It was interesting to read about the regulation of “non-commercial commodity futures” in a recent NY Times article. As it discusses oil investment limitations being considered by regulators, the article describes the difference between commercial and non-commercial traders as follows:
“[S]peculative” traders were primarily those that the agency defines as “non-commercial,” which are essentially financial investors who are not users or producers of the commodities and are primarily interested in betting on the direction of prices. “Commercial users,” by contrast, include farmers, airlines and oil companies that want to hedge against the risk of rapid price changes.
According to the article, non-commercial investments in commodity futures such as wheat and corn are already regulated by the Commodity Futures Trading Commission. The CFTC, however, has long left the regulation of energy commodities to the New York Merchantile Exchange. In other words, the exchanges have not been required to “set or enforce position limits aimed at preventing ‘excessive speculation’” on energy commodity prices.
The recently-Obama-appointed GFTC chairman, Gary Gensler, plans to give the difference between the industries a “thoughtful review,” no doubt in an attempt to prevent a repeat of the oil-price rollercoaster ride we’ve experienced in the past year or so.
My question is: Is this a good idea? Should the energy industry be proteceted similarly to the aggriculture industry by not allowing non-commercial investors to trade in futures?
On one hand, it makes sense. The futures markets were originally created to protect farmers from price fluctuations between the time crops were planted and harvests brought in. In the oil industry, there are sometimes years between the Final Investment Decision of a large project and “first oil”—and project profitabilty may not come until years after that. If non-commercial investors are keeping the “futures system” from providing the protection it was intended to provide, then don’t let them play, by golly.
On the other hand, though, there must be some reason the NYME decided to treat the energy industry differently… Right?
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