By: Aya Abdellatif
While many may not understand the futures commodity market, it plays an important role in the lives of most Americans.[1] The futures commodity market is extremely important because of its effect on different prices of goods that are integral to the American economy including corn, coffee, gold, etc.[2] Recently, the Commodity Futures Trading Commission (“CFTC”) approved a final rule which limits physical commodity trading for twenty-five different commodities.[3] This rule seeks to limit the amount of trading of commodities by actors looking to trade solely for speculation, which distorts the prices of the commodities.[4] The CFTC attempted to introduce position limits in the past; however, a few of the CFTC’s attempts were unsuccessful after courts vacated their position limits.[5]
These position limits are key because the heavy speculation of some of the commodities that this rule is seeking to regulate created part of the economic crisis of 2008-2010.[6] Further, the CFTC states that this rule will allow for greater control and accessibility of commodities which different industries need.[7] However, there are critics of the rule arguing that the bona fide hedging provision of this new rule undermines the entirety of the final rule.[8]
The CFTC stated that the enactment of the rule is necessary to curb excessive speculative commodities trading which harms the individuals and businesses who hedge the commodities they actually use or deal in.[9] The bona fide hedging provision, in summary, allows for businesses who claim to be end-users to engage in hedging for the benefit of their businesses (i.e. an airline looking to hedge the cost of fuel).[10] However, this exception allows certain players to enter into different hedge positions while still awaiting approval of the positions from the CFTC.[11] This provision may broaden an exchange’s authority related to the exception because the provision allows the exchange to initially grant the exception, with the CFTC reviewing the exception after the fact.[12]
While some may argue that this language is critical because end-users are in need of the commodities they are trading, it opens up the argument that the bona fide trading language is too broad. This difference in viewpoints has become a political issue, with many Democrats holding the view that the language is too broad.[13] Democrats, along with a CFTC Commissioner, argue that the bona fide hedging rule “may swallow the final rule.”[14]
This issue concerning bona fide hedging, and the amount of power it grants certain players in the market, is not new.[15] As Chairman Tarbet remarked during his Opening Statement concerning the final rule, “the Commission’s prior proposals were too restrictive on what constitutes bona fide hedging. They threw up too many roadblocks for businesses to access futures markets. Ultimately, an overly rigid interpretation of bona fide hedging stood in the way of finalizing a position limits rule.”[16] Overall, the actions of market players will play a significant role in the next few months to years. If market players take too much advantage of the bona fide hedging provision, the final rule may be challenged in court which could lead to an overhaul of the current rule. Even if many Americans do not participate in the futures commodity market, it can be certain that the events to come will affect the daily lives of Americans and what they pay, whether it is at the supermarket, gas pump, or elsewhere.
[1] See Nick K. Lioudis, Commodities Trading: An Overview, Investopedia (May 8, 2020), https://www.investopedia.com/investing/commodities-trading-overview/#the-bottom-line (providing basic background information regarding the futures commodity market).
[2] See James Chen, Futures, Investopedia (Feb. 5, 2020), https://www.investopedia.com/terms/f/futures.asp (providing an overview of futures and their importance to the economy).
[3] See Ben Bain, Traders’ Oil Bets Get New Federal Limits Under CFTC Regulation, Bloomberg News (Oct. 15, 2020), https://www.bloomberglaw.com/document/X48DLSE8000000?bna_news_filter=securities-law&jcsearch=BNA%2520000001752db0d8caa57f6dbf45760001#jcite.
[4] Id.
[5] See Jeongu Gim et al., CFTC Finalizes Positions Limits Rules, JD Supra (Oct. 20, 2020), https://www.jdsupra.com/legalnews/cftc-finalizes-position-limits-rules-31654/.
[6] See L. Randall Wray, The Biggest Bubble of All Time: Commodities Market Speculation, Pub. Citizen (Oct. 21, 2011), https://www.citizen.org/news/the-biggest-bubble-of-all-time-commodities-market-speculation/ (discussing the extent that the commodities market contributed to economic troubles in the United States).
[7] See Opening Statement of Chairman Heath P. Tarbet in Support of Final Rule on Position Limits, Commodity Futures Trading Comm’n (Oct. 15, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement101520b.
[8] See Maya Weber, CFTC Completes Rule on Position Limits with More Tweaks for Energy Sector, S&P Glob. Platts (Oct. 15, 2020, 9:25 PM), https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/101520-cftc-completes-rule-on-position-limits-with-more-tweaks-for-energy-sector.
[9] See Opening Statement of Chairman Heath P. Tarbet, supra note 7.
[10] See Tom Zanki, Divided CFTC Enacts Long-Awaited Rules On Position Limits, Law360 (Oct. 15, 2020, 9:06 PM), https://www.law360.com/articles/1319895/divided-cftc-enacts-long-awaited-rules-on-position-limits.
[11] Id.
[12] See Weber, supra note 8.
[13] Id.
[14] Id.
[15] Opening Statement of Chairman Heath P. Tarbet, supra note 7.
[16] Id.
