HardAssetsInvestor

Written by Lara Crigger  |

December 21, 2010

John Hyland: CFTC’s Position Limits Face ‘Lack Of Consensus’

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The CEO of U.S. Commodity Funds and outspoken critic of position limits dissects the latest CFTC hearing.

 

Last Thursday's CFTC hearing on position limits seemed like it would be earth shattering, but in the end, it was mostly just more sound and fury, signifying nothing. The CFTC, which suggested limiting futures traders' positions to no more than 25 percent of deliverable supply (among other recommendations), revealed that in fact, it wouldn't have a final plan in place regarding position limits until January next year, at the earliest.

To help us understand the finer points of the hearing, we turned to John T. Hyland, CEO and portfolio manager of U.S. Commodity Funds. Hyland is no stranger to the debate over increased regulation of commodities futures markets; he has testified before the Commodity Futures Trading Commission about the impact of USCF's controversial United States Oil Fund (NYSEArca: USO) and United States Natural Gas Fund (NYSEArca: UNG), both of which have been accused of distorting their respective energy markets.

Recently, HAI Editor Lara Crigger caught up with Hyland to discuss the CFTC's latest hearing, including whether the new rules will push investors overseas, why we still don't know how large the swaps markets are, and whether we really learned anything new at all.

 

Crigger: Last Thursday, the CFTC held a hearing and released a report on position limits. But did we really learn anything new about their stance on the matter?

Hyland: Well, as of last Wednesday, we knew—based on comments by various individual commissioners—that the five commissioners are not on the same page when it came to position limits. You have one true believer, one that's maybe a believer, two who clearly have doubts and one in the middle. There's no consensus on the commission on this topic, and that came through on Thursday in the comments.

We knew the math about calculating position limits would be similar to what was proposed in January, but I think we're still unclear on several points as regards to futures. And we knew they were supposed to bring out position limits on over-the-counter swaps, but that things had fallen behind schedule. As of Thursday, we still did not know how big the swap/OTC market really is.

So when you add it all up, what did we learn? Not much.

Crigger: Can they really devise realistic position limits before you know the size of the swaps market they have to regulate?

Hyland: Commissioner [Michael] Dunn asked the staff a few times for some commentary on the size of the OTC/swap market. The actual swap trade repository is not supposed to be operational until July 2011, so of course they wouldn't have a full answer, but the staffers basically dodged the question entirely.

Now, they've been working on this position-limits question for over a year now. You'd think they'd have at least some idea, at least for some of the high-profile commodities like crude or natural gas. I don't expect seven-digit accuracy here, but I would imagine the staffers should be able to answer whether the swap market for natural gas is half the size as the listed futures market, or twice as big, or five times as big, or so on.

Crigger: What do you think's the hold-up?

Hyland: Bureaucratic caution. They don't want to put a number out there if it's actually wrong. But I think that by being unwilling to put out a number, they're keeping the market in greater suspense than it needs to be. If they just came out and said, "Here's the order of magnitude," then the market would have some idea of how to gauge how big position limits would be for swaps, and the market could move on. Keeping it an unknown keeps the market stuck there.

Commissioner [Jill] Sommers asked how the math worked on the position limits between the two classes, one being the listed futures and options, the other being swaps. If the position limits for listed futures, are, say, for 5 million contracts' worth - so you can own 120,000 contracts or whatever their math says; and for argument's sake we say the swaps market also totals 5 million—does that mean we really have a 240,000-contract total as our position limit, and [the CFTC] is indifferent on which we elect to use, futures or swaps? Or do we have two sublimits, of 120,000 contracts each?