Statement of 

Craig S. Donohue 

Chief Executive Officer of CME Group Inc. 

Before the 

Commodity Futures Trading Commission 

Hearing on Energy Position Limits and Hedge Exemptions 

July 28, 2009 

I am Craig Donohue, Chief Executive Officer of CME Group Inc. (“CME 

Group”). CME Group, on behalf of its four designated contract markets (“CME 

Group Exchanges,” “Exchanges” or “DCMs”), appreciates the opportunity to 

provide its views to the Commodity Futures Trading Commission (the “CFTC” or 

“Commission”) in conjunction with the Commission’s review of its approach to 

speculative position limits in energy contracts and hedge exemptions from such 

limits. 

 CME Group is the world’s largest and most diverse derivatives marketplace. 

We operate four separate Exchanges, including Chicago Mercantile Exchange Inc. 

(“CME”), the Board of Trade of the City of Chicago, Inc. (“CBOT”), the New 

York Mercantile Exchange, Inc. (“NYMEX”) and the Commodity Exchange, Inc. 

(“COMEX”). The CME Group Exchanges offer the widest range of benchmark 

products available across all major asset classes, including futures and options on 

futures based on interest rates, equity indexes, foreign exchange, energy, metals, 

agricultural commodities, and alternative investment products. 

 We also operate CME Clearing, one of the largest central counterparty clearing 

services in the world, which provides clearing and settlement services for 

exchange-traded contracts, as well as for over-the-counter (“OTC”) derivatives 

contracts through CME ClearPort®. Using the CME ClearPort® service, eligible 

participants can execute an OTC swap transaction, which can be transformed into a 

futures or options contract that is subject to the full range of Commission and 

exchange-based regulation and reporting. The ClearPort® service mitigates 

counterparty credit risks, provides transparency to OTC transactions and brings to 

bear the exchange’s market surveillance monitoring tools. 

1 

 
 

 The CME Group Exchanges serve the hedging, risk management and trading 

needs of our global customer base by facilitating transactions through the CME 

Globex® electronic trading platform, our open outcry trading facilities in New 

York and Chicago, as well as through privately negotiated transactions. 

 The theory that speculators in futures markets cause unwarranted price 

volatility and excessively high and low prices is not new; Congress has been 

repeating that notion since the latter 1800s. Farmers and their legislative 

representatives have called for the elimination of speculators on futures exchanges 

The Commodity Exchange Act (“CEA”), however, does not limit speculation, but 

only “excessive speculation.” This is an implicit recognition that futures markets 

cannot operate without the participation of speculators. 

 The so-called “speculators,” such as index funds and swap dealers, who are the 

focus of recent intense criticism, are not engaged in traditional speculative activity, 

i.e., trying to beat the market. Rather, swap dealers use futures markets to facilitate 

the hedging of more complex and specific risks accepted in connection with swap 

transactions with commercial customers and others. Denying or limiting their 

access to the futures markets will simply impede hedging activity by commercial 

market participants. Index funds aggregate the buying and selling decisions of 

many thousands of investors, most of whom are doing what they have been taught 

for decades to do: diversifying their investment portfolios and hedging inflation 

risks to their investment returns in order to maximize their retirement savings and 

their individual wealth. 

 The debate regarding controlling excessive speculation in the energy markets 

by means of position limits or otherwise needs to be informed by two facts: first, it 

is rare for speculators, index traders and/or swap dealers to have control of a large 

share of the open interest in any futures contract, and second, efforts to control 

price or volatility by position limits is a failed strategy. 

 Position limits are not a costless palliative to appease angry farmers or gasoline 

or heating oil buyers. Position limits, when improperly calibrated and 

administered, can easily distort markets, increase the costs to hedgers and 

effectively increase costs to consumers. Unfortunately, many demands for 

speculative limitations assume that severe limits on speculation will bring prices to 

some favored level. On the contrary, position limits on futures contracts will not 

and do not control cash market prices. There is a complete disconnect between the 

2 

 
 

implied promise to drive prices down or up, whichever the most vocal constituency 

desires, and the ability of position limits to deliver on that promise. 

 We have taken a very strong position in the past and in the answers to your 

questions today respecting the value of additional hard position limits in the 

NYMEX energy complex. We employ position limits during the last three days of 

trading before the delivery period begins and position accountability levels at other 

times to avoid congestion and other market disrupting events that may flow from 

excessive concentrations of positions. Nothing we have heard or read discredits 

the principles on which that policy was built. Although our administration of 

accountability levels in the energy complex may not be broadly understood by the 

public, it is certainly understood by the Commission’s Division of Market 

Oversight (“DMO”), as it is routinely subject to rule enforcement review by DMO. 

 Notwithstanding the success of our existing accountability regime, we 

recognize that others have concerns respecting the role of index funds and swap 

dealers in the futures market, and in particular, the impact that their participation in 

the markets might have on energy prices. We are prepared to respond to those 

concerns by adopting a hard limit regime for those products, including singlemonth and all-months combined limits in addition to the current limits that apply 

during the last three trading days of the expiration month. This modified regime 

will include the administration of tailored hedge exemptions for swap dealers and 

index funds, and as whole, should alleviate external concerns that positions held by 

these investors and hedgers will increase price volatility or artificially inflate or 

deflate prices. 

 We are prepared to lead. We strongly believe that any steps taken to impose 

hard position limits must support the national policy of enhancing transparent 

markets and central counter party clearing — which was reaffirmed by Congress in 

its amendments to the CEA just last year — and prevent market participants from 

moving away from the best regulated, most transparent, safest marketplace to less 

regulated or even completely unregulated markets that are and will continue to be

beyond the control of the Commission and Congress. To be sure, position limits 

that are imprecise or wrongly administered will merely drive trading away from 

transparent markets and regulated clearing. While the Commission might be able 

to obtain jurisdiction over the OTC market for purposes of imposing position limits, 

the market for energy products is global and there is nothing to prevent market 

activity from migrating to those platforms that are beyond the Commission’s and 

Congress’ reach, including foreign markets. This diversion into dark pools and 

3 

 
 

uncontrolled credit risks clearly contravenes the goals of the Administration and 

Congress to limit systemic risk and enhance the regulatory regime. 

 We believe that CME Group is in the best position to impose and administer 

position limits and hedge exemptions regarding the energy commodities, and are 

therefore prepared to act in the near term, before the Commission or Congress. As 

described below, CME Group’s ability to establish position limits that will not 

have severe adverse consequences to its markets and to administer those limits 

fairly and rigorously is well-established. 

