25 March 2010

Today's CFTC Hearing on Metals Position Limits

Pretty much what you might expect. The gorillas hate restrictions, and threaten to take their business elsewhere if anyone tries to regulate them. Since there are only a few major metals exchanges in the world, TOCOM, LBMA, and COMEX, one might think the CFTC could pick up the phone and coordinate something with their counterparts without straining the smoothness of their golf swings.

For the most part commissioners say they are afraid of limiting transparency by increasing transparency requirements. As if there is sufficient market transparency today.

So let's not limit cheating, because it might lessen the volume of fraud on their exchanges and drive it to other countries. Let's see, like Japan, which has MORE transparency by company position, and London, which is mostly a physical market without futures as I recall. The FSA is cracking down on fraud. Maybe that will drive more business over here. Better tell them to ease up.

Perhaps the Commission is concerned that the financial pirates might try and take over Havana and turn it into their private casino. Oops, been there, tried that, too corrupt for their local standards. How about Somalia? They seem to be open to new free market trading concepts.

Gentlemen. Don't worry so much about other countries. Most of the recent financial frauds seem to be originating just to the east of the Hudson River and west of Long Island. Clean up your own house, and let the world look to its own devices.

For the most part as a regulator, the CFTC seems like the FED, but without the pocket protectors and PhD's, and the formal ownership by those whom it is supposed to be regulating.

Time for a change, America. I hate to sound negative, but if anything comes of this I will be astonished. The change will come after there is a major scandal, or a breakdown in the markets. And then the push will be to 'move on' and not look at what anyone did or did not do, but how we can 'fix it' by moving the regulatory responsibility to a committee of Chicago aldermen, or a contingent of Beverly Hills divorce lawyers. Are the Westies available for regulatory outsourcing? Hey, I know who can do it, after all, it's God's work.

What they said at CFTC hearing on metals limits

March 25 (Reuters) - The Commodity Futures Trading Commission held a hearing on Thursday to examine whether position limits are needed to curb speculation in metals futures markets.

Here are comments from participants:


"Based upon what we learn, we will further review CFTC rules to determine what, if any, course of action is most appropriate." (Goldman Sachs alumni, and a Rubin protege.)

MICHAEL DUNN, Democrat commissioner, CFTC

"I am concerned that position limits in regulated futures markets without corresponding limits in the over-the-counter markets may result in less transparency in our markets, if those presently trading on exchanges move to over-the-counter and other opaque markets to circumvent CFTC regulations." (The benefit of course is that Joe Average doesn't trade on the unregulated and opaque markets, and won't be skinned on a weekly basis, or at least unless he or she is a qualified investor. Still, a decent thought.)

BART CHILTON, Democrat commissioner, CFTC

"The sensible, reasonable approach to position limits that guards against manipulation and stops excessive speculation is what we need to protect consumers.

I hope this hearing helps put us on a fast-track to getting a proposal out there." (A lone voice of reform. Bart is a man of the people.)

SCOTT O'MALIA, Republican commissioner, CFTC

"The exchanges registered with the commission are not the market's epicenter. Significant price discovery in these markets takes place abroad in London." (Let the FSA do it. Mentor is Mitch McConnell.)

"We must ensure that any rules or regulations do not offer any opportunities for regulatory arbitrage or decreased transparency of U.S. markets."

TOM LASALA, chief regulatory officer, CME Group (CME.O)

"The only impact that CFTC-imposed limits will have in the metals market will be to shift business away from U.S. exchanges to less-regulated or even wholly unregulated markets that are beyond the commission's jurisdictional reach." (Therefore one should never regulate because people will just move their business offshore. But that does beg the question of protecting AMERICAN investors and regulating THEIR markets. Very discouraging to hear this from the 'chief regulatory officer.')

DIARMUID O'HEGARTY, London Metal Exchange

"We've put a lot of work over the past 100 years to try and learn from the various mistakes in the market over the years and what we've ended up with is, I think, as good as it gets." (Got tungsten?)

