Commissioner Bowen Supports Position Limits
Commentary by Bob Zwirb and Steven Lofchie
CFTC Commissioner Sharon Y. Bowen called for the finalization and implementation of the CTFC's proposed position limits rules. In an address before the District of Columbia Bar, Commissioner Bowen asserted that the rules are a "necessity" and compared position limits to seat belts. "They won't be needed every day, but when you are driving a car and have an accident, they can mitigate your injuries," she said.
Commissioner Bowen contended that public speculation lies "at the heart" of the position limits issue. "While we may not be able to quantify speculative impacts on prices...neither can we show there is no impact." She suggested that the CFTC should try to minimize the damage excessive speculation could cause by limiting the size of the positions that can be held by a single market participant. She recognized that the public understands speculation to be good and necessary and that commercial companies hedge their risks in the marketplace, but the Commissioner warned that the need for speculation is not infinite. "You need a certain amount of water in the creek to swim. . . . At a high enough level, [however,] it threatens to wash you away. To drown you," she said.
Commissioner Bowen also highlighted two underestimated benefits of position limits: greater recordkeeping and more market data. She argued that these two benefits would help the CFTC to "cut through the darkness" affording a better view of market structure for commodity markets. Forthcoming position limit rules must incorporate lessons learned from pre-crisis behavior, as well as account for future challenges, she concluded.
Commentary
Since the price of oil now hovers just barely above $30 a barrel, having fallen nearly $110 in the past few years, and many energy firms now operate on the verge of bankruptcy, one may question the necessity of imposing "seat belts" on the crude oil market. Certainly, industry participants would favor a turbo charge in today's energy environment.
It is surprising that, citing a study that attributes 15 percent of the runup in oil during the last decade to speculation, Commissioner Bowen omits any mention of a similar study by the CFTC's own economists in 2008, which found the opposite to be true: oil prices during that period rose inversely to the speculative activity of swap dealers and index funds in energy derivatives (CFTC "Staff Report on Commodity Swap Dealers & Index Traders with Commission Recommendations," Sep. 2008, at p. 4, 22-23). That is, while oil prices rose during the period December 31, 2007 to June 30, 2008, the activity of commodity index traders during this period declined. As prices today on both oil and metals continue to plummet to multiyear lows – "battered by a mix of weak growth, rising output and a stronger dollar," as The Wall Street Journal reports ("Prices for Base Metals Plummet," Wall St. J. (Nov. 15, 2015)) – one wonders whether the prudent action would be to encourage more speculation in these markets rather than less – that is, unless one is expected to believe that commodities' prices go up only on speculation, and down only on fundamentals.
Commentary
The notion that, on a widespread basis, speculation drives prices up and beyond the reasonable expectations of market participants has always seemed questionable from the standpoint of economic theory. If, because of the behavior of some speculators, prices were to rise to unreasonably high levels, then why wouldn't other speculators seek to sell into those unreasonably high prices, make a sure profit, and drive prices down? Leaving aside the generalities in that assertion, it is hard to imagine a better example in which real-world events disproved utterly the notion that speculators could drive prices up, than the case of the energy markets during the events of the last few years. If speculators truly were driving up the price of oil by withholding supply from the market, then wouldn't other sellers (such as Saudi Arabia, Kuwait, Venezuela, Iran, Russia and U.S. frackers), who have a greater ability to deliver than any speculator has a capacity to store, step in to sell and make a profit? If current events in the oil markets are insufficient to dissuade a person from believing that position limits are irrelevant to energy market prices, then the questions that remain are as follows: (i) what events would be sufficient to dissuade that person and (ii) if no set of events would be sufficient, then isn't that person's fixed belief antipodal to the notion that regulation should be supported by data?
Commissioner Bowen's response to the last question is this: it hardly matters that "data does not exist to identify the impact of speculation in our markets with any statistical certainty." Commissioner Bowen then insists that we need position limits because "sovereign entities" may influence prices. Is the CFTC going to charge oil-producing nations with hoarding (by not drilling) or oil-using nations with hoarding (by storing oil)? How could that possibly work? Imagine what would happen if China were to accuse the United States of violating Chinese position limits by storing oil in strategic reserves. Neither the lack of data nor the impracticability of enforcing position limits against other sovereign nations seems to dissuade the Commissioner. In her view, this is a matter not of "quantitative" data but of "public policy process." The notion that a rule should be supported by a "process" that ignores the absence of data seems completely mistaken. Why hire knowledgeable regulators if they remain indifferent to data?
Commissioner Bowen's final argument seems to be that position limits are needed because the general public lacks "confidence." Even so, to adopt a massive regulatory regime on this basis is questionable when the lack of public confidence is utterly uninformed by facts.