 It is important to include a brief word on the value of indexing. Index investing 

in commodity futures is an efficient means for thousands of small traders to gain 

the benefit of asset diversification or to hedge inflation risks. Contrary to the 

picture painted by a few witnesses at recent Congressional hearings, index funds 

are not monoliths where a single speculator, who controls a large block of capital, 

stays long against all odds and logic. The individual investors in the index buy and 

sell as any other individual investor and the fund’s holdings vary accordingly. 

 For example, a review of the U.S. Oil Funds open positions shows that it was 

liquidating positions while oil prices were rising (contrary to the view of 

those same favored Congressional witnesses) and taking additional positions when 

oil prices were falling (again contradicting common expectations). In fact, the 

CFTC staff’s 2008 report entitled “Commodity Swap Dealers & Index Traders with 

Commission Recommendations”1

 contained a number of findings, including that 

index traders were reducing their positions in the OTC crude oil “futures 

equivalent” swap substitutes at the same time that the price was escalating. Indeed, 

the net reduction in the futures-equivalent swap positions constituted an 11% 

decline over the first six months of 2008. The staff’s analysis parallels the 

conclusions of many other economists who have also studied the issue of causation 

in the context of speculators and commodity futures prices, none of which have 

found a causal link between speculative trading and an increase in commodity 

4 

 

1

 Commodity Futures Trading Commission, Commodity Swap Dealers & Index Traders with 

 Commission Recommendations, (Sept. 11, 2008) (hereafter, “Staff Report”), available at 

http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers

 09.pdf. 

 
 

prices.2 In the intervening time between the publication of the Staff Report and 

these hearings, not a single reliable study has contradicted such findings. 

5 

 

It has been suggested that our pecuniary interests create a conflict of interest in 

respect to setting our own limits. The theory is that the revenue generated from the 

index funds and swap dealers may compromise our desire to act to protect markets. 

This is simply not true3

; index funds and swap dealers hedging their net exposure 

(cont'd)

2

 See, e.g., Antoshin and Samiei’s analysis of the IMF research on the direction of the “causal arrow” 

 between speculation and commodity prices in “Has Speculation Contributed to Higher Commodity 

 Prices?” in World Economic Outlook (September 2006): 

On the other hand, the simultaneous increase in prices and in investor interest, especially 

by speculators and index traders, in commodity futures markets in recent years can 

potentially magnify the impact of supply-demand imbalances on prices. Some have 

argued that high investor activity has increased price volatility and pushed prices above 

levels justified by fundamentals, thus increasing the potential for instability in the 

commodity and energy markets. 

What does the empirical evidence suggest? A formal assessment is hampered by data and 

methodological problems, including the difficulty of identifying speculative and hedgingrelated trades. Despite such problems, however, a number of recent studies seem to 

suggest that speculation has not systematically contributed to higher commodity prices or 

increased price volatility. For example, recent IMF staff analysis (September 2006 World 

Economic Outlook, Box 5.1) shows that speculative activity tends to respond to price 

movements (rather than the other way around), suggesting that the causality runs from 

prices to changes in speculative positions. In addition, the Commodity Futures trading 

Commission has argued that speculation may have reduced price volatility by increasing 

market liquidity, which allowed market participants to adjust their portfolios, thereby 

encouraging entry by new participants. 

 Similarly, James Burkhard, managing director of Cambridge Energy Research Associates testified to 

 the Senate Energy Committee on April 3, 2008 that: 

 In a sufficiently liquid market, the number and value of trades is too large for speculators 

to unilaterally create and sustain a price trend, either up or down. The growing role of 

non-commercial investors can accentuate a given price trend, but the primary reasons for 

rising oil prices in recent years are rooted in the fundamentals of demand and supply, 

geopolitical risks, and rising industry costs. The decline in the value of the dollar has also 

played a role, particularly since the credit crisis first erupted last summer, when energy 

and other commodities became caught up in the upheaval in the global economy. To be 

sure, the balance between oil demand and supply is integral to oil price formation and 

will remain so. But ‘new fundamentals’—new cost structures and global financial 

dynamics—are behind the momentum that pushed oil prices to record highs around $110 

a barrel, ahead of the previous inflation-adjusted high of $103.59 set in April 1980.

3

 The CME Group Exchanges take their responsibilities under the Core Principles seriously. The 

 Exchanges face both financial and reputational risk if one of their markets were the target of a 

 successful manipulation, unwarranted price movements or volatility caused by “excessive 

 
 

are low volume traders who generally are entitled to member’s rates. The revenue 

impact of the loss of a hedge exemption for those classes of traders, in an 

appropriately established hard limits regime, is immaterial to CME Group. Our 

primary concern is the impact of the loss of liquidity on commercial hedgers and 

the overall safety and soundness issues that arise from driving business offexchange. 

6 

________________________ 

(cont'd from previous page)

 speculation” or if their customers became the target of fraud or other abuse. A look at the 

 resources devoted to these efforts should make clear how seriously the exchanges take their self-

 regulatory responsibility. 

• U.S. futures exchanges spent between $5 and $6 million dollars in each of the past two years 

upgrading the computer systems used to catch abuses and detect attempts to manipulate or 

otherwise distort prices or volatility. These systems allow analysts to find patterns of trading 

suggestive of rule violations, to maintain a detailed trade warehouse to examine the prior activity 

of traders being investigated, and to not only find suspicious activity from days, weeks or months 

in the past, but to detect suspicious trading as it is occurring. The systems include position data on 

all “big” traders, i.e., those with positions above some critical reporting threshold. This allows the 

analysts to watch for attempts to manipulate or otherwise improperly affect prices. 

• U.S. futures exchanges have a 2009 operating budget of $29.9 million devoted to market 

surveillance, market compliance and audit functions. 

• During 2007 and 2008, U.S. futures exchanges opened 3,651 investigations of potential rule 

violations, including front running, wash trades, trading against a customer order, disclosure of 

customer orders, prearranged trading, inequitable allocation of trades, improper out-trade 

resolution, manipulation, position limit violations, rogue trading, and improper block and EFP 

trades. It should be noted that the overwhelming majority of investigations result from the 

electronic surveillance systems the exchanges have in place and only a small proportion arise 

from complaints and tips. 

• During 2007 and 2008 US futures exchanges took disciplinary actions in 1,334 cases, levying 

fines and restitutions of $10.3 million, suspending traders for a total of 3,414 days and barring 22 

traders from trading at the exchange for at least a year and in some cases permanently. 

See Michael Gorham, The Exchange-Traded Derivatives Market: A Light in the Current Financial 

Darkness, June 9, 2009, at 14-15. Gorham notes that these figures were arrived at by quantifying the 

regulatory activity of CME Group, the Kansas City Board of Trade and MGEX, which account for 

98% of the trading volume on futures exchanges. 

