New Commodity Futures Trading Commission Chair Timothy Massad held a public hearing on the agency’s commodity position limit rules on June 19. The CFTC re-opened its rulemaking process for further comment after many commodity market participants said the limits – on everything from oil to soybeans – would make it harder for companies and trading firms to hedge their positions.
But it became apparent that separating speculation from hedging is harder than it sounds. Those that qualify as hedgers are exempt from some of the provisions of the cap rules. However, the issue of basis risk has gummed up the works.
The roundtable focused on gross hedging, cross-commodity hedging, anticipatory hedging and the process for obtaining an exemption from the caps. With cross-commodity hedging, the CFTC has proposed that the two positions have a correlation of 80 percent or above to qualify as hedging.
Market participants said that the basis between two commodities changes often, so the 80 percent rule is too arbitrary – similar to arguments made against FAS 133’s 80-120 hedge effectiveness test during the comment period for that rule.
The CFTC will have to settle the issue eventually since Congress passed legislation requiring the limits. How the commission will address this issue remains to be seen.