CFTC’s Bart Chilton Takes it to the (Position) Limits One More Time

Yves here. This post is important not simply because it describes where the fight over position limits stands and why it’s important, but it also gives some insight into regulator processes. It makes clear how even as few as two well placed officials, Bart Chilton and Gary Gensler, did a great deal to hold the line against predatory large financial firms. It also shows how hard regulators have to fight to do their job.

By Jennifer Clapp, Professor in the Environment and Resource Studies Department, University of Waterloo, Canada. Cross posted from Triple Crisis

One of the Commodity Futures Trading Commission’s (CFTC) most colorful commissioners, Bart Chilton, announced last week that he is stepping down soon. Chilton, one of the few commissioners at the CFTC with agricultural experience, has been a rock-n-roll hero of position limits during his term, frequently referring to rock music in explaining his views on commodity derivatives regulation. For example, he referred to position limits—a ceiling on the number of futures contracts a single non-commercial trader is allowed to hold—as “suggested speed limits on a dark desert highway” (a reference to the 1977 Eagles song “Hotel California”).

Chilton’s parting speech noted that the CFTC was “taking it to the limits one more time” (a reference to another Eagles song). This was in direct reference to the CFTC’s announcement that same day of new, rewritten regulations to establish position limits on speculative commodity futures trading. The proposed rules mark an important milestone for the CFTC in its attempts to rein in excessive speculation that can disrupt commodity markets. But in the longer history of the issue, how best to regulate these markets is likely to remain contested.

The rules are aimed at a suite of physical commodities, including agricultural crops, fuels, and metals. The 2010 Dodd-Frank Financial Reform Act requested the CFTC to impose position limits to help reduce volatility in these markets. In its attempts to do so, the regulating agency has faced a storm of criticism and legal action from financial-industry interests who feel that position limits are unwarranted and disruptive of free markets.

Indeed, this is the CFTC’s second try at crafting new rules to impose position limits in recent years. The first version—unveiled in 2011—was successfully challenged in court by financial lobby groups. The International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) disagreed with the CFTC’s interpretation that the Dodd-Frank Act required it to impose position limits. They also claimed that the CFTC did not demonstrate that position limits were justified.

In October 2012, just before the earlier rules on position limits were due to go into effect, the courts ruled in favor of the challengers, preventing reforms from being implemented. The CFTC filed an appeal to the court’s decision, and got right back to work drafting a new version of the regulations, which were finally approved by the last week.

Consistent with its previous version, the proposed rules impose position limits on 28 physical commodities as well as derivatives associated with those commodities. Bona fide hedgers—that is, those traders who are producers or end-users who are in the markets to hedge against genuine risk—are exempted from these limits.

Other exemptions were also introduced, however, and the requirements for parent and affiliate firms to bundle their positions (important for reporting purposes and to determine if position limits have been exceeded) have been eased. The earlier version required firms to aggregate their positions if they owned a 10% or more stake in an affiliate, and that requirement has now been relaxed to those firms with more than a 50% share in an affiliate. This loosening will likely please banks that own a minor stake in commodity firms, as they earlier complained that the 10% threshold was far too low.

In introducing the proposed regulations, the CFTC asserted that it already has congressional power to impose position limits (which it has had since the Commodity Exchange Act was passed in 1936) and restated that the Dodd-Frank bill required it to put new position limits in place.

Still, to ward against another potential lawsuit, the regulator provided over 450 pages of rationale for the proposed regulations. It gives detailed examples of the cornering of the silver market in 1979-80 by the Hunt brothers, and manipulation of the natural gas market in 2006 by the hedge fund Amaranth, as justification for the imposition of position limits.

The CFTC also provides an extensive evaluation of over 134 academic studies on the effect of commodity speculation on price volatility (a review that is much more even-handed and inclusive than the ISDA’s very selective review of literature on its CommodityFACT website). The review revealed mixed views, but as CFTC Chairman Gary Gensler noted, in his view when studies are split about the effects, “it’s better to err on the side of caution.”