 
 

 

1. Applying position limits consistently across all markets and participants, 

including index traders, managers of Exchange Traded Funds, and issues of 

Exchange Traded Notes.

Last year, fuel prices bounced to levels that were painful to consumers and 

the economy. While prices later subsided significantly, we understand the impact 

those price levels had on the daily lives of U.S. consumers. Unfortunately, the 

pressure to reverse rising prices has led some to look for a simple causal agent that 

can easily be neutralized. The favored culprit is the traditional villain in futures 

markets going back more than 100 years − speculators. Economic research and 

analysis overwhelmingly supports the conclusion that speculators have not had a 

significant impact on the direction of energy futures prices. Thus, while we 

appreciate that last year’s high prices had an impact on consumers, the simple truth 

is that the case has yet to be made for sweeping measures to impose further 

restrictions on regulated markets. 

Futures markets perform two essential functions — creating a venue for 

price discovery and permitting low cost hedging of risk. Futures markets depend 

on short and long term speculators to make markets and provide liquidity for 

hedgers. Futures markets could not operate effectively without speculators and 

speculators will not use futures markets if artificial barriers or tolls impede their 

access. 

Blaming speculators for high prices diverts attention from the real causes of 

rising prices and does not contribute to a solution. The publicly available data has 

been relatively consistent over time in demonstrating that speculators in crude oil 

futures contracts have been relatively balanced as between buy and sell positions in 

the market. The weight of the evidence and informed opinion also confirms that 

the high prices are a consequence of normal supply and demand factors. The Wall 

Street Journal surveyed a significant cross section of 53 economists who agreed 

that: “The global surge in food and energy prices is being driven primarily by 

fundamental market conditions, rather than an investment bubble . . . .”4

 

7 

 

4

 Phil Izzo, Bubble Isn’t Big Factor in Inflation, WALL ST. J., May 9, 2008, at A2. 

 
 

The academic work and the contemporaneous explanations of price 

movements in commodities markets have been largely ignored by a few vocal 

critics, who have gained an undue share of attention by making sensational claims. 

For example, Michael Masters’ claim that buy and hold index traders poured more 

than $60 billion into the major commodity indices in January through May of 2008, 

resulting in the purchase of approximately 187 million barrels of WTI crude oil 

futures causing WTI crude prices to soar by nearly $33 per barrel as a result of this 

buying pressure, was proved false in every material respect by serious scholars last 

year. 

Mr. Masters’ claims were not true in relation to actual futures positions held 

by index traders. Moreover, it bears repeating that the CFTC 2008 Staff Report 

contained a number of findings, including that index traders were reducing their 

positions in the OTC crude oil “futures equivalent” swap substitutes at the same 

time that the price was escalating. Indeed, the net reduction in the futuresequivalent swap positions constituted an 11% decline over the first six months of 

2008. As previously noted, the staff’s analysis parallels the conclusions of many 

other economists who have also studied the issue of causation in the context of 

speculators and commodity futures prices. 

8 

 

 Moreover, in January 2009, the U.S. Government Accountability Office issued 

a report titled, “Report to Committee on Agriculture regarding Issues Involving the 

Use of the Futures Markets to Invest in Commodity Indexes,” which analyzed the 

available data respecting any causal relationship between speculation and 

commodity prices generally (the “GAO Report”),5

 and effectively concurred with 

these studies. The staff identified eight empirical studies and three qualitative 

studies analyzing the impact that index traders and other futures speculators have 

had on commodity prices. The staff found that, unlike the empirical studies, the 

qualitative studies did not use experimental or statistical controls to evaluate the 

causal relationship between speculative trading and commodity prices and do not 

provide a systematic way to assess the empirical veracity of the causal relationship. 

Importantly, the eight empirical studies reviewed “generally found limited 

statistical evidence of a causal relationship between speculation in the futures 

markets and changes in commodity prices — regardless of whether the studies 

focused on index traders, specifically, or speculators, generally.”6

5

 U.S. Government Accountability Office, Issues Involving the Use of the Futures Markets to Invest in 

 Commodity Indexes, (Jan. 30, 2009), available at http://www.gao.gov/new.items/d09285r.pdf. 

6

 Id. at 5. 

 
 

 The GAO Report further explained that “all of the empirical studies we 

reviewed generally employed statistical techniques that were designed to detect a 

very weak or even spurious causal relationship between futures speculators and 

commodity prices. As result, the fact that the studies generally did not find 

statistical evidence of such a relationship appears to suggest that such trading is not 

significantly affecting commodity prices at the weekly or daily frequency.”7

 

 Neither the countless studies nor reference to the supply/demand factors driving 

the market has calmed the critics who demand an easy solution to high prices, 

which they claim can be mandated without cost or consequence. This group — 

which does not include any competent energy economists — insists that driving 

index funds and/or speculators from the markets will bring prices back to the 

correct level. 

 The proponents of mandated position limits do not understand the role of 

speculation, do not understand that there are speculators on both the buy and sell 

sides of the market and fail to grasp that imposing artificial costs and constraints 

on speculation in markets regulated by the CFTC is likely to drive prices to 

artificial levels, which can distort future production decisions and cause costly 

misallocation of resources of production. Such constraints also may well result in 

the shift of activity to less regulated and transparent markets abroad, which could 

shift this activity off the CFTC’s radar screen. 

 As Chairman Gensler himself acknowledged in his recent Congressional 

testimony before the Senate Permanent Subcommittee on Investigations and as we 

discuss below in response to a later topic, in view of the various exclusions and 

exemptions from CFTC authority available for transactions executed in OTC 

market, the CFTC does not currently have authority to impose federally mandated 

position limits that would extend to the traditional bilateral OTC market. 

Consequently, our concern is that new CFTC-imposed restrictions on fully 

regulated designated contract markets would have the predictable and inevitable 

effect of simply shifting price discovery activity from regulated and transparent 

derivatives markets to unregulated, nontransparent derivatives markets. We fail to 

9 

 

7

 Id. at 5-6. 

 
 

understand how this result would serve the public interest or current efforts by the 

Administration and Congress to limit systemic risk in the financial system.8

 

2. The effect of position limits on market function, integrity, and efficiency. 

 Futures markets provide price discovery and a means to hedge economic risk. 

Futures markets make it possible for those who want to manage price risk —

hedgers — to transfer some or all of that risk to those who are willing to accept it 

— speculators. The terms and conditions of each futures contract are unique and 

are specifically designed based on an exchange’s perception of market need. 

