Streetwise Professor

The Futures Industry Association, a trade group for futures commission merchants and exchanges, has come out strongly in opposition to the CFTC’s proposed energy position limits.  The most interesting thing to me about the FIA letter is the fact that one of the central pillars of its argument is similar to an objection I’ve been raising for some months: specifically, that the CFTC doesn’t have a legal leg to stand on because (a) Congress has authorized the CFTC to impose limits when “it is necessary to diminish, eliminate, or prevent” the “undue and unnecessary burden” of “excessive speculation” that causes “sudden or unreasonable fluctuations or unwarranted changes in the price” of any traded commodity, but (b) CFTC has made no finding that excessive speculation that causes unreasonable price fluctuations exists, or has existed, in energy products.  Indeed, it’s worse than that.  CFTC’s attitude has been “we don’t got to show you no steenking evidence.”  CFTC, and notably Chairman Gensler, have also invoked repeatedly the idea that concentration is a danger that should be controlled through position limits.  But the Commodity Exchange Act is silent on concentration in this context.

The FIA letter is quite blunt: “Substantively in the absence of the ‘necessary’ finding, the CFTC lacks the statutory authority to adopt position limits.”  FIA also states that “[t]he ‘excessive concentration’ and ‘uncontrolled speculation’ themes the CFTC cites are both factually unproven and legally irrelevant.”  The letter states further that the “‘excessive concentration’ focus is misguided.”  I agree with all this, and have said and written as much over the past year (or more).  I further agree with the FIA’s statement that “FIA is not aware of any convincing or even credible evidence that large traders with speculative positions in energy futures markets have trumped fundamentals as the determining factor in energy futures prices.”  (Emphasis in original.)  Again, agreed.

To summarize, like the FIA, I believe that the CFTC position limit proposal is unjustified and legally dubious.  It is unjustified because there is no credible evidence, or logical argument even, that speculation has distorted prices.  It would be nice to make policy on the basis of, you know, evidence, wouldn’t it?  (Isn’t this the administration that said it was going to base policy on science, not politics?)  It is legally dubious because the CFTC’s authority to impose limits is not absolute.  The CFTC can impose limits pursuant to a particular purpose laid out in statute, but the CFTC’s justification for its proposal (a) does not show that its limits are in fact necessary to achieve that purpose, and (b) includes considerations that are altogether absent from the statute.

This is regulatory overreach based on no evidence.  Other than that, it’s great!  Kudos to the FIA for joining me in pointing that out.