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Better Markets Calls For Tough Rules to Curb Excess Speculation

Better Markets, a watchdog group promoting the public interest in the capital and commodity markets, has urged federal regulators to curb commodities speculation so American families and businesses will stop being gouged at the gas pump and checkout lane by Wall Street.

The nonpartisan group filed a comment letter Monday with the Commodity Futures Trading Commission regarding its proposed rule to establish position limits on commodities, such as crude oil and wheat, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Better Markets called on the agency to strengthen its proposal issued in January, noting that it fails the Dodd-Frank requirement to "diminish, eliminate, or prevent excessive speculation."

"Big Wall Street banks and speculators need to be stopped from driving up prices and picking the pockets of American farmers and families," said Dennis Kelleher, president and chief executive officer of Better Markets. "That’s what financial reform was supposed to do, and that’s what the CFTC must do now. The question is whose side are you on: speculators making enormous profits or America’s farmers and families paying skyrocketing prices?"

The comment letter details how excessive speculation in our commodity markets has triggered dramatic increases in the price of vital commodities such as food and energy – impacting every American family. For example, prices within the last year have increased for wheat (80 percent), heating oil (47 percent), and cotton (140 percent). Those price spikes are imposing a terrible burden on our economy and are, in some areas of the world, causing widespread deprivation and starvation.

Better Markets called on the CFTC to strengthen its proposal, especially by imposing market-wide position limits for speculation in each product market, in addition to individual trading limits targeting manipulation. Speculation should be limited to 30 percent of each market, which is the historical level necessary to provide liquidity for legitimate hedgers such as farmers. Concentration position limits should also be implemented to prevent manipulation, the letter argues.

The nonprofit group also called for the elimination or substantial limitation of so-called commodity index funds, which have distorted the market while delivering huge profits for Wall Street firms. Commodity index trading has ballooned since 2005, pumping as much as $300 billion into commodities markets, resulting in a one-way speculative bet that has increased volatility and prices. For example, speculation in wheat futures has increased from 12 percent of the market in 1996 to 65 percent in 2008, with hedging by producers and purchasers dropping to 35 percent. For cotton futures, speculation jumped from 28 percent in 1996 to 50 percent in 2010, with a corresponding decrease for hedgers from 72 percent to 50 percent.

Additionally, Better Markets called on the CFTC to immediately impose such position limits within commodity markets, which differ from capital markets because their purpose is for hedging by producers, not for speculation. That power has been established in federal law since 1936, and strengthened under Dodd-Frank to ensure that "the price discovery function of the underlying market is not disrupted."

Regulators should dismiss industry claims for a delay until swap data becomes fully available later this year, the letter argues. Excessive speculation in the futures market, which provides the primary benchmark for pricing in the physical market, must be addressed independently of the swaps markets. When speculators dominate price discovery in the futures markets, they dictate the prices paid for real commodities by flour millers, airlines and other businesses.

There is no legitimate reason for any pause, especially as at least 40 academic and governmental papers have shown that excessive speculation inflates commodity prices. Instead, the CFTC should act now to protect Americans from the rampant speculation that costs them every time they pay for products such as gas, coffee, heating bills and airline tickets.

"The facts show that speculation in commodities has reached excessive levels and is driving up prices having nothing to do with the fundamentals of supply and demand. The data also shows that speculators are also increasing the cost of hedging, and pushing too many producers and purchasers out of the market. This is wrong and must stop now. The time for the CFTC to act is now," Kelleher said.

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