 Position limits in the futures markets are a tool used to promote liquidation and 

ensure orderly delivery in physically delivered contracts. If position limits are not 

being used for these purposes and are thus set at arbitrary levels, they artificially 

restrict access to markets and liquidity and are consequently likely to prevent 

prices from reaching a true market equilibrium, thus undermining the price 

discovery process. 

 Exchanges have a continuing responsibility respecting position limits under the 

CEA.9

 The exchanges’ obligations in this regard are set forth in the Commission’s 

Core Principle 5 for DCMs, which requires boards of trade to adopt position limits 

or position accountability where necessary and appropriate, and the Commission, 

in evaluating a contract market’s speculative limit program, considers the specific 

limit levels, aggregation policies, the types of exemptions allowed, and the 

methods for monitoring and enforcing compliance with the limits. 

 Many proponents of position limits underestimate the positive impact of 

speculation and do not account for the fact that there are speculators on both the 

 

8

 This result also would seem contrary to the legislative intent underlying last year’s legislation 

 imposing new CFTC oversight on certain contracts traded on the essentially unregulated exempt 

 commercial markets. Congress undertook this action after witnessing the results of the Amaranth 

 experience. 

 Using the market surveillance tool of position accountability levels, NYMEX staff members 

 determined to direct Amaranth in August 2006 to reduce its open positions in the first two nearby 

 contract months based upon what they believed to be a significant concentration in NYMEX markets 

 in Natural Gas futures. However, this prudent regulatory action by the regulated futures exchange 

 simply resulted in a shift of positions by Amaranth from NYMEX to ICE, an unregulated exempt 

 commercial market, which was undetectable at that time both by NYMEX and the CFTC. 

9

 46 Fed. Reg. 50938, 50939. 

10 

 
 

buy and sell sides of the market. We cannot, however, be insensitive to the 

consequences of imposing artificial costs and constraints on speculation. A recent 

study examining the role of speculators and index traders on commodity prices 

explained the adverse consequences that would result from artificially restricting 

speculators’ participating in the futures market: 

Speculators drive prices only to the extent that the market believes 

that informed views on the forward supply and demand fundamentals 

drive the speculators. Consequently, if one were to remove 

speculators from the commodity futures market, one would simply 

force the market to function with less informed views, degrading the 

price discovery mechanism. The fact is, a well-functioning physical 

commodity market needs to bring a view of future supply and demand 

fundamentals to its inventory management. Restricting the market 

participants that inform that view or eliminating the markets in which 

information on the future is assembled does not eliminate the need for 

a view on the future. The decisions would simply have to be based on 

a less informed view, with the risk falling squarely on the physical 

producers and consumers who may not be best equipped to manage 

that risk.10

 This is particularly the case in the oil market. Before the successful 

introduction of futures trading in 1983, the oil market had migrated through a 

series of non-competitive and non-transparent mechanisms for price determination. 

Before World War II, the Texas Railroad Commission oversaw production and 

price determination within the State of Texas. After the war, a corporate oligarchy 

— “the seven sisters”— organized a system for pricing based largely on netbacks 

to geographic points. In the early 1970s, OPEC, which was established in 1960, 

successfully asserted itself to take control of price determination. Though these 

three mechanisms were independent of each other, they shared two significant 

characteristics: prices were determined non-competitively and each process lacked 

transparency. 

 

11 

 

10 David Greely and Jeffrey Currie, “Speculators, Index Investors and Commodity Prices” at 18 (June 

2008), available at

http://www.classiccmp.org/transputer/finengineer/%5BGoldman%20Sachs%5D%20Speculators,%20

Index%20Investors,%20and%20Commodity%20Prices.pdf. 

 
 

 Futures trading which overlaid the commercial delivery mechanism referenced 

above was introduced in 1983. Despite the severe and unstable conditions that 

have persisted and continue to persist in the world oil market outside the U.S., the 

U.S. energy futures market has achieved an undaunted record of price convergence 

and reliable performance during its entire existence. This period of time has 

witnessed a litany of the most extreme world market conditions conceivable 

including: 

• 3 wars in the world’s largest supply region

• An on-going active major supply cartel (which is completely beyond the 

reach and authority of the U.S. Government)

• Severe price drops from significant (and deliberate) increased production 

by the world’s largest producer

• Severe volatility in the underlying unit of account (the dollar)

• Most of the world’s supplies come from either non-democracies or weakdemocracies, many of whom are openly inimical to the U.S. 

 Even as large as the commercial market for oil is, it does not have either the 

transparency or liquidity that is available in the futures market. In the absence of 

the futures market, the oil market would be subject to historic pressures allowing a 

lack of transparency and liquidity to influence transactions and price determination. 

Given the size and macroeconomic importance of the oil market, it is sound, even 

essential, policy to support the price discovery mechanism that provides 

transparency and liquidity − the foundation blocks for competitive price 

determination. 

 Thus, it is essential to avoid artificially constraining participation in the futures 

market for oil. For the past 26 years dating back to the initial launch of energy 

futures contracts on U.S. markets, the U.S. energy futures market and the 

commercial market mechanism that underlies it have successfully worked to 

sufficiently offset the obstacles to transparency and competition that persist outside 

the U.S. The result has been transparency, competitive price determination, and 

reliable mechanisms to successfully manage risk. 

Imposing federal position limits for political purposes will have unintended 

adverse consequences on the markets, as did the ban on short-selling imposed by 

the Securities Exchange Commission (“SEC”) last year. In fact, even former SEC 

Commissioner Christopher Cox subsequently acknowledged that the ban “had 

12 

 
 

several unintended market consequences,”11 and ultimately publicly expressed 

regret over implementing the ban: “While the actual effects of this temporary 

action will not be fully understood for many more months, if not years, knowing 

what we know now, I believe on balance the commission would not do it again. 

The costs appear to outweigh the benefits.” 12

3. The effect of position limits on facilitating the risk management of 

clearinghouses. 

The use of position limits, if properly calibrated and administered, ensures 

orderly settlement and delivery and enhances market integrity of those contracts. 

However, position limits do not have a significant effect on facilitating the risk 

management of clearing houses. Clearing houses employ their own sophisticated, 

well-functioning risk management program. At the CME Group, information on 

individual participant’s open positions in relation to the position limits set by our 

respective Exchanges is submitted to the risk team to be factored into their overall 

analysis. Position limits, however, are only one fairly small type of data factored 

into our comprehensive risk management program. For example, CME’s Clearing 

House places considerably greater emphasis on the concentration risks of market 

participants as assessed against the overall size and liquidity of the relevant market. 

