Not improved with age

CFTC/speculators: America’s top commodities cop is eager to prove his bona fides. Gary Gensler, the new head of the Commodity Futures Trading Commission, plans to hold hearings this summer on whether the agency should limit the activities of energy traders to curb “excessive speculation”. But any rules born of such a simplistic view are likely to be harmful.

This new initiative represents a 180-degree reversal from the CFTC’s position just a year ago, when the agency issued a report debunking the idea that speculation was behind the oil price run-up. Several years of trading data showed roughly equal volumes of long and short positions in the oil futures markets.

Apart from that evidence, a big problem with Gensler’s new inquiry is that “excessive speculation” is in the eye of the beholder. One person’s speculator is another’s welcome provider of market liquidity. Granted, the CFTC is targeting commodities with finite supplies, so at first glance position limits might deter those who otherwise would seek to corner a market or cause a squeeze when futures contracts mature. But attempts to do so are already prohibited by rules against market manipulation.

Gensler also wants to re-examine the rule that exempts traders from position limits when they are hedging actual deliveries of a commodity. If that exemption was removed, those who took a purely financial interest in a commodity – through, say, derivatives that settle for cash – would face constraints.

This could throw a big wrench in the market. Say a bank sold fuel hedges to an airline. The bank could trade energy futures freely, but if it tried to lay off its own exposure to the airline with other counterparties using cash-settled instruments, its trading partners might face limits. That would limit the bank’s ability to sell the fuel hedges in the first place. The end result would be higher costs to the airline.

The CFTC also wants to review whether commodity index funds — used by many investors to take exposure to energy markets — should also be subject to position limits.

Yet existing rules appear to cover the situations regulators worry most about. Instead of seeking to restrain trading, the government should give agencies like the CFTC more resources to enforce existing anti-manipulation and fraud rules. That would be far less likely to backfire.