When I saw the list of panelists to speak at the Commodity Futures Trading Commission’s hearings on speculative position limits last month my interest was peaked. Dr. Henry Jarecki was on the list and I have had the pleasure and challenge of interviewing Dr. Jarecki who has also contributed a couple of articles to Futures over the years.
I was interested because I knew that Dr. Jarecki had strong opinions on the issue and tends not to pull his punches. To put it more bluntly, he doesn’t suffer fools lightly and there has been a lot of foolish talk and recommendations on using regulatory powers to limit speculation and affect price by those who would blame speculators for the run up in commodity prices in general and more specifically for last year’s spike in crude oil.
I knew Jarecki had a different opinion because we profiled him in Futures a year ago when the controversy over index funds was heating up and he clearly stated that the idea of speculators causing price spikes was nonsense. He suggested limiting futures speculators was akin to smashing all the thermostats in an attempt to break a heat wave.
Jarecki was a pioneer in the field creating long-only funds to track the price of a basket of commodities. He also understands efforts to manipulate markets as he was a director with Comex during the Hunt Brothers attempt to corner the silver market and he played a role in stabilizing silver prices after the Hunt Brothers scheme fell apart in bankruptcy.
Given that several of the invited speakers (and perhaps a couple CFTC Commissioners) had accepted the view that speculators contributed to the spike, I expected Jarecki’s testimony to be provocative. What I didn’t expect was for the CFTC to revoke the exemption his firm enjoyed from spec limits in corn, wheat and soybean futures less than one month after his testimony.
But on Monday the CFTC withdrew no action letters permitting DB Commodity Services LLC, a commodity pool operator (CPO) and commodity trading advisor (CTA), and Jarecki’s firm, Gresham Investment Management (GIM), permitting them to take positions in certain grain markets that exceed federal speculative position limits set forth in CFTC Regulation 150.2.
The CFTC stated in its letter that the “no-action position in both cases stated that any change in circumstances or conditions could result in a different conclusion.”
However, the letter did not say whether any such change in circumstance had occurred.
In the letter granting GIM non action relief the CFTC stated that the relief was based on the following conditions:
• The futures trading activity passively tracks the [funds] strategy;
• The strategy continues to reflect a broadly diversified basket of tangible commodities, calculated and rebalanced based on an objective, predetermined mathematical formula, as described in your letter;
• The futures trading activity is unleveraged;
• The futures trading does not result in price exposure for [the firm](i.e., the price exposure is passed on to the individual account holders or the various pool participants, including investors in funds subject to, or exempt from, the Part 4 rules, as the case may be);
• As noted, positions in excess of the speculative limits are not carried into the spot month;
• [The firm’s] clients are provided with at least the level of disclosure and transparency described in your letter; and
• The maximum long CBOT corn, soybean and wheat futures positions held pursuant to the no-action relief do not exceed 17,500 contracts for a single non-spot month (27,000 contracts for all months combined) in corn, 9,000 contracts for a single non-spot month (15,000 contracts all months combined) in soybeans, and 11,000 contracts for a single non-spot month (13,000 contracts all months combined) in wheat.
To my knowledge, none of those conditions have changed.
The CFTC did state in the no action letters that strategies employed by these entities would not qualify for a bona fide hedge exemption under the Commission’s regulations. So if the programs engaged in over the counter swaps and their counterparties hedged in the futures market, those counterparties would currently qualify as bona fide hedgers (at least for now).
In his written testimony Jarecki argues convincingly against the notion that speculators caused price spikes and noted that “every manipulation I have ever seen or heard of has been undertaken in physicals and almost always by commercials” — who by the way as a group are aligned with the blame speculators crowd.
Jarecki may have ruffled feathers when he noted, “I appreciate, however, that the idea that commodity futures purchasers cause high physical market prices is superficially appealing. And I accept that the Commission may, in response to public concern, decide that something should be done. Ut aliquid fiat, we used to say when I practiced medicine: “In order that something be done.” When the relatives were pushy and asked us to do more, we gave large and very colorful pills. Ut aliquid fiat videatur: “In order that it be seen that something is being done.”
Ironically, the concluding paragraph in Jarecki’s written testimony states: “Indeed, before thinking about position limits themselves, the regulatory body should revisit the question of swap exemptions and, if necessary, require all those currently enjoying such benefits to request the position limit exemptions that firms like ours have asked for and been granted for many years. It would, in any case, be grossly anti-competitive and would put out of business small enterprises like ourselves if what we do were banned or limited in any way before the same effective constrains are placed on those who assert swap exemptions.”
This is apparently what the CFTC has chosen to do. I have not been able to speak with the CFTC or Jarecki since this announcement and I certainly would like to get both perspectives before accusing the CFTC of having a thin skin but the timing is suspicious and given the lengths the agency went to publicly discuss the issue it is odd that it did not provide more of an explanation for its action.
Tags: CFTC, Dr. Henry Jarecki, Spec limits
