Commodity Futures trading Commission (CFTC) Acting Chairman Walt Lukken should be getting better at testifying before Congressional committees but appeared somewhat weary at yet another hearing on Tuesday morning. One Senator questioned how Lukken could respond that he was not sure of the effect of speculation on commodity prices after noting at past hearings that he thought supply and demand were the determining factors. Apparently the questions are wearing on Lukken and to be fair, it is the Senators who seem to have made up their minds regarding the role of speculation on prices. And based on some of their questions, they clearly have not conducted the level of research into the matter as Lukken has. Lukken however, should be happy that a consensus is forming to appropriate more resources to the CFTC. Sen. Dick Durbin (D-IL) has introduced legislation to increase the CFTC budget and reiterated that pledge at today’s hearings.
I guess we should come to expect more heat than light from such hearings but it is disturbing when members of Congress seem to present disingenuous arguments.
Sen. Saxby Chambliss (R-GA) stated in his testimony, the proportion of positions held by commercial participants – those who can physically deliver crude oil or accept delivery of crude oil – and non-commercial positions – those held by speculators – has not changed over the past two years. Speculation in this contract, by non-commercial participants, has held steady at nearly 20%.
Back when we first looked at the affect of long-only commodity indexes back in 2005, we noted how that Commitment of Traders (COT) report had become distorted as the activity of index traders was being misrepresented in the commercial category. Economists for the CFTC acknowledged this and soon thereafter undertook a comprehensive study of the report. The result was the creation of a supplemental COT report (CIT) that created a new category: index traders. Unfortunately the supplemental report only includes 12 agricultural commodities and no energy contracts. However, given that the report shows the open interest of index traders alongside the traditional report, it should be relatively accurate to extrapolate out the size of index traders in energy futures based on the proportional allocations of these indexes. It clearly shows that the index traders, representing speculative acticity, are showing up in the commercial category.
This is disturbing coming from Chambliss because he seemed to be better informed than others Senators on the subject. At least he acknowledged the folly of blaming Lukken for $4 per gallon gasoline. Surely he knew that that the activity of index funds shows up disproportionately in the commercial category. His description of Commercial in his written testimony— those who can physically deliver crude oil or accept delivery of crude oil— has not been accurate since 1991 when the CFTC allowed swap dealers a hedge exemption. Swap dealers with short cash positions were granted relief from speculative limits so they could hedge in the futures markets because they were legitimate hedgers even if they were not “commercials” in the traditional sense as described by Chambliss.
That decision by the CFTC appears to be the crux of the matter, which makes it disturbing that it has not been brought up in a material way at the recent hearings.
Tags: CFTC, CIT, COmmitment of Traders Report, Hearings, Index funds, speculators
