The CFTC floated its proposal to set energy futures & futures options position limits yesterday. Here's the NOPR, and here's a cheat sheet and FAQ about the proposal.
The result is no surprise to me. In the weeks leading up to the announcement, many reporters had called to ask for my take on the CFTC's likely course of action. I responded that the CFTC would do something, but that the limits it chose would be relatively generous. The agency was between a rock and a hard place. On the one hand, Congress clearly expected action; indeed, I strongly suspect that Gensler had to promise that he would act on energy position limits to get the job in the face of skepticism from Bernie Sanders and some others in the Senate. On the other hand, it eventually dawned on the Commissioners that overly restrictive limits would just drive business to OTC, and perhaps overseas; given that Gensler in particular wants to rein in the OTC markets, this would be an extremely perverse outcome. So, they did something, but not much.
Which isn't the best alternative, but it's not the worst either. The best alternative would have been to take a principled stand like the FSA, which has remained skeptical on position limits because of the lack of any evidence that speculators distort prices.
Indeed, the entire justification for the CFTC action could be summarized as (with apologies to The Treasure of the Sierra Madre):
"Evidence? We ain't got no evidence. We don't need no evidence. We don't have to show you any steenkin' evidence!"
Don't believe me? Well, here's what they say:
The Commodity Exchange Act directs the CFTC to act prospectively, as necessary, to curb or prevent excessive speculation . . . The CFTC's notice of proposed rulemaking does not speak to whether there was excessive speculation in the regulated derivatives markets for energy commodities. [From the FAQ.]
The CFTC need not demonstrate that there has been excessive speculation in the regulated derivatives markets for the major energy commodities. [Emphasis added.]
I see. There is no evidence that speculation has distorted prices in the past, but the Commission feels it is perfectly acceptable to act against the purely hypothetical possibility that it might in the future-even though the logical and empirical basis for the hypothetical is extremely dubious, at best.
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