The CFTC’s approach, this time around, to show how a lack of limits has distorted markets is a smart attempt to reverse the burden of proof. The onus now is on the lobby groups that seek to challenge the rules to show that the imposition of position limits harms liquidity and prevents hedging.

Although the proposed rules are now on the table, there are reasons to temper one’s optimism going forward. The two most vocal champions of tighter position limits at the CFTC have announced that they are leaving the organization. Gensler had already announced, before Chilton, that he would be departing by end of year.

There is likely to be a fierce battle over the replacements for Chilton and Gensler, and there is every chance that their replacements won’t be as committed to tight rules on position limits. President Obama only just this week announced his nominee to replace Gensler, Timothy Massad, who as a Treasury official was responsible for bailing out the banks following the credit crisis.

Position limits for commodity markets have been a subject of heated debate on and off for the past 100 years. As history shows, regulations on commodity traders have repeatedly been hard fought, later challenged, often repealed, and subsequently brought back again after a crisis in which speculators are viewed with great suspicion. Speculators, in other words, have tried to live “Life in the Fast Lane,” while regulators have been reluctant to “Take it Easy.” Given the winding path of commodity derivatives regulation over the years, and with the promise of a “New Kid in Town,” it is hard to know how significant this latest development will be in “The Long Run.”

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  1. profoundlogic

    Nice use of lyrical prose. All kidding aside, this issue could be more important than many people imagine. The potential ramifications of the grand larceny currently going on in our commodities markets could easily spill out into the broader banking sector. Just think about the notional derivatives issue and you get the picture.

    Right now the crooks continue to hide behind a complicit government willing to do their bidding, but history has shown that greed knows no bounds and these clowns have a propensity for pushing things too far.

    Jesse has done some nice work on this issue in the gold market. It has become a comical farce, and if it blows up (as he suspects it might) it “could make the London whale look like the Canary Wharf carp”.

  2. AndyB

    The outright suppression and manipulation of the precious metals markets by JPM et al is no longer a conspiracy theory, but verified fact. JPM has an effective “corner”, especially in the silver market, which would not be allowed for any other commodity such as wheat, corn etc. But because they are effectively acting as agents for the USTreasury and the FED, they are allowed free rein in criminality and corruption. Any legitimate price discovery for gold, silver would expose the purposeful debasement of the USD and the destruction of the middle class. We wouldn’t want that, now would we?

    1. profoundlogic

      Good points. Perhaps Yves can start looking into this a bit more in depth as I think it speaks to the larger frauds we have going on in the economy in general. I believe reading on one of Yves’ previous comments or posts that she didn’t really follow gold too closely? I think the activities/market action currently playing out are directly tied to the overall agenda. Logic would suggest that it’s all connected.

      I think it’s extremely naïve to see the gross frauds perpetrated throughout the financial sector and then suggest that gold is simply responding to “market” forces. That begs the question. What is the underlying theme in our current financial markets?

      Another thing I find interesting is that the usual commenters appear to have puckered up. This seems to be a subject no one wants to discuss.

      1. Sluggeaux

        The regular posters are probably all on the floor choking on their cornflakes, reading today’s announcement that Turbo Timmy Geithner has been appointed president and managing director of the looting firm Warburg Pincus. Keep your hand on your wallet…

        1. profoundlogic

          LOL! Yes, I saw that wonderful news as well. I’m sure Rubin is brimming with pride knowing that the Devil’s spawn are thriving.

      2. readerOfTeaLeaves

        Jesse’s Cafe Americain is listed on the blogroll on the right side of the page. Jesse has been all over this, and continues to be a fascinating read. If you are not a current reader, you may want to check it out.

  3. arby

    Chilton and Genzler have been at their posts for at least five years. They are failed regulators. They have failed in their public trust. They failed to even bring Jon Corzine and those who colluded with him to steal people’s segregated accounts to public scrutiny. I am sure, like Tim Geithner, the two Washington perennials will be amply rewarded by their private sector friends as they go through the revolving door once again. We will probably see them coming back through that door in a few years a couple rungs up the ladder.

