Commodities traders take aim at rule to limit speculation
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Some of the world’s biggest commodities traders will take a strong line against a new plan to limit market speculation, arguing it would derail the everyday business of buying and delivering shipments of grain, oil and metals.
A lobby group representing companies including Archer Daniels Midland, BP, Cargill and Louis Dreyfus Commodities intends to file a sweeping critique of the “position limits” rule proposed by the US Commodity Futures Trading Commission in formal comments due on Monday, according to a copy seen by the Financial Times.
The commission should “reconsider and revise” its proposal and “avoid any wholesale redesign of the current regime”, the Commodity Markets Council’s draft letter said.
The lobby group represents some of the largest global trading houses, which use futures markets to insure against a rise or fall in the price of inventories they buy and sell. It also includes futures exchanges and some proprietary trading groups and exchanges.
Its membership includes speculators targeted by the CFTC proposal and merchants that are supposed to be exempted from it. Some trading houses also manage in-house hedge funds for investors.
The CFTC rule aims to prevent “excessive speculation” from distorting commodity prices. Congress included it as part of the Dodd-Frank financial reforms in response to notorious spikes in oil and wheat prices in 2008.
Under the 164-page proposal, commodity merchants must certify they are holding large futures positions to hedge against physical inventories in order to claim the exemption from the limits. CMC members believe it will disallow positions opened ahead of pending purchases of commodities, such as yet-to-be harvested corn.
“Our main concern is that, if it is done poorly, this rule has the perverse effect of taking away risk management tools that we’ve used in the ag and energy sector for decades,” said Gregg Doud, CMC president.
Position limits have been among the most contentious of the dozens of derivatives rules the CFTC has unveiled in the past three years. The current proposal is the regulator’s second attempt after a federal court rejected the initial version in response to a lawsuit brought by Wall Street.
The EU is developing its own set of commodity position limits.
The CFTC’s proposed rule invokes the Hunt brothers’ attempt to corner the silver market in the late 1970s and the spectacular collapse of hedge fund Amaranth over natural gas bets in 2006 to explain the need for the new limits, which apply to all futures and swaps linked to a list of 28 commodities.
The CMC letter said the proposal would “exceed the mandate of Congress”, though Mr Doud said the group was not interested in litigating the issue.
Brian Dierlam, director of federal government affairs at Cargill, said: “We want the final rule to reflect the needs and concerns of the commercial marketplace”.