Moreover, in terms of pro-active response, the risk team would consider requesting 

that a Clearing Member deposit additional margin, or maintain additional capital or 

possibly increase its contribution to the guaranty fund. By contrast, the risk team 

generally would not be seeking a reduction in positions of individual participants 

being carried by a Clearing Member. 

4. Whether the CFTC needs additional authority to implement such limits. 

 Section 4a(a) of the CEA authorizes the Commission to impose daily trading 

limits and speculative position limits for the purpose of “diminishing, eliminating 

or preventing” the burdens of “excessive speculation.”13 The statute defines 

“excessive speculation” as that which causes “sudden or unreasonable fluctuations 

13 

 

11 Rachelle Younglai, SEC Chief Has Regrets Over Short-Selling Ban, Reuters, Dec. 31, 2008, available 

at http://www.reuters.com/article/newsOne/idUSTRE4BU3GG20081231. 

12 Id. 

13 7 U.S.C. §6a(a). 

 
 

or unwarranted changes” in the price of a regulated futures contract.14 Pursuant to 

this authority, the Commission historically has set speculative position limits for 

enumerated agricultural commodities. With respect to all other commodities, 

however, the Commission has delegated the authority to set position limits to 

designated contract markets. 

 This delegation of authority took place in 1981 when the Commission adopted 

former Regulation 1.61, which required exchanges to impose speculative position 

limits.15 In setting forth its reasoning for requiring exchanges to take such action, 

the Commission emphasized that Section 4a(a) “should not be read in a vacuum,” 

explaining that when the CEA “is read as a whole, it is apparent that Congress 

envisioned cooperative efforts between the self-regulatory organizations and the 

Commission. Thus, the exchanges, as well as the Commission, have a continuing 

responsibility in this matter under the Act.”16 The Commission went on to note 

that former Regulation 1.61 “merely effectuates completion of a regulatory 

philosophy the industry and the Commission appear to share,” referencing the fact 

that the exchanges had already been imposing position limits on certain contracts.17

To ensure that no doubt remained as to the exchanges’ role with respect to 

speculative position limits, the Commission further explained that CEA Section 

8a(7)18 “underscores the fact that Congress affirmatively contemplated a regulatory 

system whereby the exchanges would act in the first instance to adopt rules which 

would protect persons producing, handling, processing or consuming any 

14 

 

14 Id.

15 46 Fed. Red. 50939. 

16 Id. 

17 Id. at 50940. 

18 Section 8a(7) of the CEA provides that the Commission is authorized: 

 

 to alter or supplement the rules of a registered entity insofar as necessary or appropriate by rule or 

regulation or by order, if after making the appropriate request in writing to a registered entity that 

such registered entity effect on its own behalf specified changes in its rules and practices, and after 

appropriate notice and opportunity for hearing, the Commission determines that such registered entity 

has not made the changes so required, and that such changes are necessary or appropriate for the 

protection of persons producing, handling, processing, or consuming any commodity traded for future 

delivery on such registered entity, or the product or byproduct thereof, or for the protection of traders 

or to insure fair dealing in commodities traded for future delivery on such registered entity. 

 7 U.S.C. §12a(7). 

 
 

commodity traded for future delivery.”19 Consistent with this approach, the 

Commission fashioned former Regulation 1.61 to assure that the exchanges would 

have an opportunity to employ their knowledge of their individual contracts to 

propose the position limits they believe most appropriate.20

 With the adoption of former Regulation 1.61, the regulatory structure for 

speculative position limits was administered under a two-pronged framework, 

resulting in enforcement of speculative position limits being shared by both the 

Commission and the DCMs.21 The Commission explained the parameters of this 

framework in its 2008 Staff Report: 

Under the first prong, the Commission establishes and enforces 

speculative position limits for futures contracts on a limited group of 

agricultural commodities. These “Federal limits” are enumerated in 

Commission regulation 150.2, and apply to the following futures and 

option markets: CBOT corn, oats, soybeans, wheat, soybean oil, and 

soybean meal; Minneapolis Grain Exchange (MGX) hard red spring 

wheat and white wheat; ICE Futures U.S. (formerly the New York 

Board of Trade) cotton No. 2; and Kansas City Board of Trade 

(KCBT) hard winter wheat. 

Under the second prong, for all other commodities, individual DCMs, 

pursuant to the core principles under the Act, establish and enforce 

their own speculative position limits or position accountability 

provisions (including exemption and aggregation rules), subject to 

Commission oversight and separate Commission authority to enforce 

exchange-set speculative position limits as violations of the Act. Thus, 

responsibility for enforcement of speculative position limits is shared 

by the Commission and the DCMs.22

15 

 

19 46 Fed. Reg. 50938, 50940 (emphasis supplied.) 

20 Id.

21 The Commission has consistently endorsed this framework when addressing issues related to 

speculative limits. See, e.g., 74 Fed. Reg. 12282; 72 Fed. Reg. 66097; 70 Fed. Reg. 12621; 69 Fed. 

Reg. 33874. 

22 Staff Report, supra, at 42. The consequences of violating speculative position limits vary based on 

whether the limits are set by the Commission or exchanges. For example, violations of exchange-set 

limits are subject to exchange disciplinary action, whereas violations of exchange speculative limit 

rules approved by the Commission are subject to enforcement action by the Commission. 

 
 

 In 1999, the Commission simplified and reorganized its rules by relocating the 

substance of Regulation 1.61’s requirements to Part 150 of the Commission’s 

regulations, thereby incorporating within Part 150 provisions for both Federal 

speculative position limits and exchange-set speculative position limits.23 With the 

passage of the Commodity Futures Modernization Act (“CFMA”) in 2000 and the 

Commission’s subsequent adoption of its Part 38 regulations covering DCMs in 

2001, Part 150’s approach to exchange-set speculative position limits was 

incorporated as an acceptable practice under DCM Core Principle 5 – Position 

Limitations or Accountability.24

 Core Principle 5 requires exchanges to adopt position limits or position 

accountability — by bylaw, rule or regulation — where necessary and appropriate, 

and the Commission, in evaluating a contract market’s speculative limit program, 

considers the specific limit levels, aggregation policies, the types of exemptions 

allowed, and the methods for monitoring and enforcing compliance with the limits. 