    1. JCC

      If David had failed against Goliath, would your opinion of David be as harsh?

      These two, particularly Mr. Chilton, have fought the good fight. It can’t be an easy one when you have the Federal Reserve, and, through companies like Goldman Sachs and JPMorgan, the Administration, Congress, and the Supreme Court almost 100% aligned against you.

      They did their duty with the latest well defined and well researched proposal, which as Yves mentions, has thrown the position limits offense issue directly onto the opposition’s lap.

      Considering that there are, for all practical purposes (as JPMorgan’s silver position clearly shows) no position limits now, I think they’ve done a good as job as could be hoped for in today’s obvious and thoroughly corrupt commodities market.

    2. archer

      Wrong wrong wrong. Would help to know what you are talking about before spouting.

      The CFTC is a secondary regulator, not even part of the Financial Stability Oversight Council.

      Did you miss that Gensler had to recuse himself on MFG? That meant of the 4 commissioners remaining, the only “tough on enforcement” one was Chilton. So no way was anything meaningful going to be done.

      As for Gensler or Chilton coming back, what are you smoking? Gensler was actually lectured at one point that he was hurting his future financial prospects by being tough on the industry. As if a former Goldman partner needs more lucre.

  4. Paul Tioxon

    Unlimited positions, in order to rely on random chance to produce not simply a good living or return on investment, but to create fortunes in the blink of an eye is the temptation. Easy money, but high risk for those not benefiting from the the commodity bet, is why we have regulations. The market is in the service of a vulgar petty bourgeoisie mentality. Millionaires in waiting, who see the royal road to wealth, and now want to walk it like those who went before, are frustrated by the government bureaucrats who are in service to the nation, the society as a whole, and not the special interest of the few, the 1%. They want something that can only be found in the darkness at the edge of town.

    “Some folks are born into a good life
    Other folks get it anyway anyhow
    I lost my money and I lost my wife
    Them things don’t seem to matter much to me now
    Tonight I’ll be on that hill ’cause I can’t stop
    I’ll be on that hill with everything I got
    Lives on the line where dreams are found and lost
    I’ll be there on time and I’ll pay the cost
    For wanting things that can only be found
    In the darkness on the edge of town”

    Darkness on The Edge of Town by Bruce Springsteen

  5. PaulArt

    These are all the result of extreme income inequality. The more money we leave with the fat cats and corporations, the more they seek ways to game the system and increase their returns. 90% marginal tax rates and 40% corporate taxes would be a first step. The second step of course is to start enforcing the Sherman Anti-Trust legislation to break up not just the TBTF Banks but take a machete to every industry and break the b**t*ds up into very small pieces.

  6. Chauncey Gardiner

    After the Great Financial Collapse of 2008 and MF Global’s bankruptcy, it beggars belief that a few individuals at financial firms who want to speculate with virtually unlimited amounts of Other Peoples’ Money are seeking an open license to do so, let alone being given that license.

    The Roberts-Scalia Supreme Court’s “Citizens United” decision regarding campaign financing together with the DC “Revolving Door” to lucrative schemes and private sector jobs after “public service” are the speculators’ keys to the kingdom. Take away the corrupting influence of money on our legislators and regulators and this BS would evaporate like raindrops on a Scottsdale sidewalk.

    I appreciate the efforts of Mr. Gensler and Mr. Chilton.

  7. William Neil

    Thanks for keeping us posted. I can only think of the distance between these speculative institutions and the 28 million Americans working for $9.89 per hour or less – the social and political distance, but also how far the mysterious processes they work with are from mundane work life. In my readings, an awful lot is hiding behind and under that term “hedging,” and I drag my mental foot in signing off on its hotly defended legitimacy.

    Other than the financial blogs like this one, there is not much of a citizen infrastructure in place to monitor and critique what goes on in this mysterious speculative world. I think of how poorly the long organized and relatively robust environmental organizations have done over the past two decades in trying to cope with the rightward drift of politics and economics as it has affected their policy areas. Then I come back to this other playing field and shake my head. I’m inclined to give Gensler and Chilton the benefit of the doubt, but I’m open to persuasion.

