New CFTC Rule on Oil Trading Too Weak to Curb Speculators, Industry Officials Say

This story appears in the Nov. 7 print edition of Transport Topics.

Trucking and fuel industry officials said a new commodity trading rule is “too weak” to curb the excessive speculation in world oil markets that causes dramatic price swings.

The Commodities Futures Trading Commission approved a rule Oct. 18 that limits — to no more than 25% of the deliverable supply of oil in one month — the number of futures contracts, or positions, that an oil trader can hold. Historically, position limits have been set by the commodity markets themselves.

Richard Moskowitz, regulatory affairs counsel for American Trucking Associations, said ATA was pleased the rule creates a “framework” for establishing reasonable limits but that “these initial limits are too weak to have a meaningful impact on excessive speculation in the energy futures market.”

Similarly, Jim Collura, vice president of government affairs for the New England Fuel Institute, called the rule “a landmark development.”

He noted that CFTC always has tracked oil futures contracts traded on commodities exchanges, but under the new rule, it has the power to create a system that also tracks trades executed by swaps dealers, those who do not trade on the exchanges. The rule also governs foreign traders and exchanges that do business with U.S. customers.

However, he did see limitations with the rule.

“The negative thing you could say is the limits by themselves — by most accounts and by both sides, those that are for it and against it — they’re probably not going to do much of anything now,” Collura said.

Collura said the 25% limit on futures contracts is too generous; it should be lower to prevent excessive speculation.

Before the rule can take effect, the CFTC must define swaps markets and swaps dealers, a very difficult legal task, Collura said.

The new rule allows trucking firms to continue to hedge fuel purchases without being subject to the position limits rule. Hedging, a protection against sudden price spikes, has always been permitted in certain industries that are heavily dependent on one commodity as trucking is on fuel.

The five-member commodities commission debated for more than two years what effect speculators have on oil prices, largely in response to complaints from truckers, airlines, manufacturers and consumer groups that excessive speculation was driving up fuel prices even though the recession had drastically slowed demand for oil.

It was not until the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010, however, that the CFTC had the power to design a rule.

Dodd-Frank, including the CFTC’s new rule, is expected to be heavily litigated once all the federal agencies involved have completed their rulemaking, Collura said.

Traders and financial institutions have argued against the restraints imposed by Dodd-Frank.

During CFTC’s protracted debate over position limits, the International Swaps and Derivatives Association Inc., known as ISDA, argued in comments filed with the commission that position limits could endanger an industry’s ability to hedge on a vital commodity.

ISDA also argued that position limits “could cause business and related employment to migrate to more favorable regulatory systems abroad.”

At the time of the vote, commodities commission chairman Gary Gensler said the new rule meets the congressional mandate on position limits.

“Position limits help to protect the markets both in times of clear skies and when there is a storm on the horizon,” Gensler said.