See Appendix B to Part 38 (“In order to diminish potential problems arising from 

excessively large speculative positions, and to facilitate orderly liquidation of 

expiring futures contracts, markets may need to set limits on trader positions for 

certain commodities.) (emphasis supplied.) The Commission’s Core Principles 

further provide that “position limits are not needed for markets where the threat of 

market manipulation is non-existent or very low,” such as for contracts on major 

foreign currencies and other financial commodities that have highly liquid and 

deep underlying cash markets, and that “a contract market may impose position 

accountability provisions in lieu of position limits for contracts on financial 

instruments, intangible commodities, or certain tangible commodities, which have 

large open interest, high daily trading volumes, and liquid cash markets.” 25 

As discussed above, the exchanges’ authority and responsibility to set position 

limits in the first instance with respect to the non-enumerated agricultural 

commodities under the CEA could not be clearer.26 If, however, the Commission 

makes a finding — after due notice and opportunity for a hearing — that there is 

“excessive speculation” (as defined in CEA Section 4a(a)) with respect to a nonenumerated agricultural commodity contract, the Commission may request that 

16 

 

23 Id.

24 Id.

25 See Part 38, Appendix B, Core Principle 5(b)(2)-(3). 

26 46 Fed. Reg. 50938, 50939. 

 
 

exchanges make necessary changes to their rules and impose speculative limits.27 

However, should an exchange fail to make the requested changes, the Commission 

has authority under the CEA to impose position limits directly. 

 To the extent that the Commission seeks to impose position limits in the OTC 

markets, we do not believe that it currently has authority to do so. CEA Section 

4a(a) only applies to “contracts of sale of such commodity for future delivery on or 

subject to the rules of any contract market or derivatives transaction execution 

facility.”28 We are not aware of any other law that grants the Commission 

authority to regulate futures markets or contracts through use of federally 

mandated position limits. 

5-6. What methodology should the Commission use to determine position limit 

levels for each market; Should the Commission limit the aggregate positions held 

by one person across different markets. 

 An exchange is best suited to police activity in its market, set position limits 

and assess whether a hedge exemption is appropriately granted to a particular 

customer. The methodology used to determine position limits for non-enumerated 

commodities should be determined by the exchange in coordination with the 

Commission. 

 As previously noted by the Commission, exchanges have a continuing 

responsibility respecting position limits under the CEA.29 The exchanges’ 

obligations in this regard are set forth in the Commission’s Core Principle 5 for 

DCMs, which requires boards of trade to adopt position limits or position 

accountability where necessary and appropriate, and the Commission, in evaluating 

a contract market’s speculative limit program, considers the specific limit levels, 

aggregation policies, the types of exemptions allowed, and the methods for 

monitoring and enforcing compliance with the limits. At the CME Group, our 

practice consistently has been to consult closely with CFTC staff before initiating 

any changes to our exchange rules concerning energy limits or position 

17 

 

27 7 U.S.C. §12a(7). In this regard, we note that the finding set forth in Section 4a(a) includes a 

causation standard, which has particular meaning in this context given the longstanding recognition 

by Congress of the special emphasis that the CFTC as an agency has historically placed on rigorous 

economic analysis of its markets. 

28 7 U.S.C. §6a(a). 

29 46 Fed. Reg. 50938, 50939. 

 
 

accountability levels. All exchange rules governing position limits and exemptions 

of course are certified to the Commission for compliance with the CEA and CFTC 

rules. 

 For example, CME Group maintains designated contract market status for each 

of its Exchanges. As such, position limits are required to be in place and 

established by the Exchanges (subject to the guidance provided by the CFTC) for 

all commodities (other than those specifically enumerated in Reg. 150.2) for the 

expiration month, each single month and on an all-months-combined basis; 

provided that beginning 12 months after the contract’s listing, position limits may 

be replaced by accountability levels for all financial contracts and intangible 

commodities meeting specified open interest and volume thresholds. With respect 

to contracts on a tangible commodity, including energy, metals and soft 

commodities, accountability levels can be put in place for all but the spot month 

which requires position limits rather than position accountability levels.30 

 Position accountability provisions provide a formal means for an exchange to 

monitor traders’ positions that may threaten orderly trading. A position 

accountability approach establishes threshold position levels that may be exceeded, 

but once a trader breaches such accountability levels, the exchange may initiate an 

inquiry to examine the trader’s rationale for holding the large position and whether 

the position poses a threat of manipulation or could otherwise be disruptive to the 

market. 

 A position accountability regime also allows exchange regulatory staff, if 

warranted, to order a trader with a position in excess of accountability levels not to 

further increase his position. If a trader fails to comply with a request for 

information about positions held, provides information that does not sufficiently 

justify the position, or continues to increase contract positions after a request not to 

do so is issued by the exchange, the accountability provision in Exchange rules 

provide authority for the Compliance Department to require the trader to limit or 

reduce his positions.31 A failure to do so is deemed a rule violation. 

 

18 

 

30 The spot month speculative position limit is required to be set at no greater than 25% of the estimated 

deliverable supply. 

31 Exchange Market Regulation staff has drafted rules that would allow an Exchange’s Chief Regulatory 

Officer additional flexibility to order a reduction of positions above accountability levels or above 

position limits (pursuant to a hedge exemption) at his discretion. 

 
 

 The CME Exchanges set accountability levels low to obtain an early alert 

within our Large Trader System and to maximize the scope of our regulatory 

authority. In fact, we recently lowered accountability levels in our core energy and 

metals contracts and expanded the scrutiny we apply to a participants position on a 

futures only basis as well as a futures equivalent basis. 

 Moreover, we create and maintain a weekly report of all participants that 

exceed NYMEX/COMEX Position Accountability Levels in all core contracts, 

through which analysts and Market Surveillance management make real time 

decisions on actions to be taken respecting market participants’ positions. 

Between June 2008 and July 2009, we took 22 such actions to reduce market 

participants’ positions. 

 An exemption from exchange set position limits can be granted by the exchange 

for bona fide hedgers based on physical or swap exposure. Firms wishing to 

exceed the position limits for the purpose of establishing a hedge of a physical or 

swap market position must file a hedge notice and obtain approval of the Exchange. 

The applicant must document that the positions to be held are bona fide hedge 

positions by providing the company’s current, historical, or anticipated exposure in 

the physical or swap markets, as well as any supplemental information the 

exchange may require. 

 Firms wishing to exceed the position limits for the commodities for which the 

CFTC establishes mandated limits must also submit monthly a Form 204 detailing 

their cash market exposure. Additionally, swap dealers and processors seeking an 

exemption in those commodities must apply for an exemption to the CFTC. The 

CFTC criteria are comparable to the criteria used by the exchange in determining 

whether an exemption should be granted. The circumstances under which a hedge 

exemption may be granted are set forth in Regulation 150.3. 

In granting hedge exemptions the exchange considers the following criteria: 1) 

hedge or swap exposure; 2) financial condition and stability of the company; 3) 

market liquidity; 4) trading history of the company; and 5) internal procedures and 

controls suitable to oversee the position. The exchange may elect to revoke the 

hedge exemption in the event the company is unable to meet the above 

requirements, or if market factors change. Firms exceeding the limits that are 

unable to demonstrate physical or derivative exposure are in violation of position 

limit rules and subject themselves and possibly their clearing firms to disciplinary 

action. 

