Casting Doubt on 'Position Limits'

02.11.2011
The marks "a critical component of the comprehensive regulatory reform of the derivatives markets," Chairman Gary Gensler's said at the October open meeting at which the new regime was approved.

On the other hand, dissenting CFTC Commissioner Scott O'Malia said there isn't any empirical evidence that shows position limits "diminish, eliminate or prevent excessive speculation."

The new rules will cover 28 physical commodity futures and options contracts and physical commodity swaps when they take effect early next year, 60 days after the commission approves an official definition of the term "swaps."

Beyond just the financial industry, that the limits could affect their ability to legitimately offset business risk.

Time will tell whether the new rules prevent excessive speculation, as intended, without imposing greater costs. But a quick look at some research, early this year and late last year, appears to make a strong case for Commissioner O'Malia's dissent.

"Position limits are not helpful in curbing market manipulation," Muhammed Shahid Ebrahim of Bangor University (part of the UK's University of Wales system) writes in a working . According to Ebrahim, the results of his modeling indicate that the "binding constraints" imposed by position limits have the "unintentional effect" of a "degradation of the equilibria and augmenting power of the speculator and other agents."