JEFF BURGHARDT, Copper and Brass Fabricators Council

"It is our belief that investment funds have been the major driver behind the record high prices we have seen in many commodities in recent years, including copper."

"Increasing initial margin amounts charged to investment funds will be a more effective solution to the problem." (User Associations always want to limit the longs.)


"It is not clear that federally designed position limits for metals would have the desired effect of limiting unreasonable and abrupt price movements for these contracts just as federally set position limits for certain agricultural products did not appear to protect those products from price volatility during the recent commodity price bull run."

KEVIN NORRISH, Managing director commodities research, Barclays Capital

"Over the last 10 years, metals and energy have migrated to more transparent, better regulated markets. However, the wrong implementation could drive both the metals and energy markets back into that more opaque territory." (Always with the threats to get their way.)

JEREMY CHARLES, global head, HSBC's precious metals business

"Given the global nature of the precious metals markets, unilateral action on the part of the Commission could simply cause large market participants to shift business to other markets." (You can no longer regulate anything that takes place in your country because of globalization. Multinationals rule the world.)


"My position is that the proposal is a mistake. Federally managed position limits seem both inappropriate and unnecessary." (perma-bear, par excellence)

RICHARD STRAIT, Triland USA, division of Mitsubishi

"In the misguided event position limits are mandated to the U.S. metals futures products, they should be applicable to the spot month only and not ... spread positions and only on an as-needed basis." (We reserve the right to manage the outer month prices.)

STEVE SHERROD, acting director of surveillance, CFTC

Citing an internal study of disaggregated commitment of traders data for COMEX, NYSE Liffe:

"In gold for all months combined and for a trader's net futures and delta-adjusted options combined position, 56 traders exceeded the position accountability levels on one or more days during the two-and-one-quarter-year sample period.

"The maximum number of traders holding positions in gold at or above the position accountability level on any one day was 26."

"Seventeen traders on average exceeded accountability levels for an average of 34 Tuesdays of the 115 Tuesdays in the sample period. The average position while over accountability levels was 20,233 contracts." (Ok we'll bite. What was the accountability level? What would happen if you set it higher to some percentage of the open interest? And what is special about a Tuesday? I'll gladly pay you Tuesday for some bullion today?)

MICHAEL MASTERS, Masters Capital Management

"Passive speculators are an invasive species that will continue to damage the markets until they are eradicated." (Who are these passive speculators, and why must we kill them? Are they getting in the way of the squid's beak?)

MARK EPSTEIN, individual trader

"If there weren't these big monster, guerrilla traders out there ... there would arrive a much more robust market-making community, the market will be much more effective in finding prices." (You say it brother.)

BILL MURPHY, Chairman, Gold Anti-Trust Action Committee

"The gold cartel ... thumb their noses at you because in over a period of complaints in 18 months of the (CFTC's) silver market manipulation investigation nothing has been done to stop them." (Well said, except I don't think those were their noses they were sticking out at them. No noses could be that small and that ugly.)

(Reporting by Christopher Doering, Frank Tank, Tom Doggett; Editing by Roberta Rampton; Editing by Marguerita Choy and Jim Marshall)

This brings to mind the famous quote from Meister Eckhart, "The price of inaction is far greater than the cost of making a mistake.”

But it is a sad reality of modern management that you are never blamed for doing nothing, and too often richly rewarded, but you are never allowed to make a mistake.

When I was in corporate life, the 'big boss' told me "If you do ninety-nine things exceptionally right, but one thing wrong, we will only remember the one thing that you did wrong."

And then he had the nerve to ask the next week in a meeting, "How can we get our employees to take more risks?"

This is the point where Obama must again begin to lead, to change the culture in Washington. The regulatory process needs the stimulus of words of direction, the proper motivational incentives, and perhaps, backed occasionally by a size 11 shoe.