Last year, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress empowered the CFTC to rein in excessive speculation to keep the commodities markets from flying off the rails. Unfortunately, the commission has yet to finalize new rules to govern speculative position limits. Meantime, speculators continue to buy $100 worth of oil futures with just $6 down.
I believe the commission already has an extremely effective tool at its disposal it could use immediately to discourage excessive energy speculation and bring down gas prices – the authority to impose higher margin requirements for oil futures contracts. The current system - in which ordinary investors put down 50 percent to buy stock, while speculators have to post only six percent to buy a futures contract in oil and other commodities - clearly is skewed.
Today, these kinds of margin requirements are not set by federal regulators, but rather by the exchanges themselves. For the same reason we don’t let pharmaceutical companies approve their own drugs, we shouldn’t let futures exchanges self-regulate by setting their own margin requirements. It defies logic.
Fortunately, in Section 736 of the Dodd-Frank bill, Congress removed the broad statutory restriction that prohibited the CFTC from setting margin requirements. Section 736 authorizes the CFTC to call for higher margin requirements in order to protect the financial integrity of the futures trading markets.
Now is the time to exercise that authority.
I do not propose that we raise margin requirements on businesses that engage in the hedging of legitimate risk. But I invite you to join me in sending the attached letter to Gary Gensler, the Chairman of the CFTC, urging him to act quickly to raise the margin requirements imposed specifically on purely speculative oil futures contracts.
I hope you will join me in this effort.
Dear Chairman Gensler,
There is strong evidence the recent surge in gas prices has little to do with the fundamental supply and demand for oil. Government data confirm that oil speculators are driving the price increase. We urge you to restore integrity to our energy markets by exercising the CFTC’s authority to require higher margin levels for speculative oil futures contracts.
Speculators are seizing on recent political turmoil in North Africa and the Middle East to drive energy prices to unwarranted levels. The Commitment of Traders Report reveals that speculators have flooded into the market in recent weeks. Since protests began in Egypt on January 25, 2011, money managers have increased their long positions in NYMEX West Texas Intermediate crude oil futures contracts by more than 35 percent, or the equivalent of 75 million barrels of oil. Oil speculators have increased long positions on the Intercontinental Exchange by nearly 50 percent. At the same time, actual legitimate hedgers have reduced their long positions in the oil futures markets.
The loser in this game of oil speculation is the American consumer. Rising oil futures translate into higher gas prices, and that means Americans have less money in their pockets to pay for basic needs.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act, we empowered your Commission with a number of new tools to rein in excessive speculation and prevent market failures. In addition to mandating speculative position limits, we removed the broad statutory restriction that prohibited the CFTC from imposing higher margin requirements. Section 736 authorizes the CFTC to require higher margin requirements in order to protect the financial integrity of the futures trading markets. Now is the time to exercise that authority. New margin requirements could take effect as soon as July, but the CFTC must begin the rulemaking process now. Higher margin levels would reduce incentives for excessive speculation by requiring investors to back their bets with real capital.
For the same reason we don’t let pharmaceutical companies approve their own drugs, we shouldn’t let futures exchanges self-regulate by setting their own margin requirements. This hand’s-off, self-regulatory approach has led to a fundamentally inequitable system in which ordinary investors are required to post 50 percent margin to buy a stock, but Wall Street traders post only six percent to purchase a risky and volatile futures contract.
We urge you to act quickly to raise the margin requirements imposed on speculative oil contracts. The margin increase should only apply to speculators, not legitimate hedgers. This is consistent with current exchange policies that apply different margin requirements for investors and bona fide hedgers. With your leadership, we can discourage damaging and excessive speculation in the oil markets and bring down gas prices.
Sen. Bill Nelson (D-Fla.) is a member of the Senate Budget, Commerce and Finance Committees.