19 

 
 

 A hard copy summary sheet of all exemptions is regularly and routinely filed 

with CFTC’s DMO in New York. This procedure has been in place for many 

years. Moreover, CFTC Rule Enforcement Reviews have included PAL inquiries 

and have affirmatively concluded that when accountability levels are reached, 

NYMEX responds promptly, almost always on the same day, by contacting the 

customer to obtain required information and take appropriate additional action 

when warranted. 

 The current framework with respect to position limits and exemption therefrom 

established by the CEA and currently implemented by the Commission and the 

exchanges is working. Therefore, it is unnecessary for the Commission to impose 

position limits across all markets and participants, including swap dealers, 

managers of Exchange Traded Funds, and issues of Exchange Traded Notes, 

without the possibility of exemptions. The Commission should continue to allow 

each exchange, subject to Commission oversight of its compliance with DCM Core 

Principles, to establish rules consistent with the objectives of reducing the potential 

threat of market manipulation or problems arising from excessively large 

speculative position and facilitating orderly trading. Should the Commission wish 

to adopt broad-based principles governing exchange-set position limits, such as is 

reflected in Core Principle 5, we would look forward to providing informed 

comment during any such rulemaking process. 

7. Should exemptions from position limits be permitted for anyone other than 

bona fide hedgers for the conduct and management of a commercial enterprise.

The statute states exemptions should only be granted to bona fide hedgers. 

What should the qualifying factors be for an entity to meet the definition of a 

bona fide hedger. 

Exemptions from position limits should be permitted for swap participants and 

index investors. 

 Swap dealers are legitimate hedgers that should continue to be allowed to 

qualify for an exemption from speculative position limits. As the Commission 

recently explained in the September 2008 Staff Report, swap dealers serve an 

important function. 

The swap dealer, which is often affiliated with a bank or other large 

financial institution, has emerged as a bridge between the OTC swap market 

and the futures markets. Swap dealers act as swap counterparties both to 

20 

 
 

commercial firms seeking to hedge price risks and to speculators seeking to 

gain price exposure. (Staff Report at p. 1.) 

In addition, the products offered by swap dealers play an important role in the 

financial markets. 

[F]or many financial entities, the OTC derivatives products offered by 

swap dealers have distinct advantages relative to futures contracts. 

While futures markets offer a high degree of liquidity . . . . futures 

contracts are more standardized, meaning that they may not meet the 

exact needs of a hedger. Swaps, on the other hand, offer additional 

flexibility since the counterparties can tailor the terms of the contract 

to meet specific hedging needs.32

 Swap dealers that assume risks in the OTC market, which are consistent with 

their legitimate businesses, should be able to transfer the residual market risk from 

their swap books to the futures markets under current standards for exemptive 

relief. Increased restrictions on swap dealers’ ability to obtain exemptions likely 

could cause two undesirable affects. First, limiting the hedge exemption for swap 

dealers could make it more costly for commercial enterprises to execute strategies 

in the OTC market to meet their hedging needs. Second, swap dealers may well 

widen spreads in order to internalize risks or attempt to hedge their risk through 

increased use of OTC instruments rather than exchange-traded futures. Both 

strategies undercut current efforts by the Administration and Congress to reduce 

systemic risk by driving OTC-generated risk into a central counterparty clearing 

context. 

 Moreover, existing rules presently allow the Commission and the exchanges to 

limit the hedge exemptions afforded to swap dealers (and other market participants) 

as necessary and appropriate to protect the market. To the extent that swap dealers 

merit different treatment, it is effectively addressed by the ability of the 

Commission and exchanges to impose conditions upon and restrict the size of any 

exemptions that they grant. For example, the Commission and CBOT presently 

condition swap-dealer exemptions for contracts with Federal position limits by 

including requirements that: (1) the futures position offset specific price risk; (2) 

21 

 

32 Staff Report, supra, at 16. 

 
 

the dollar value of the futures position must not exceed the dollar value of the 

underlying risk; and (3) the futures position not be carried into the spot month.33

 Furthermore, basing any exemption from position limits for swap dealers on the 

“conduct and management of a commercial enterprise” or the nature of their clients 

would be unworkable. The CFTC’s own Staff Report explains that swap dealers 

do not use the futures markets to hedge price risk associated with specific swap 

clients or specific OTC transactions. 

Since swap dealers are willing to enter into swap contracts on either 

side of a market at times they will enter into swaps that create 

offsetting exposures, reducing the swap dealer’s overall market price 

risk associated with the firm’s individual positions opposite its 

counterparties. Since it is unlikely, however, that a swap dealer could 

completely offset the market price risks associated with its swap 

business at all times, dealers often enter the futures markets to offset 

the residual market price risk.34 

Because swap dealers use the futures markets to hedge residual market risk in 

their swap books, particular futures positions of a dealer cannot be linked to a 

particular swap client or identified OTC transaction. Therefore, it would be 

illogical and unworkable to condition a risk management exemption for swap 

dealers on their ability to show that they are hedging risk arising from an OTC 

transaction with a client that is a traditional commercial hedger.35

 In addition, futures markets are used for more sophisticated hedging than 

“traditional” commercial hedging (i.e., a substitute for transaction to be made or 

positions to be taken at a later time in a physical marketing channel). For example, 

22 

 

33 See 74 Fed. Reg. 12284. Similarly, in granting no-action relief to index funds, Commission staff has 

imposed certain conditions, including requirements that: (1) fund positions are passively managed; (2) 

fund positions are unleveraged, so that financial condition should not trigger rapid liquidations; and (3) 

fund positions are not carried into the delivery month, when physical delivery markets are most 

vulnerable to manipulation or congestion. CFTC Letter 06-09 (Apr. 19, 2006); CFTC Letter 06-19 

(Sept. 6, 2006). 

34 Staff Report, supra, at 48. 

35 The Staff Report also reported that speculators generally were not using swap dealers to evade energy 

position accountability levels. Indeed, the amount exceeding accountability levels in crude oil was 

only 2% of total open interest on the long side and only 1% of total open interest on the short side. 

See Staff Report, supra, at 5. 

 
 

electric utilities may hedge capacity risks associated with weather events by use of 

degree day unit futures contracts, although that hedge involves no substitute for a 

transaction in a physical marketing channel. Similarly, insurance companies may 

hedge hurricane or other weather risks. Enterprises that consume a commodity not 

used in a physical marketing channel, such as airlines that use jet fuel, generating 

facilities that use gas and produce electricity, freight companies whose loads 

depend on geographic pricing differentials and hundreds of other important 

examples that readily present themselves, are not traditional commercial hedgers 

with respect to such transactions. 

