Wednesday, June 11, 2008

Speculator Challenged

UNITED STATES: 'Speculators' challenged.
Oxford Analytica
Published: June 11, 2008

UNITED STATES: 'Speculators' challenged.
Amid growing public disquiet about the rising cost of food and fuel, US regulators have come under increasing pressure from Congress to seriously question the role investor activity is having in driving up commodity prices.
Yesterday, the Commodity Futures and Trading Commission (CFTC) -- the main US regulator -- convened the inaugural meeting of its Energy Markets Advisory Committee. The meeting is the latest in a series of initiatives from the CFTC aimed at ensuring that energy and commodity derivative markets function without manipulation or abusive trading.
One of the key proposals has been to bolster information sharing with its UK counterpart, the Financial Services Authority (FSA). Yesterday the CFTC held talks with the FSA, to discuss introducing limits on traders' positions in London's oil markets. Around one-third of all West Texas Intermediate (WTI) crude oil futures contracts -- the US benchmark -- are traded via the FSA-regulated ICE Futures Europe exchange.
Another recent CFTC initiative, that of publicised investigations, represents a shift in culture for a regulator that has traditionally conducted enforcement investigations on the quiet. Cognisant of the level of widespread concern, the CFTC has decided to be open about investigations to demonstrate that it will identify and punish those involved in abusive market trading:
· Last December, the CFTC commenced an investigation into whether market participants are involved in using physical storage and distribution capabilities in concert with derivative trading in order to create market squeezes for crude oil.
· It has an ongoing investigation into whether or not abusive trading caused unusual price dynamics in the US cotton futures market earlier in the year.
However, in May, the CFTC announced that it had found no evidence of market manipulation in the silver market following a thorough investigation of data concerning the US silver futures market between 2005-07.
The mounting political pressure for action on commodity speculation is weakened by the absence of conclusive data demonstrating speculation's numerical impact on high energy prices. Furthermore, the complexity of derivatives trading makes it difficult to differentiate those market participants taking truly speculative positions versus those with longer-term commercial interests.
The draconian restrictions on investor activity being espoused by some US politicians would compromise derivative market liquidity and hinder risk management, making their adoption unlikely. However, the CFTC's new information-gathering and enforcement initiatives should yield a more nuanced and effective regulatory landscape.

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