CFTC imposes long-awaited caps for speculators’ bets on gold, other commodity prices

October 15, 2020.

The U.S. voted Thursday to impose so-called position limits on the size of speculators’ bets in a slew of commodities markets, wrapping up a yearslong push to follow through on the Dodd-Frank Act.

The regulator approved a final rule setting position limits on 16 agricultural, metal and energy commodities derivatives for the first time and updating pre-existing caps on nine agricultural goods. 

Position limits are designed to keep speculators, rather than users or producers of commodities, from causing price swings which don’t reflect supply and demand dynamics.

In a 3-2 vote of the CFTC’s commissioners, the federal agency established upper thresholds on positions speculators can take in markets for gold, cattle, crude oil and others, leaving futures exchanges leeway to adjust the caps in response to changing market conditions and consumer needs.

“Similar to the process for granting non-enumerated exemptions, we are leveraging the knowledge of the exchanges as well as their ability to act more nimbly to respond to market needs,” said CFTC Chairman Heath Tarbert, a Republican appointee.

The decision concluded a long-running debate surrounding the role of the government in setting boundaries on speculation in markets which include farmers, ranchers, hedge funds, futures exchanges, energy companies and banks.

Passed in response to the 2008 financial crisis, the Dodd-Frank Act includes a provision requiring the CFTC to set position limits. The law’s supporters believed that unchecked speculation had caused a spike in oil prices and that a regulatory cap on such bets could prevent similar problems in the future.

CFTC officials have floated five position limits proposals over the last 10 years, Tarbert said, including three which were torpedoed by industry opponents and one which a federal court struck down in 2012.

This time, Tarbert added, the agency had developed a rule which received a much better reception from a range of parties involved in trading commodity derivatives, which can be useful risk-hedging tools.

“We have balanced the interests of all the participants in these markets — some of which are in diametric opposition to one another,” he continued.

The final rule was adopted over the objections of the agency’s two Democratic commissioners, who voiced concerns that it gives futures exchanges too much authority to adjust their own position limits.

“While today’s final rule purports to respect congressional intent and the purpose and language of [Dodd-Frank], in reality, it pushes the bounds of reasonable interpretation by overly deferring to the exchanges,” said Commissioner Rostin Benham.

“The proposed rule demoted the [CFTC] from head coach to Monday-morning quarterback,” said Commissioner Dan Berkovitz.

“The final rule declares that the players on the field are the referees,” he continued. “In this arena, the public interest loses.”