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CFTC moves to cap speculative trading

January 13, 2012

The Commodity Futures Trading Commission (CFTC), the US federal regulator for derivatives trading, voted on 18 October to approve rules to curb speculative trading, mandated by the provisions of the federal Dodd-Frank overhaul of financial regulations.

The Commodity Futures Trading Commission (CFTC), the US federal regulator for derivatives trading, voted on 18 October to approve rules to curb speculative trading, mandated by the provisions of the federal Dodd-Frank overhaul of financial regulations. The federal rule gave CFTC the authority to limit exchange trading and “over-the-counter” swaps in commodities – including wheat and soyabeans as well as gold and petroleum – by limiting the number of contracts that a single firm can hold, but there are many exemptions to the rules the CFTC has adopted.

The curbs are aimed at investment firms and speculative funds that trade in commodity futures to profit from swings in market prices, widely believed to be a causal factor for much of the volatility in (food) commodity prices over recent years.

Under the new rules, due to come into force in January 2012, the volume of futures contracts that financial institutions can trade in 28 commodities will be restricted, while physical users of the commodities – such as airlines, agribusiness companies and others – will be exempt from the cap. There is also a stipulation that on contracts for near-term delivery, no firm can own more than 25% of a commodity’s estimated deliverable supply.

Critics complain, however, that the rule is so filled with exemptions that banks and hedge funds will have little difficulty in continuing speculative trading. According to Mark Masters, a hedge fund manager and chairman of Better Markets, a group advocating restraint in financial speculation, the move is “a good first step”.

t In November, the CFTC ordered an audit of every US futures trading firm – to verify that customers’ money is protected – after it was discovered that an estimated US$600M had gone missing from the bankrupt brokerage firm MF Global. CFTC has opened a formal investigation into the MF Global affair, following numerous “risk supervision failures”.


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