We urge you not to let the smoke and mirrors of the Op-ed economists dissuade you from your central mission to protect the public form abuse. The Congress is absolutely correct to conclude that it must address the problem of excessive speculation and correct in concluding that the CFTC cannot be trusted to effectively address the problem. With the commodities markets overwhelmed by speculation and the Congress empowering other agencies to do the job that the CFTC has failed to do, the CFTC has changed its tune, belatedly admitting that it did not have sufficient information to perform its primary function of preventing excessive speculation and recognizing that foreign boards of trade do not exercise effective regulation of trading. Begging foreign exchanges for data and foreign regulators to act responsibly is not only embarrassing; it is absurd when the CFTC has not put its own house in order. The CFTC’s proposals are too little too late.
There are five areas in which reform is necessary, with a variety of policy making institutions needing to take action. We recognize that this is a tall order, but a half a trillion dollars sucked out of the economy and the pocketbooks of American households by the speculative bubble of recent years demands you take action now.
- All traders must register and be certified (for honesty and competence, like bankers and brokers).
- All trading must be reported across all transactions
The Commodity Futures Modernization Act (CFMA) created a market in over the counter trading that is beyond regulatory scrutiny. These dark markets have played a prominent role in major manipulations. Without comprehensive registration and reporting, there will always be room for mischief that is out of sight to the regulator. Large traders should be required to register and report their entire positions in those commodities across all markets. Registration and reporting should trigger scrutiny to ensure the good character, integrity and competence of traders.
- Eliminate the funny money
- Raise margin requirements
- Increase capital reserve requirements
We need to restore the balance between speculation and productive investment. Margin requirements on organized exchanges are a fraction of the margin requirements on stocks. If it is cheaper to put your money into speculation, why bother with real investment. The margin requirement for commodity trading among non-commercial traders should be fifty percent higher than the margin requirement for investment in stocks, but more lenient terms should apply to physical traders. Capital requirements should be increased to further reduce the amount of leverage in these markets and dampen excessive risk taking.
- Reduce the ability to push prices up
- Lower position limits and tie position limits and margin policies to needs of physical traders
- Lengthen settlement windows
- Ban conflicts of interest (analyst's reports that enrich analyst's portfolios)
Large position limits and short settlement periods invite efforts to influence prices. They should be reformed to reduce the risk. The practice of hyping prices by firms that stand to profit from the predictions should be should be banned.
- Restore the proper functioning of commodity markets and their regulators
- Enforce meaningful speculative limits
- Do honest analysis (classify traders correctly)
- Close the loopholes (foreign boards of Trade exemptions, the Enron and swaps loopholes)
- Create minimum criminal penalties for violation of commodity laws
Public policy must return the futures markets to their function of supporting the operation of physical markets. Speculation should not be allowed to dominate these markets, and limits should ensure that genuine commercial traders are a substantial majority of the market by imposing strict speculative limits. Traders must e properly classified to ensure this outcome.
We must not only close the Enron-loophole, which allowed vast swathes of trading to take place with no oversight, but also ensure vigorous enforcement of registration and reporting requirements. We must take back the authority we have given to foreign exchanges and stop abandoning authority to private actors.
Failure to comply should result in mandatory jail terms. Fines are not enough to dissuade abuse in these commodity markets because there is just too much money to be made.
- Redirect investment to productive long-term uses
- Put a tax on short-term capital gains
- Move pension funds out of speculation
- Ban institutional index funds
We must level the playing field between long-term productive investment and short-term speculative gains, with a tax on short term capital gains between 33 and 50 percent to make holding productive investments for long periods as attractive as flipping short term financial paper.
Speculators will insist that they will just go abroad, but the Congress need not fear such an outcome. If the U.S. is determined to assert jurisdiction over trading in the U.S. and for U.S. commodities, foreign exchanges will comply. To survive they desperately need to have access to legal instruments for U. S. traded commodities. Individuals may chose to become expatriates and move to countries that chose not to comply, or they may break the law, but vigorous enforcement will put a stop to it. I suspect that the vast majority of traders do not want to live in places like Zimbabwe or Leavenworth, Bangladesh or Sing Sing.
If we do not do more than the half hearted approaches that are on the table, we will continue to lurch from crisis to crisis. American consumers are suffering needlessly from this speculative bubble in vital necessities. It is time for thorough reform and re-regulation of the financial commodity markets.
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