Summary Comments 

on the 

Testimony before the CFTC 

July 28, 2009 

Todd E. Petzel, Ph.D. 

Chief Investment Officer 

Offit Capital Advisors, New York 
1 Petzel, Todd E. “A New Look at Some Old Evidence: The Wheat Market Scandal of 1925,”

Food Research Institute Studies, Vol XVIII, Number 1, 1981.

Summary Comments on the Testimony before the CFTC

July 28, 2009

Todd E. Petzel, Ph.D.

Chief Investment Officer

Offit Capital Advisors, New York

Introduction

Mr. Chairman and Commissioners, my name is Todd Petzel and I am the Chief Investment Officer of Offit

Capital Advisors, a New York City based Registered Investment Advisor.  We advise over forty family and

not‐for profit clients controlling more than $4 billion in all asset types.

I have long been a student of and a practitioner in the futures markets.  My academic research dates

back over thirty years.    From 1982 to 1995 I was first Chief Economist of the Coffee, Sugar & Cocoa

Exchange, where my duties included market surveillance, and then the Chicago Mercantile Exchange.  

During that time I worked closely with the CFTC and its staff on market surveillance and position limit

issues.  In 1996 I became a money manager.  Also since 1996 I have been elected as a public director to

both the National Futures Association (NFA) and the Futures Industry Association (FIA).    I want to

emphasize that my testimony here today represents my own views and should not be attributed to

either organization or its members.

The three broad topics I address in my written commentary concern market information, position limits

and the impact of traditional investors now active in commodity futures markets.   

Information

Information is the life blood of both well functioning markets and effective market regulation.  I support

the Commission’s recent efforts to collect more background detail on positions and provide regular

summaries of that data to the public.  Most commercial participants have a very good understanding of

current market dynamics, but the broader public should benefit from a clearer understanding of who is

participating in the market and why.

Position Limits and Exemptions
2 Petzel, Todd E. “A New Look at Some Old Evidence: The Wheat Market Scandal of 1925,”

Food Research Institute Studies, Vol XVIII, Number 1, 1981.

We have had federally mandated position limits for select agricultural commodities since 1936.  And for

just as long there have been exemptions allowed to those limits for hedging purposes.    Over time

exchanges were charged with establishing position limits for other futures.  The goal was simple.  Avoid

outsized positions that can disrupt prices in general or the convergence of spot and futures prices at

expiration.    The exchanges have a very strong reason to get this right.    Commercial participants act

voluntarily.    If a market is perceived to be either inaccurate or easy to disrupt, those commercial

participants simply will not trade.

But a balance has to be maintained.  Limits that are too large may allow for market disruption, but if the

limits are too small there will not be enough capital in the market to provide regular liquidity or

adequate transfer of risk.    The growth of these markets over decades suggests the exchanges have

generally gotten this balance right.

In the early part of the 1990’s the traditional concept of hedge exemptions evolved to include risk

management exemptions covering unleveraged, synthetic financial positions.  We also came to embrace

hedge exemptions for dealers who were creating off‐exchange financial and commodity index products

for their clients, and who then needed to manage the risks those products created.   

It is sometimes suggested that such off‐exchange activity can be used to circumvent existing position

limits.    The expanded position information mentioned above will shed light on this conjecture.    If a

problem exists, there are suggestions in my testimony how this might be addressed.

While the proper size and effectiveness of position limits can be debated at great length, what cannot

be disputed is the necessity of dealer hedge exemptions associated with any activity that is consistent

with, and allowed by, the established position limits.    The negative impact of disallowing such

exemptions on the effectiveness of our futures markets cannot be overstated.

Traditional Investors Participating in Futures

Over the past two decades institutional and individual investors have increasingly embraced the use of

unleveraged commodity futures contracts as part of their long term asset allocations.    In my written

testimony I go into some detail concerning how these investments work and their impact on the

markets.   

In these remarks I will simply say that I believe these investors in aggregate have had a material impact

on price levels, price spreads and the level of inventories being held.  That does not mean, however, that

these investors are manipulators or that they should be banned from the markets.    There is much

concern today in the investor community about federal deficits, the size of the Fed’s balance sheet and

the prospect of wealth destruction through inflation.    These investors are looking to real assets,
3 Petzel, Todd E. “A New Look at Some Old Evidence: The Wheat Market Scandal of 1925,”

Food Research Institute Studies, Vol XVIII, Number 1, 1981.

including commodities, as their own hedge.    If they are precluded from using unleveraged futures

positions, they will not go away.  Instead they will shift their focus toward foreign and physical markets

where it may prove less efficient for them and it will definitely be less transparent to regulators and the

other market participants.

Summary

In summary, the importance of well functioning futures markets is beyond dispute.  The exchanges have

strong incentives to provide reliable, open, and non‐manipulated markets to all users.    Recent

improvements in transparency should be maintained and applauded.  If changes are made to position

limits in any market, great care should be exercised to not set them too low, discouraging a wide range

of participants who bring valid market information and liquidity to all commercial users.  It would be a

major step, and in my opinion a most unfortunate one, for a free society to move from a stated policy of

preventing market manipulations to using laws and regulations in an attempt to change temporarily

unpopular market outcomes.