The Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC) are all taking steps toward increased regulation of speculative investors and their use of commodity futures contracts. CFTC Chairman, Gary Gensler says it’s not a matter of “if” but “when” increased regulations will be implemented.
“Right now there are three federal agencies all looking at different parts of this issue,” says Valerie Wood, President of Energy Solutions, Inc. “It is getting far more attention than ever before, so we do expect to see some changes. Unfortunately, no one really knows what those changes are going to look like and how speculators will react to them.”
The CFTC categorizes traders into two primary categories. The commercial sector consists of large hedgers or traders that have an interest in the underlying commodity (i.e. a producer or consumer of the underlying product). The non-commercial sector consists of large speculative traders, including investment banks and hedge funds, who use commodities markets solely as a way to increase profits.
“One problem with the current system is that companies, not trades, are categorized into these sectors,” says Wood. “In today’s world, a company may have affiliates that fall into both the commercial and non-commercial sector, but trades aren’t necessarily accounted for that way. Another problem is that multiple financial tools have made it more challenging to track total positions held and this has allowed traders to exceed allowable position limits.”
For consumers, increased regulation could mean less day-to-day price volatility and most would welcome that. However, if increased regulation reduces the number of players or traders involved in the marketplace, it could also mean less liquidity, which could hamper the trading of commodities on futures markets.
In its latest monthly edition of The Advisor, Wood provides additional insight into the status of talks and hearings as it relates to energy commodity contracts and increased regulation of speculators. Request your free copy of the August 2009 edition of The Advisor by sending your request to request@energysolutionsinc.com or call (608) 848-9589.
About Energy Solutions, Inc.
Formed in 1996, Energy Solutions, Inc. is independently owned. With more than 25 years of experience in the natural gas industry, our team focuses on natural gas prices and in helping businesses improve their internal processes for the purchase of natural gas.
