A.B.A. supports position limits on index funds

by Ron Sterk
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WASHINGTON — The American Bakers Association on April 22 signed on to an amicus brief in support of position limits on index funds trading in the wheat market.

“Market volatility continues to be a major issue for bakers,” said Robb MacKie, president and chief executive officer of the A.B.A. “The buy and hold strategy that index funds employ in the wheat market only further weakens the wheat markets’ ability to react to traditional fundamentals. When this happens, the wheat markets become a much less reliable tool for true price discovery.”

The Commodity Futures Trading Commission currently is appealing a late 2012 court ruling that struck down its proposed rule implementing position limits on index funds in agriculture, metals and energy markets.

“Open interest in the Chicago soft red wheat contract is almost seven times the size of the 2013 crop,” said Cory Martin, director of government affairs at the A.B.A. “The position that index funds hold in the wheat market is massive, and when you combine that with their tendency to sit on these contracts regardless of what is happening in the market, it leads to increased volatility. For example, from 2005 to 2007, the range in monthly price movements was only 61c per month. From 2008 to today, that has increased to $1.17 per month. The jump in monthly volatility corresponds with the increase in index funds’ investment in the wheat market.

“The position limit rule will go a long way in addressing unsustainable market volatility. Limits preclude the funds’ ability to buy and hold a vast amount of open interest in the market, allowing the market to react appropriately to traditional market fundamentals.”

The association said it would continue to work with Congress and the C.F.T.C. to address market volatility.

The A.B.A.’s annual convention was under way April 21-24 in Aventura, Fla.

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