Commodity Markets Oversight Coalition Amicus Brief Sides with CFTC in ISDA v. CFTC
Commentary by Bob Zwirb and Steven Lofchie
The Commodity Markets Oversight Coalition ("CMOC") submitted an amicus brief in support of the CFTC in its appeal of a federal district court's ruling vacating its promulgation of position limit rules for physical commodities, ISDA v. CFTC, 887 F. Supp. 2d 259 (D.D.C. Sep. 28, 2012). CMOC's brief argues that the CFTC's rules are supported by the rise of speculative traders in the early 2000s, which "fundamentally altered the commodity derivatives markets to the detriment of commodities users" and by a congressional mandate that the CFTC take "swift decisive action" to end the "serious problem" of excessive speculation. Invoking the 2008 financial crisis, CMOC argues that the position limits were necessary "when properly viewed through the lens of the 2008 financial crisis and the long history of Congressional interest in excessive speculation." It faults the District Court's outcome for being "improperly divorced from the circumstances existing at the time [Dodd-Frank] was passed, and from the evil which Congress sought to correct and prevent."
See: Brief of Amicus Curiae Commodity Markets Oversight Coalition in Support of Appellant CFTC in Favor of Reversal.
Commentary
It is safe to say that the CMOC, formerly known as the Energy Markets Oversight Coalition, sees speculation in the marketplace where others do not. This is reflected in its brief, which - in contrast with that of the CFTC, the House Democrats, and Better Markets, which do not rely upon findings of excessive speculation to make their cases, but instead argue that no such predicate is necessary - argues that the commodity derivatives markets have been harmed from trading by "hedge funds, pension funds, and other large institutions."
There are two problems, however, with the CMOC's thesis that speculation has harmed the futures markets. First, in 2008, the CFTC's economists issued a report that not only failed to support this thesis, but found that oil prices rose inversely to institutional activity in the energy derivatives markets, suggesting that the positions of hedge funds "provided a buffer against volatility-inducing shocks." Interagency Task Force on Commodity Markets, Interim Report on Crude Oil, at 5 (July 2008), available here.
Second, there is simply a dearth of academic-quality economic research showing that speculative trading has significantly affected volatility and prices. See, e.g., Craig Pirrong, "Still No Theory. Still No Evidence." Streetwise Professor (Apr. 10, 2011), available at http://streetwiseprofessor.com/?p=4991#comments (characterizing studies associating speculation with price distortions cited by CFTC Commissioner Chilton as "superficial quasi-academic studies, and quotations from various figures, including some well-known economists, who have done absolutely no serious research on the subject"). Perhaps that is why the CFTC maintains that it does not need to show excessive speculation in order to establish position limits, that it can impose such limits "prophylactically." In taking the issue of excessive speculation head on, the CMOC, unlike others, should at least be applauded for addressing the rationale for the rule.
Commentary
The "Interagency Task Force," whose report is cited above, was led by CFTC staff and included staff of the Departments of Agriculture, Energy and Treasury, the Federal Reserve, the Federal Trade Commission and the SEC. Here are some further key lines from the report, which questioned whether speculators had driven up the price of oil:
• "The key driver of oil demand has been rapid economic growth";
• "[t]he distinction between hedging and speculation in futures markets is less clear than it may appear";
• "speculators serve important market functions - immediacy of execution, liquidity and information aggregation";
• "statistical correlations and tests are consistent with the view that current oil prices are being driven by fundamental supply and demand factors"; and
• "there is no statistically significant evidence that the position changes of any category of or sub-category of traders systematically affect prices"; "this is to be expected in well-functioning markets.
In short, the CFTC's own study seems to indicate that (i) speculators don't drive up oil prices, (ii) speculators are generally good for the markets and (iii) there is so much going on in the world oil markets (wars, economic booms and busts, government-sponsored oil subsidies) that it is impossible to be confident that position limits would lower prices or make markets better; further, it seems more likely that position limits would be expensive to implement and would make markets worse. Against the background of the report of the interagency task force, the CFTC's enthusiasm for position limits is puzzling. After all, the CFTC has a plate of responsibilities that is overflowing, and a budget that is unlikely to meet its requests (see our recent news stories on the CFTC's budget). Why spend limited agency resources on a dubious project when there is good that could be done elsewhere?