December 20, 2010

A Solution in Search of a Problem

Asking "what are position limits supposed to do, exactly, and how?" economist Craig Pirrong explains why limits currently being considered by the CFTC appear to be "the financial equivalent of leeches or faith heeling." In particular, Pirrong argues that the rationale for the imposition of limits to control "excessive speculation" is "dubious theoretically and empirically," and "will have little, if any effect, on the size, strength, or price impact of [speculative] waves."

Pirrong also points out that the concerns with positions held by large funds such as ETFs " is misplaced": "If prices move against a big ETF (like USO, for instance), it's painful for the fund holders, but their positions are effectively fully collateralized, so their losses do not create counterparty default losses that could put others into distress."

Date
December 19, 2010

Cross Reference (links require a Cabinet subscription)
Dodd-Frank Act, Title VII, Sec. 737

Tags

Regulated Activities

Position Limits

Regulated Entities

FCMs and IBs, Floor Brokers

Body of Law

CEA Regulation

Jurisdiction

US - Federal

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