The brouhaha about CFTC position limits

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1 November 2011
Anshuman Jaswal
The recent introduction of the position limits for commodities markets by the CFTC has led to strong reactions. Many industry participants have felt that the move would restrict their functioning in the exchange-traded derivatives markets and damage the ability of traders to speculate. Another issue that there has been no substantial support for the effectiveness of position limits. It is believed that they curb speculation and reduce concentration in the market. Some believe that there main purpose would be to create an audit trail that would be easier to keep tabs on for the regulator. However, we cannot say for certain that position limits would be able to increase market stability. Indeed, since their effect is not very well understood, it is very much likely that by introducing position limits, we might actually be adding to the volatility and imbalance in the market. This would be contrary to the initial goal of the regulator and undesirable from an economic point of view. One of the commissioners of CFTC who voted in favor of the limits nevertheless made this point with regard to the lack of clarity on how effective these limits are. Another point of view that some industry participants have is that the limits are really not an issue. The reasoning is that for most of the industry participants, it is not possible to trade the kind of volumes required to be affected by the limits. Hence, they see them as merely a move on part of the regulator and the government to control the extreme actions of speculators in the markets. This seems a sensible perspective to have and it is indeed true that the limits would directly affect very few participants. Even the firms that might get affected would still be able to deal in very large volumes in absolute terms. Finally, the belief that position limits would lead to regulatory arbitrage seems far-fetched. Yes, it is theoretically possible, but considering the US markets are the largest for many of these commodities and there would be few options outside of the US to trade such volumes, the likelihood of regulatory arbitrage is not very high. Besides, the thing about regulatory arbitrage is that it can happen in both directions. Some securities or derivatives might see volumes moving to Europe, but there would also be movement in the opposite direction once the European regulations come into effect. As an industry, our goal should not be to worry about regulatory arbitrage or whether a few players might find there activities restricted by impositions such as position limits, it should be to study such measures in greater detail to understand their impact. If someone is able to prove their usefulness or otherwise conclusively, the regulator can always change their their perspective and rules.

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