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Tuesday
Sep202011

Regulatory Stalemate: The Debate on the CFTC’s “Position Limit” Rule 

As reported on 14 Sept 2011 (EST) by Reuters, CFTC’s proposed “position limit” rule has received much criticism from the investment community. The “position limit” rule aims to clamp down how many total contracts of commodities a speculative trader can control. The CFTC believes that the measure will help discourage excessive speculation. Critics however hold that the CFTC belief is not backed by sound economic analysis and are unconvinced about the impact of such rule. The rulemaking process of CFTC has also been under fire as the agency missed the Dodd-Frank deadline in finalizing the rule.

The agency in fact received whistle blowing reports from, allegedly, its own employees regarding the workability of the rule. Three of the five commissioners of the agency reportedly expressed skepticism as well. It is now widely expected that the approval date of this “position limit” rule may be pushed into early October from September.

Regulators have become much more uptight in light of recent volatility. The CFTC “position limit” rule in some ways seems to resonate with the SEC’s “large trader” rule (rule 13h-1 of SEA). Both of them target large traders whose ability to exercise investment leverage may, as regulators seem to believe, can upset the stability of markets and hence impede fragile economic recovery.

In the eyes of investors, the influx of rulemaking may lead to overregulation which offset investment incentives, which can also dampen baby-step recovery up to this day. The risks for investors lie in regulators’ possible intent to extend monitoring efforts beyond home borders, limiting investment options and causing unwanted complications.

The Reuters news report on “position limit” rule can be found here.

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