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Futures: Position limits are not a cure for price spikes

Moves to curb supposed speculation on futures exchanges are pointless populism, as commodity price spikes reflect physical market supply/demand factors.

Nothing gets politicians’ backs up more about the financial markets than when they’re perceived to be holding the "man on the street" to ransom. This summer’s spike in wheat and corn prices, and the resulting fear that there might be a repeat of the 2007/08 global food crises, has European financial regulators in a combative tizzy.

Last month EU internal market commissioner Michel Barnier – himself a former French agriculture minister – announced that the European Commission intended to introduce more stringent oversight of the commodity derivatives markets (see Barnier warns markets off reg arbitrage), with a particular focus on agricultural contracts.

The EU agriculture commissioner, Dacian Ciolos, told delegates at a Mifid conference in Brussels last month that European regulators should consider position limits on futures exchanges to counter excessive movements in commodity prices. This would mirror moves by the US regulator, the Commodity Futures Trading Commission, which had imposed limits in its jurisdiction as part of the Dodd-Frank legislation.

The CFTC itself hasn’t been able to produce the evidence that excessive speculation is the cause of price spikes. But pressure came to bear from politicians who blamed speculators for the spike in oil prices in the summer of 2008.

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