Gold, Grains and Gasoline

As any veteran of the agonizing series of delays and loopholes built into the attempt to stop naked short selling in the stock market can recall, the “players” who manipulate our markets for profit have a playbook that keeps their games going even when the refs first blow the whistle.  They delay, delay and delay, and all along the path, they weaken the restraints that might keep them from maximizing their profits.

The latest hidden profit game that they are defending is the manipulation of commodities markets.

How can this be?  After all, it’s been a lynchpin of financial markets regulation since the 19th century that position limits, open futures markets, and capital requirements are needed to protect innocent producers and consumers from market manipulation.  It is said that the attempt to regulate our public commodities markets is due to the gold manipulations that nearly crashed the US economy as we attempted to pay for the Civil War.

So how can these markets be manipulated even today?  How can the players be defending a place they use to manipulate?

The answer (no surprise) is the derivatives market, yet again.

I got this in a note from a major law firm (Linklaters) today:

Federal District Court Vacates the CFTC’s Position Limit Rules on Derivatives Linked to 28 Physical Commodities

October 1, 2012

On September 28, 2012,1 the U.S. District Court for the District of Columbia (the “Court”) vacated the Commodity Futures Trading Commission’s (the “CFTC”) position limits rule relating to derivatives linked to 28 physical commodities (the “Position Limits Rule”).2  In adopting the Position Limits Rule the CFTC took the view that the Commodity Exchange Act (as amended by the Dodd-Frank Act) (the “CEA”) required it to do so regardless of cost/benefit analysis and without determining that limits are necessary to prevent speculation (a “Necessity Determination”).  SIFMA and ISDA challenged the Position Limits Rule seeking to enjoin its enforcement before its October 12, 2012 effective date.

Although SIFMA and ISDA asserted multiple grounds for invalidation, the Court decided the case narrowly.  The Court rejected the CFTC’s argument that a Necessity Determination is unambiguously not required and also rejected SIFMA’s and ISDA’s argument that a Necessity Determination is unambiguously required.  Courts typically defer to an agency’s interpretation of an ambiguous statute, but the Court nonetheless vacated the rule because the CFTC failed to formally determine the CEA is ambiguous and instead relied on its view of the statute’s unambiguous meaning.3  Without addressing the other grounds for invalidation raised by SIFMA and ISDA, the Court even suggested the CFTC could formally interpret the statute as ambiguous and re-adopt the Position Limits Rule without making a Necessity Determination.

The Court’s decision is a victory for SIFMA and ISDA, but it may prove to be only a temporary reprieve, as the CFTC may decide to re-propose and re-adopt the Position Limits Rule or it could appeal the Court’s decision.4

So the manipulators can continue to use the commodity swaps market as their way to corner or slam commodities.  Isn’t that comforting?

So don’t be surprised when prices move the opposite direction from what supply/demand would suggest.  There’s a very large hidden market at work here.


ISDA is the International Swaps Dealers’ Association

SIFMA is the Securities Industry and Financial Markets Association, which replaced the NASD a few years ago


2 Responses to Gold, Grains and Gasoline

  1. William Kinsolving says:

    So what do we invest in that trades in an honest market of supply and demand? Is there an area in the market that isn’t skewed by manipulation? Should we go to the desert to trade and live on grasshoppers? Somebody would either corner them or counterfeit them or naked short them. A pox on every market. Bartering is the only safe exchange, (and watch what that other guy is doing with his hands.) Cheers to you, Howard.

  2. Conscience of a Conservative says:

    Howard , I’m really puzzled by this(well not really). While of course it’s an outrage that the banks and their lobbyists inserted into Frank-Dodd legislation a need for CFTC to do cost study analysis before implementing any rules, the fact is commodity markets have always operated under position limits which are meant to discourage short squeezes and market manipulation. No one party should control a disproportionate amount of outstanding contracts, yet somehow that basic notion engrained in our markets for so long has been glossed over. Nobody is or should be against speculation or short selling, but it’s just common sense that players who engage in this activity should not be defining the market price.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: