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