Traders and pundits alike saw some of the fog surrounding the commodities market lifted last week, as the Commodity Futures Trading Commission (CFTC) unveiled a new system for reporting participants' commitments.

The CFTC's Disaggregated Commitments of Traders (DCOT) report will now be published alongside the traditional weekly Commitments of Traders (COT) format, which tracks the market back to 1995.

The impetus for the new report was a recommendation made by a September 2008 staff study about the influence of swap dealers and index traders on the commodities markets. At the zenith of the speculative bubble last year, the CFTC's traditional COT reports were widely lambasted for failing to delineate the activities of hedge funds and swap dealers in the oil market.

Differences Between Reports

In the traditional COT report, traders are separated into three categories within two broad classifications. "Nonreportable" traders are small speculators whose positions fall short of CFTC reporting thresholds. Large, or "reportable," traders, on the other hand, are required to report to the CFTC daily, due to the sheer size of their positions. These traders are further split into either "commercial" or "noncommercial" designations.

Commercials, who deal with a commodity in the cash market, include producers, merchants, processors and users of commodities that manage their business risks by hedging with futures. Swap dealers, or investment-banking operations that offer over-the-counter commodity derivatives to their customers, are also included in the commercial category, since they use futures to hedge residual exposures from their derivatives activities.

In contrast, noncommercial traders trade futures speculatively, and include professional money runners such as commodity pools, managed accounts and hedge funds.

The new DCOT report classifies traders along finer lines. In its initial iteration, positions in 22 physical commodities are split into four categories, according to traders' principal lines of business, namely:

• Producer/Merchant/Processor/User
• Swap Dealers
• Managed Money
• Other Reportables

The new classification system doesn't resolve all the inadequacies of the COT reports by any means, but it definitely provides more information than the old scheme. By splitting commercial traders into two separate categories, the CFTC makes it easier for you to gauge the influence of investment-banking entities—the swap dealers—on the commodities markets.

Dealer activities aren't completely transparent, however. For example, we're not seeing beyond the bank level to the ultimate customer. We also still don't know if a swap dealer's counterparty is speculative, such as a hedge or index fund, or a commercial entity dealing with the cash commodity. For certain commodities, namely those with hard ceilings on speculative positions, it's a fair guess that the counterparties are noncommercial. After all, a commercial entity could hedge a large cash position under an exemption to speculative position limits, thus forgoing a transaction with a swap dealer.

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