  8. kevinearick

    Electromagnetic Frequency: Perspective on Stupid

    Ok, let’s take a break from the drilling. We are at BigAgREITs, the short is getting shorter with each short squeeze, and sovereigns must buy them directly. The BAR doesn’t care about property or money, which is why derivatives always blow up. Empire is obsessed with control, and impulsively blows itself up.

    Empire controls something it trains you to want from birth, you give it what it wants, focus on a contrived constitution assuming preemption over natural rights, joining a herd, and it gives you money, a promise to control your children as well, to spend on its product, capital control, to complete the positive feedback loop. It’s smoke and mirrors, hiding smoke and mirrors.

    The Bush administration failed to pump the SS ponzi, and the Obama administration failed to pump the MC ponzi. Who the H gives a F, except gold and its derivatives?

    The point of the drilling is to show you how stupid it is to focus on the gravity. The solar planets are like buoys (space conservation) in the harbor. Don’t hit them. Of course the sun, the tip, is hot. With all the talk on the Internet, has the course of empire changed?

    Life is an apprenticeship. You want to be the apprentice, to grow life. You can’t make contact so your object must make contact with you to make the bridge, and the fact is that humanity as a herd is just too D stupid to be of any interest, except to itself. Have you taken a look at the clusterF that is the USNavy on the margin?

    That is the State of 21st Century Generation, the Boeing/Microsoft implementation model, driven by the Silicon Valley/Chimerica design model, with Nazi stupidity coming out the pipeline. The space program failed because it was an empire gravity problem, charting gravity inside the box. Go to Living Light and pay $20 for a carrot; it’s always Manhattan all over again.

    The trick to finding the needle in the haystack is being the magnet. The trick to finding the magnet is to be the needle. The eye of the needle is the choke. Birds of a feather…

    Build the instrument to find what you are looking for, not to map itself with relative obscurity. Humanity is like a 12-yr-old with waterwings, afraid to leave the shallow end of the pool.

    Spotting kids with effective talent isn’t difficult. They set up on bullies to entertain themselves when they have nothing better to do, as the final timing adjustment, and, for them. All gates to prosperity are always open.

    The problem/solution is isolation, increasing pressure on decreasing volume, mirroring the law of diminishing returns, individual choice. What the herd sees as a threat, the kid sees as an opportunity. What the herd sees as a weakness, the kid sees as a strength. And vice versa. The mirror is a circle with a dimensional contact set.

    The water doesn’t boil uniformly due to source relativity. Don’t make the problem harder than it is. Where the mirror is, between talking and doing, in the sentence depends upon your perspective. Is that pause by the Chinese Fed a comma, and if so…?

    Take a look at the implications of the personal telco project again. What do you suppose those suns are drilling into anyway? What is the difference between right-handed and left-handed torque? Why aren’t most women left-handed?

  9. craazyman

    We leverage up one to one-eighty-five
    We’ll get the bailout when we take a dive
    We pay professors to send up the flack
    When regulators go on the attack

    They say we’re crazy but we have a good time
    While we’re hiding the clues at the scene of the crime
    Life’s been good to me so far

    1. craazyboy

      Dire Straits – Money for Nothing (cover)

      I want my CFTC

      Now look at them stock traders that’s the way you do it
      You trade the futures with the CFTC
      That ain’t workin’ that’s the way you do it
      Money for nothin’ and chicks for free.

      Now that ain’t workin’ that’s the way you do it
      Lemme tell ya them guys ain’t dumb
      Maybe get a blister on your little fat finger
      Maybe get a blister on your fat thumb.

      We gotta bundle our hedged long and short deliveries
      We gotta move the commodities or we gotta move the shorts of these.

      See the little ****** with the earring and the make up
      Yeah buddy that’s his own hair
      That little ****** got his own jet airplane
      That little ****** he’s a billionaire.

      We gotta bundle our hedged long and short deliveries
      We gotta move the commodities or we gotta move the shorts of these.

