London, 7 April 2010

After the sound and fury that accompanied the release of proposed position limits for major energy contracts for consultation, you might have thought both supporters and especially opponents would have rushed to make their views known. You would be wrong.

The Commodity Futures Trading Commission's (CFTC) three-month long consultation, now in its final three weeks, has been greeted with deafening silence. The list of responses, published on the Commission's website, includes only three substantive ones from around the industry (producers, consumers, traders and brokers). The rest are brief form replies using standard language filed in support of limits as part of a grassroots campaign:

See: www.cftc.gov/LawRegulation/PublicComments/10-002.htm

Only Three Responders

The main substantive response has come from the Futures Industry Association (FIA), which describes itself as the principal spokesman for the commodity futures and options industry, with members including 30 of the largest futures commission merchants in the United States.

FIA sets out its hostility to position limits in some detail, questioning their rationale, lawfulness, and the CFTC's authority to impose them in the manner described

The second substantive response comes from the American Feed Industry Association (AFIA), representing the feed industry and its suppliers. It writes in support of the CFTC's effort to impose limits on energy, but mainly because it wants the same comprehensive framework applied back to farm contracts.

Farm contracts are already subject to federal limits; they were the model for proposed energy limits. But the CFTC's new proposals for energy are more complete (including over-the-counter swaps and consolidating positions across related markets). AFIA wants the energy limits established so these extra protections can be applied to agricultural markets too.

Finally, the not-for-profit Institute for Agriculture and Trade Policy (IATP) writes in support of limits to prevent excessive speculation and volatility spilling over from the (unlimited) energy markets into the (limited) farm contracts via commodity index holdings, and harming "the two thirds of developing countries that are net food importdependent".

IATP worries liquidity in these markets is far more than required for physical hedgers and volatility makes price-risk management harder not easier.

And that's it, so far (April 7). Not a word from a major bank, commodity dealer, oil and gas producer, airline, or industrial energy consumer.

The Sound of Silence

Given the strong passions the subject has generated, for and against, the public record is disappointingly thin. The reluctance of high-profile dealers such as Goldman Sachs, Morgan Stanley and the other big commodity banks to go on the record defending unlimited positions is understandable, given the sometimes irrational opprobrium heaped on all their endeavours in the wake of the financial crisis.

Reticence from commodity producers such as Exxon and BP , and consumers, such as cement, steelmakers and airlines, is more surprising. They are supposed to be the major victims of speculator-driven price changes or major users of large-scale hedges that could suffer from restrictive limits, depending on your point of view.

Even the big institutional investors and hedge funds, whose giant holdings via the "massive passives" of commodity indices or actively managed positions, have remained silent.

While some information was put on the record during the actual public hearings last summer about the impact of speculation, and again in January, when the CFTC released its proposed limits for consultation, there was very little evidence of the actual impact that speculation and limits had, beneficial or otherwise.

Stand Up & Be Counted

The lack of a more detailed public record matters because it means the arguments both for and against limits have not been properly tested. Opponents argue the limits would unduly restrict legitimate commercial hedgers, particularly their ability to take on speculative positions in addition to bona fide commercial hedges. But not one oil and gas producer, trader or airline has come forward to explain how its regular commercial operations would be infringed or explain why it needs to be able to hedge and speculate at the same time.

Swap dealers have also been conspicuous by their silence. FIA has argued, on their behalf, their right to run unlimited bona fide hedges, and offer risk management, and speculate, is being abridged in a way that will reduce the effectiveness of their businesses. But none of the dealers has come forward to explain how the limits would impact them in practice.

In a few months, the CFTC will take a second vote on whether to adopt and enforce the proposed limits (perhaps in modified form). But on present evidence, the debate will not have moved on much, at least in any constructive way.

The debate remains an overly theoretical dialogue of the deaf. No doubt commissioners and congressional committees are being lobbied furiously behind the scenes to water down the proposals, and by supporters to stiffen the CFTC's resolve. But backroom deals are no substitute for an honest, open and evidence-driven public debate.

If position limits are really worth fighting for or against, rather than a distraction, it is time supporters and opponents stood up to be counted and explain their reasons in detail so they can be tested in the open.

Ends --

By John Kemp, Reuters columnist – for Commodities Now

The views expressed are his own