CFTC Commissioner Giancarlo Questions Position Limits Rulemaking

CFTC Commissioner J. Christopher Giancarlo delivered a speech before the USA EnergyRisk Summit. The speech focused on whether the proposed CFTC position limits rulemaking is necessary in the energy markets.

According to Commissioner Giancarlo, evidence presented at the CFTC’s recent Energy and Environmental Markets Advisory Committee (“EEMAC”) meeting suggests that (i) the “run up in oil prices before the financial crisis did not bear any of the signs of excessive speculation,” and (ii) “speculators are not responsible for the significant declines in oil prices over the last nine months.”

Commissioner Giancarlo reported that EEMAC also heard evidence indicating that energy derivatives markets are “generally functioning well, especially in the spot months, with no evidence that excessive speculation is causing any price movements, much less sudden and unreasonable ones.” He stated that based on what EEMAC heard, major energy markets “exhibit reasonable liquidity” and any regulations aimed at excessive speculation seem to be “a solution to a nonexistent problem.”

Additionally, Commissioner Giancarlo explained, the EEMAC meeting suggested that the current problem is caused not by excessive but inadequate speculation. He noted that in determining whether position limits are necessary or appropriate, the CFTC does not consider data on any over-the-counter swap. Given this lack of data, he stated, “it is hard to believe” that the CFTC has set necessary and appropriate limits “if it doesn’t even understand the true scope of the market.” According to Commissioner Giancarlo, EEMAC discussed two potential changes to address the “negative impact of the CFTC’s proposal on liquidity”: (i) tasking the CFTC with utilizing a system of position accountability, and (ii) having the CFTC review and update its deliverable supply estimates.

Commissioner Giancarlo stated that EEMAC also heard evidence suggesting that the CFTC’s proposal “unduly focuses on ‘limiting the activity of commercials in hedging in the markets,'” which would increase the risk of pricing commodities. In his own view, the overall effect of the CFTC’s bona fide hedging framework would be to “impose a federal regulatory edict in place of business judgment in the course of risk hedging activity by commercial enterprises.” He encouraged the CFTC to allow greater flexibility by permitting commercial enterprises to adapt to developments and advances in hedging practices.

Commissioner Giancarlo recommended that the position limits rulemaking be guided by two principles: (i) following data and (ii) being attentive to the true costs and benefits of the rulemaking for hedgers and taxpayers.

Lofchie Comment: The argument that speculators are responsible for driving up the price of energy by hoarding it seems divorced from reality. Outside of the CFTC and the political debate over speculators and position limits, the question whether hoarders are driving up the price of oil is not seriously discussed. For example, the Administrator of the U.S. Energy Information Administration (“EIA”) testified recently before the Senate Committee on Energy and Natural Resources that energy prices are affected by macro factors – such as the state of sanctions against Iran or the development of technology – factors that operate on a far broader scale than that of the ability of speculators to hoard oil (here is the testimony).

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