      We gotta bundle our hedged long and short deliveries
      We gotta move the commodities or we gotta move the shorts of these.

      I shoulda learned to play the guitar
      I shoulda learned to play them drums
      Look at that mama she got it stickin’ in the camera
      Man we could have some fun

      And he’s up there, what’s that?
      Subpoena noises?
      Bangin’ on his keyboard like a chimpanzee
      That ain’t workin’ that’s the way you do it
      Get your money for nothin’ get your chicks for free.

      We gotta bundle our hedged long and short deliveries
      We gotta move the commodities or we gotta move the shorts of these.

      Listen here
      Now that ain’t workin’ that’s the way to do it
      Change the regs game on the CFTC
      That ain’t workin’ that’s the way you do it
      Money for nothin’ and chicks for free.
      (Get your) Money for nothin’ chicks for free
      Money for nothin’ chicks for free
      Money for nothin’ chicks for free
      Money for nothin’ chicks for free
      Money for nothin’ chicks for free
      Money for nothin’ chicks for free

      (I want my, I want my CFTC)

  10. Conscience of a Conservative

    Chilton and Gensler have been right on so many issues, but terribly ineffective, perhaps over-whelmed and out-gunned by Wall Street, the banks and other captured regulators, not to mention lack of support from within Treasury or the Fed. Kind-a-sad, but reminds me of how Brooksly Born lost her fight on derivatives as well.

  11. Thisson

    The problem is manipulation, not speculation. If CFTC (and SEC) would do their job properly and crack down on all of the manipulation, these position limits would be superfluous.

    Think about it: any position opened by a speculator has a counterparty, and that counterparty is either a legitimate hedge (that is thus being provided liquidity by the speculator), or the counterparty is another speculator and the two cancel each other out (one is long, the other is short).

    1. Conscience of a Conservative

      Disagree, the idea behind position limits is to prevent short squeezes and to prevent one participant’s actions or position from potentially destabalizing an entire market

  12. rich

    An Analysis Of The CME’s Comex Gold/Silver Inventory Report Legal Disclaimer

    As it turns out, based on Federal Rules of Civil Procedure (FRCP), even though the CME waited 5 years before invoking and applying the disclaimer on the inventory reports, the CME has for all intents and purposes legally insulated itself for any legal claims that may arise from publishing the inventory when the Comex defaults and has shifted the burden to the individual vault operators who submit the data that the reports are based on. I called on a friend and colleague who is one of the sharpest attorneys I have ever met to give his assessment of the timing of the CME’s application of the inventory report disclaimer:

    The disclaimer language at issue appears to be tailored specifically not only to forestall ALL fraud cases based on that element, but to do so at the pleading stage of the case, i.e., BEFORE THERE IS ANY DISCOVERY OF THE DEFENDANT’S DOCUMENTS AND INFORMATION, by way of a dismissal under [Federal Civil Rules of Procedure] 12(b)(6) or the State court equivalent.

    One of the trickier elements in a civil fraud case (criminal is slightly different on this point) is proving that you reasonably relied on the misrepresentation at issue, meaning you did in fact rely on it, and that your reliance was reasonable (an objective standard to winnow out idiotic plaintiffs). The intent behind the disclaimer is to provide a legal override of such facts, like a trump card.

    Federal Civil Rules of Procedure 12(b)(6) allows a defendant to ask a judge to dismiss the lawsuit before any real litigation takes place based on a “failure to state a claim even accepting all facts stated in plaintiff’s complaint as true.” In order to compel a judge to deny the Defendant’s motion to dismiss under this Rule, the Plaintiff must show that it’s possible for him to prove a set of facts in court that shows he is legally entitled to the “relief ” (damages from investing in this situation) requested in the legal claim because he bought Comex futures in reliance on the truthfulness of the CME Comex inventory reports at the time he made the investment. As my friend states: “the intent behind the disclaimer is to provide a legal override of such facts, like a trump card” – which leads to the Defendant’s argument that the Plaintiff failed to state a claim. As applied to the CME situation, the Plaintiff will fail in its pursuit in damages against the CME.

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