change the way major banks and producers/users do business.
Okay, bear with me guys, because here's where it gets complicated. Please correct me if I get any of this wrong, because the CFTC release was pretty cryptic. But to the best of my understanding, the new limits are as follows:
For spot month contracts, no single company (trader) or the sum total of its subsidiaries may hold contracts for more than 25% of the estimated deliverable supply of the underlying commodity. Outside of the spot month, companies (traders) are limited to 10% of the underlying commodity's first 25,000 in open interest, and 2.5% thereafter.
The following 28 commodities are the core commodities identified by this regulation:
- CBOT Corn
- CBOT Oats
- CBOT Soybeans, Bean Oil, and Bean Meal
- CBOT Wheat
- KCBT Hard Winter Wheat
- MGEX Hard Red Spring Wheat
- ICE Cotton #2
- CME Milk
- CME Feeder Cattle
- CME Lean Hogs
- CME Live Cattle
- CBOT Rough Rice
- ICE Cocoa
- ICE Coffee
- ICE FCOG (Sell, Mortimer, sell!!!)
- ICE Sugar #11 and #16
- NYMEX Henry Hub Natural Gas
- NYMEX Light Sweet Crude Oil
- NYMEX NY Harbor Gasoline Blendstock
- NYMEX NY Harbor Heating Oil
- COMEX Copper
- COMEX Gold
- COMEX Silver
- NYMEX Palladium
- NYMEX Platinum
This is pretty controversial stuff, and it looks like the next step is the courtroom. Aside from bank speculation (let's face it - the largest bank prop trading operations have already been divested) this is going to have a massive impact on companies like Cargill who are more or less in the business of grains speculation. If the liquidity in the US futures market dries up due to speculators trading abroad (or in the cash markets), then the CFTC just threw the baby out with the bath water.
It will be interesting the see the effects of these new regs, and I'm guessing it won't take long. Unless, of course, enforcement turns out to be a joke, in which case it'll just be business as usual.
If anyone out there can explain the Natural Gas exemption to me, I'd much appreciate it. Also, how will these limits be applied to crack spreads and crush spreads? And whose job is it to tally the number of swaps contracts and add that to the open interest figures of the underlying? How the hell are they even going to do that?
How are they going to enforce it? Literally not allow a trader to buy additional contracts, if they are at the limit? Yeah, no idea how they are going to do that.
As for the exemption: there is most certainly some special interest / lobbying involved.
Good call on Gargill, I wonder how this will affect Glencore's business....anybody?
It's funny you should mention this, as I just spent two hours listening to someone talk me unconcious about natural gas development in the US, and I've come to the following conclusion:The natural gas exemption is there because the government wants that industry to grow, and will reign in the excesses later. There's a lot of chatter coming from resource people about the massive deposits that are being developed, and while I'm not a commodities person at all, it looks to me like natural gas is the next heated (pun intended) market. While the lobbyists are no doubt trying for good bonuses this year (or however the hell they're paid), this supports the US's strategic agenda of being energy self sufficient. Politicking notwithstanding, there was a lot of talk about this during the Bush years as well, so I'm not dignifying any one person/group, I'm just pointing out that this is a very long term development that will have heavy state involvement for the forseeable future. I don't have a mountain of stats to back anything I just said, it's just what it looks like to me based on what I currently know.
I see an opportunity here. When the government wants an industry to grow, there's a fortune to be made. I'm thinking something along the scale of growth that defence companies saw in the time from 1900-present.....MASSIVE.
My own opinion is that every other energy source has had very heavy costs attached, and this is a chance to do it right and stabilize energy needs while buying time to develop a permanent solution (I'm still casting my lot with nuclear / solar for the very long term, not that I'll even be alive to see that day come).
Wow. Are you trying to tell me that the US government actually has something resembling an industrial policy / energy independance plan? That would be very welcome...although not imposing additional regulation on a commodity because you want it to grow is not a very bold move.
If that is the real reason, I am all in favor...energy independance for the US would be very good for geopolitical stability.
days of free market are long gone.........
Eddie, what is a "crack spread" or a "crush spread?"
Crack spread is the spread created when you buy oil futures and offset the position by selling gasoline and heating oil futures, which allows you to hedge against risk due to the offsetting nature of aforementioned securities.
Crush spread is used in the soybean futures market to manage risk by combining soybean, soybean oil and soybean meal futures positions into a single position - hedge the margin between soybean futures, soybean oil and meal futures.
The regulatory pendulum is finally starting to swing, too bad it's in all the wrong places.
Still no laws about how much corn I can buy though, watch out whole foods, I'm bringing a dump truck
how often is ti that one trader exceeds that now
That's almost impossible to know because traders (especially huge institutional traders) not only don't disclose their positions, they go to great lengths to disguise them.
While it's unlikely that one party ever held more than 25% of the open interest in corn or crude oil, it's not at all far fetched to think that it's happened many times in the softs (cotton, cocoa, coffee, etc.) or the meats (traditionally mob-controlled Chicago markets).
Is this legal? I read an article yesterday saying how this might of crossed the line and will be contended in courts.
Gotta love regulations limiting positions. I can't imagine that a way around this will be found.
London is going to pick up so much business with this new legislation and the financial transaction tax in the EU....
This is exactly why we should completely ignore the left when it comes to energy planning. Nuclear is perfectly fine with a lot of development and advancement still left to be discovered.
Everyone in this world is such a cunt. People don't like wind turbines because it makes wooshing noises. We were going to put solar all over death valley, but some lizard got in the way. No one wants a nuke plant near them, yet everyone loves the energy they produce. Let's not go after natural gas since fracking has a chance to contaminate the water.
On and on and on. Complete cunts.
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