Dark to Light OTC Markets

If there is one chief concept behind the new law, it is transparency. In the futures world, the major change will be bringing light and regulatory oversight to the over-the-counter (OTC) derivatives market. As you know, OTC markets are where those annoying credit default swaps traded. To give you an idea of how this increases the regulatory universe, the currently CFTC-regulated exchanges account for roughly $5 trillion in annualized trading. The OTC market is roughly $600 trillion. We are going boldly where no regulator has gone before. To say the least, we have our work cut out for us.

Speculation and Position Limits

In addition to OTC markets, there is another key provision of real significance required by the new law. In the run-up to 2008, we saw an enormous shift in speculative money coming into futures markets. Over a several year period, roughly $200 billion in speculative money came into these markets. Crude oil reached $147.27 a barrel; gasoline topped $4 a gallon. Wheat, which trades at roughly $8 a bushel these days, was trading at $24. It went on and on, and then it all crashed.

I’m not suggesting a direct correlation between the inflow of speculative money or positions and the price volatility, by any means. Many of us learned, however, that while there may not be such a thing as too much speculative money, that same money might be too concentrated. We saw very large concentrations of trader positions in 2008. That has continued. Since then, we saw one trader hold more than 20 percent of the crude oil market. Even earlier this year, one trader held over 40 percent of the silver market.

While I’m not suggesting speculators drove prices in 2008 or today, I know they had an impact then and believe they are having some impact today. You don’t have to take it from me though. Economists at Oxford, Princeton and Rice universities all document that speculators have had an impact on prices.

Congress got it, and that is why the new law requires mandatory speculative position limits—to ensure that too much concentration doesn’t exist.

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