Opening Statement, Public Meeting on Proposed Rules Under Dodd-Frank Act
Commissioner Michael V. Dunn
January 13, 2011
Thank you all for joining us today for this important meeting regarding the implementation of the Dodd-Frank Act. Today’s meeting will address proposed rules regarding:
- Position limits for physical commodity derivatives; and
- Documentation requirements for swap dealers and major swap participants.
The Commission is required pursuant to the Dodd-Frank Act to set position limits, as appropriate, to diminish, eliminate, or prevent excessive speculation. There has been the suggestion by some that once we set position limits on physical commodity derivatives, the price that we pay for gas, bread, milk and other things would inevitably drop, and that volatility in commodities markets would simply cease to exist. I believe this is a fallacy.
Price volatility exists in markets that have position limits and in markets that do not have position limits. Price volatility exists in markets that have substantial participation from index funds and markets that do not have any index fund participation whatsoever.
As Nobel Prize winning economist Paul Krugman pointed out in a recent editorial, price volatility exists in our markets because we live in a “finite world” where there is not, at any given moment in time, an inexhaustible supply of oil, wheat, milk or other physical commodities to meet the global demand for such products. Simply put, sometimes prices are higher because the demand for a product around the globe is greater than the supply. Since these are global commodities, the demand driving higher prices might not even be from US consumers but from a growing middle class in countries with emerging economies. Mr. Krugman points out that this doesn’t necessarily mean that speculation plays no role.
With the passage of the Dodd-Frank Act the CFTC now clearly has a mandate to set position limits on commodity markets and the OTC markets, as appropriate, to diminish, eliminate, or prevent excessive speculation. To date, CFTC staff has been unable to find any reliable economic analysis to support either the contention that excessive speculation is affecting the markets we regulate or that position limits will prevent excessive speculation. The task then is for the CFTC staff to determine whether position limits are appropriate. With such a lack of concrete economic evidence, my fear is that, at best, position limits are a cure for a disease that does not exist or at worst, a placebo for one that does.
I am voting for the proposed rule on position limits in order to gather more information. If there is more than anecdotal evidence that there is excessive speculation distorting the prices in our markets, we need to see it. If there is statistical or economic analysis that shows that excessive speculation exists and that position limits will diminish, eliminate, prevent it, we need to see it. If there is evidence that position limits will lower the price that we pay for gas, milk and steak while simultaneously insuring the integrity of our markets and the price discovery process, we need to see it. Only after all these questions have been answered will I be able to determine whether or not position limits are appropriate. If we determine that position limits are appropriate to diminish, eliminate or prevent excessive speculation, I think we must then work with our sister regulators around the globe to ensure that limits set here in US markets, are not simply evaded by trading in other venues around the world.
Lastly, I would like to speak briefly about the budget crisis the CFTC is facing. The CFTC is currently operating on a continuing resolution with funds insufficient to implement and enforce the Dodd-Frank Act. My fear at the beginning of this process was that due to our lack of funds the CFTC would be forced to move from a principles based regulatory regime to a more prescriptive regime. If our budget woes continue, my fear is that the CFTC may simply become a restrictive regulator. In essence, we will need to say "No" a lot more. No to new products. No to new applications. No to anything we do not believe in good faith that we have the resources to manage. Such a restrictive regime may be detrimental to innovation and competition, but it would allow us to fulfill our duties under the law, with the resources we have available.
I would like to once again thank the staff at the CFTC for all their hard work in regard to these very important proposed rules.
Last Updated: January 18, 2011