Editor's Note: CME Group responded to this proposal, check their statement at the end of this story.
Worries over higher gas and diesel prices have sent a shockwave through the market, impacting the slow economic recovery. On Tuesday, President Barack Obama announced a new program that will take steps to make sure that manipulation of the market by speculators does not cause more trouble for consumers. The proposals, which include asking Congress to take action, involve the Federal Trade Commission and the Commodity Futures Trading Commission.
As he announced the proposals, Obama noted that "things that we can do administratively, we are doing. And I call on Congress to pass a package of measures to crack down on illegal activity and hold accountable those who manipulate the market for private gain."
He outlined proposals for Congress to consider including funding for "more cops on the beat to monitor activity in energy markets." He says the funding could also be used to upgrade technology so surveillance and enforcement officers aren't hamstrung by "older and less sophisticated tools than the ones that traders are using."
He also called on Congress to increase the civil and criminal penalties for illegal energy market manipulation and other illegal activities. "So my plan would toughen key financial penalties tenfold, and impose these penalties not just per violation, but for every day a violation occurs," Obama said.
The third action for Congress would be to give the agency responsible for overseeing oil markets new authority to protect against volatility and excess speculation by making sure that "traders can post appropriate margins, which simply means that they actually have the money to make good on their trades." Obama said.
As part of these actions, the President is aiming to empower CFTC to raise margin requirements for the oil futures markets. Any changes in futures trading can impact other commodities.
However, are these changes merely window dressing in an election year? Farm Futures Market Analyst Arlan Suderman notes that the exchanges already have responsibility to set margin requirements in a way that "ensures that financial stability and accountability exists if the market goes against a speculator's position. Margin requirements are not meant as a tool to manage the size of their positions."
Suderman worries that the proposed changes would give government the authority to "manipulate" market participation, especially in light of a proposal by the Administration to get disaggregated data that would identify individual participants. "The combination of these policies could chase/force the speculator from the market, which appears to be the desirable outcome to many," Suderman adds.
Senior Editor Bryce Knorr notes that reducing the level of trading activity in crude oil futures to levels seen before the explosion of activity that began in 2006 "would reduce prices by only 8% in today's environment according to my pricing model."
Knorr adds that manipulation should be sharply policed, but the world energy market "is so huge it is increasingly difficult for any one firm to affect prices. Position limits in and of themselves don't lower prices, as we've seen in commodity markets."
How this plays out with Congress remains to be seen, but keeping an eye on how this issue moves forward is important. Remember it started with complaints about prices at the pump, but consumers have also been complaining about food prices as well.
CME Group responded to the proposals, pushing back on the idea of "manipulation." Here's the organization's statement:
"CME Group agrees that manipulation is detrimental to markets and should be vigorously policed, as is currently being done. However, we caution against mistakenly categorizing speculation as a form of manipulation. Market makers and speculators serve an important function in the market - allowing energy users and producers to manage oil price risk and providing the necessary liquidity to ensure effective price discovery and more efficient transfer of price risk.
"The administration's proposal to use margin requirements to control cash prices is misplaced. The administration must recognize that exchanges, as the operators of regulated energy markets, are in the best position to monitor volatility and manage margin requirements. Margins are based on volatility and cannot be used to manage cash prices. Rather, they serve as important tools for CME Group and other exchanges to use in managing the financial risks of the clearing houses we operate, which are a key component of the risk management policies being put into effect under Dodd Frank. Additionally, taking away from exchanges the ability to manage margins would make the markets less efficient, less tied to fundamentals and would create the potential to push the hedgers out of the market, which would make oil more expensive for all consumers."