Time to Short Speculation

Speculation has moved to the front of the agenda at the Commodity Futures Trading Commission. The CFTC has embarked on two regulatory excursions that will examine areas where speculation has been overlooked, or even sanctioned.

The Commodity Exchange Act is an anti-speculation law. Section 4a(a) declares that excessive speculation in commodity futures may "cause sudden or unreasonable fluctuations" in the prices of the underlying commodities. The CEA gives the CFTC express power to control speculation. The CFTC has enacted rules controlling speculation in agricultural commodity futures (see this CFTC guide) but not in futures for other commodities. Yesterday, the CFTC announced that it would begin hearings on the possiblity of controlling speculation in energy commodities by developing similar position limits for those futures. According to Bloomberg News, this may mean trouble for the energy trading departments at Goldman Sachs and Morgan Stanley.

Bona fide hedging transactions, "economically appropriate to the reduction of risk," are exempt from the agricultural commodity position limits. In March, the CFTC issued a concept release announcing plans to review the way bona fide hedging exemptions are granted. For more on that release see this Fried Frank memo.