A.B.A. urges C.F.T.C. to go forward on position limits

by Ron Sterk
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WASHINGTON, D.C. — The American Bakers Association has submitted comments urging the Commodity Futures Trading Commission to move forward with proposed limits on futures trading by index funds.

“A.B.A. has long pursued this policy with the C.F.T.C.,” said Robb Mackie, A.B.A. president and chief executive officer. “Index fund investment in the wheat market has led to incredible volatility. Their buy and hold strategy has caused wheat prices to fluctuate dramatically, effectively limiting the usefulness of the futures markets as a resource for price discovery. The futures markets simply are not working as they should. Placing limits on index funds while removing the hedge exemption that this group currently receives will allow the markets to once again react appropriately to fundamental supply and demand.”

In its comments to the C.F.T.C., the A.B.A. contends current volatility, caused in part by the impact of index funds in the market, more than qualifies as excessive speculation since it has caused unreasonable and unwarranted fluctuations in the wheat markets.

“The assumption that index fund activities in the wheat market are passive and have no impact is erroneous, especially considering that this segment of market participants effectively own 342% of this year’s soft red wheat crop,” said Cory Martin, A.B.A. senior manager of government relations. “How can this massive position have no impact?”

“The original intent of the futures markets, particularly for the wheat market, has been left behind,” Mr. Martin said. “The markets were clearly intended to allow producers and users of a physical commodity to manage their risk, but index funds have dramatically increased that risk, many times forcing these traditional market participants to find alternative means of selling or securing wheat.”

More than 5,000 comments had been received by the C.F.T.C. during the 60-day public comment period, which ended March 28, according to the agency’s website. The C.F.T.C. voted four to one Jan. 13 to move forward a proposed rule to implement position limits on noncommercial hedgers in commodity markets, including metals, energy, soft commodities and agricultural futures. A final C.F.T.C. vote will come sometime after the comment period.

In 2009 the A.B.A. testified before the U.S. Senate in favor of imposing position limits on index funds and defining index funds as speculators instead of as commercial hedgers. The A.B.A. also participated in multiple C.F.T.C. meetings and sent numerous letters in support of position limits to the commission.

The U.S. Congress passed the Dodd-Frank financial law in July 2010 providing the C.F.T.C. the power to set trading limits. But there has been disagreement within the C.F.T.C. about whether the commission has the power to enforce such limits and from some in the trading community as to the actual impact on commodity prices and volatility from large index funds.

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