The Dow Jones Indexes’ mid-year economic outlook broke down into a discussion over the hedge exemption afforded swap dealers and index traders who hedge their cash positions in the futures markets.
Despite a Commodity Futures Trading Commission (CFTC) study released last September that disputed consistent and relentless arguments that speculators caused last year’s spike in crude oil, several members of Congress have persisted in pinning the blame on the large index funds that track various commodity indexes. There are several efforts to take away the hedge exemption that allows index traders hedging their cash exposure to commodity markets with futures to trade beyond speculation limits.
Those blaming speculators for price volatility would like to limit hedge exemptions to the traditional commercial participants who actually make or take delivery of a commodity.
Phil Flynn, senior energy analyst for PFGBest Research, who provided an outlook on crude oil at the panel, said it would be a mistake to restrict participation in commodity markets. “Liquidity always lowers volatility,” Flynn said, “[markets] have gotten more volatile because of the economy, not because of more participants.”
Stephan Platt, commodity futures strategist for Archer Financial Services, took a different view, noting that the size of the various commodity indexes has created big problems as various commodity futures markets rolled from month to month. “Commodities are finite and need to be treated differently,” Platt said.
Jack Scoville, vice president at Price Futures Group, said that the spike in wheat prices in 2008 was a “Cash market led rally, not a spec index funds rally.”
This goes counter to the report (Levin Report) recently released by the U.S. Senate Permanent Subcommittee on investigations regarding the wheat market. CFTC Chairman Gary Gensler in testimony before that subcommittee today noted, “The Subcommittee’s wheat report found that index traders were one of the primary causes for the large price spreads that inhibited convergence [in the wheat market]. The report recommended that the CFTC limit the positions of index traders to the standard speculative position limits for wheat futures. The CFTC is seriously considering this recommendation and will examine it in its upcoming hearings.”
Scoville said, “I am waiting for someone to show me how the funds have done this,” adding that if prices get to a level they should not reach, they will not remain there very long.
Flynn added that restrictions on participation in the oil futures market could do damage to the market as large traders would hedge in the physical market. “They would be buying product and taking it off of the market…it would make trading less transparent,” Flynn says.
The Dow Jones-UBS Commodity Index is up 3.74% in 2009 and there was approximately $27.5 billion tracking their group of indexes as of the end of the first quarter.
Tags: CFTC, hedge exemption, speculators