Index investors likewise are critical to the orderly functioning of the futures 

markets and should be granted an exemption from position limits. Steven Strongin, 

Managing Director of Goldman, Sachs & Co. recently explained the significance 

of index investors to the futures markets: 

One of the exceptional achievements of the commodity futures 

markets is the separation of the ownership of commodity price risk 

from the ownership of the physical commodity. That is, these markets 

allow participants to buy and sell the commodity price risk without 

requiring the exchange of the physical commodity. 

This separation can create economic benefits. The producer - who by 

nature must hold the physical commodity − is no longer required to 

bear all of the risk of price fluctuations, against which it would need 

to hold expensive equity capital. Instead, the producer can shift this 

risk off of its balance sheet. This frees up expensive equity capital and 

allows the producer to focus on its core competency of operating its 

business, rather than the management of commodity price risk. 

Index investors are remarkably well-suited to bear the commodity 

price risk that producers wish to shed. They are typically long-term 

investors with diversified portfolios of equities and bonds, such as 

pension funds and endowments. Commodity futures investments offer 

these investors an asset with an equity-like rate of return, but one that 

is not correlated with equity and bond returns, and therefore offers a 

good source of portfolio diversification. Further, commodity index 

investments provide greater protection from inflation, although the 

trade-off is greater exposure to the risk of economic recessions. 

However, given that these investors have long-term investment 

23 

 
 

horizons, they are best suited to bear this macroeconomic risk than are 

other investors. 36 

 In other words, “the role of index investors is to supply a pool of stable, passive, 

unleveraged capital to bear commodity price risk.”37 In addition, “by allowing 

commodity producers to transfer their inherent commodity price risk exposure to 

long-term investors who are better-suited to bear it, the participation of the index 

investors in the commodity futures markets lowers the cost of capital to 

commodity producers, and by lowering costs helps to lower commodity prices over 

the long run.”38

Moreover, because index investors lack the wherewithal to make or receive 

delivery of the physical crude oil, by necessity they must close out and offset their 

initial long position in a contract month by purchasing a short position in that 

contract month prior to termination of trading for that contract.39 Therefore, index 

investors do not create artificial demand. Those wishing to exclude index investors 

from the futures markets, however, tend to focus on the alleged market impact of 

index investors when such traders establish a long position in a contract month but 

somehow fall strangely silent concerning any possible price impact by index 

investors when they execute significant sales to liquidate their open long position. 

If the Commission were to base any exemption from position limits on the 

“conduct and management of a commercial enterprise” it would need to ensure that 

24 

 

36 Testimony of Steven H. Strongin, Managing Director, Goldman, Sachs & Co. Before the Permanent 

Subcommittee on Investigations Committee on Homeland Security and Governmental Affairs, U.S. 

Senate (July 21, 2009 ) at 3-4, available at www.hsgac.senate.gov. (“Strongin Testimony”). 

37 Id. at 4. 

38 Id. 

39 As Strongin explained: 

In the case of index investors, this selling back of all commodity futures purchased before 

the time of delivery is built into the mechanical structure of the commodity index 

itself. . . . This process is called “rolling” the futures positions . . . .[T]his process 

involves selling futures as their delivery time approaches and then buying new futures 

farther out on the forward curve. In this manner, index investor maintain their 

investments in [] futures at a fixed point on the forward curve, much like a bond investor 

seeking to maintain a constant maturity in his or her bond portfolio. By “rolling” their 

commodity futures positions in this way, index investors never take physical delivery of 

the commodity and so cannot be adding to physical demand.” Id. at 5. 

 
 

it neither limits such commercial participants’ ability to hedge legitimate 

commercial risk (either in the same commodity or a substantially related 

commodity) via a swap, nor limits swap dealers’ ability to hedge the residual 

financial exposure in their swap books. As detailed above, we do not believe that 

it would be possible to ensure these important objectives. Instead, we strongly 

believe that such an exercise would be both fundamentally flawed and ultimately 

futile and would only result in harming both futures and OTC markets. 

8. Finally, if you believe the Commission should not set position limits on 

energy contracts, please address the inconsistent approach for other commodities 

with a finite, physically deliverable supply, such as certain agriculture 

commodities. 

Significant differences do exist between energy contracts and agricultural 

contracts that bear upon the application of position limits. However, before 

discussing those differences, it may be useful to review briefly the limited category 

of agricultural contracts that are currently subject to federally mandated 

speculative position limits. Federal limits currently apply to the following 

contracts: Corn and Mini-Corn; Oats; Soybeans and Mini-Soybeans; Wheat and 

Mini-Wheat; Soybean Oil; Soybean Meal; Hard Spring Wheat; Hard Winter Wheat; 

and Cotton No. 2. Of this list, the pure grain contracts have all been subject to 

federal limits since such limits were first imposed by the Commodity Exchange 

Authority, the CFTC’s predecessor agency, in 1938. Moreover, in 1987, federal 

limits were extended to Soybean Oil and Soybean Meal specifically as a result of a 

petition made by the CBOT. Given that these soybean products tended to trade in 

tandem with its Soybean contract, the extension was sought by the CBOT to 

provide consistent treatment across related products. Consequently, 71 years 

following the initial imposition of federal limits, the only contract currently subject 

to federal limits that was not included in the original list of grains and that was not 

volunteered by an exchange is the Cotton No. 2 contract. 

In other words, of the many agricultural products that have been introduced 

by futures exchanges over the years, federal limits do not apply to livestock 

contracts, dairy contracts or forestry products and similarly do not apply to cocoa, 

coffee, orange juice or sugar contracts. But the Cotton No. 2 contract was added to 

the list in 1940 and remains there today. 

We could not identify any instance where the Commission or Commission 

staff has opined on a qualitative distinction separating the list of agricultural 

contracts subject to federal speculative limits from the agricultural contracts not 

25 

 
 

subject to such limits. The fact that most agricultural contracts are not subject to 

federally mandated limits might be understood as a recognition over time by both 

Congress and the CFTC that position limits set and monitored by exchanges under 

the oversight of the CFTC simply constitutes a more effective means of ensuring 

the market integrity of exchange-traded contracts. However, if we were to engage 

in conjecture regarding common features applicable to the agricultural contracts 

currently subject to federal limits, we could note that all of these contracts have 

seasonal constraints on supply and also have considerable vulnerability to 

environmental growing conditions such as weather and rainfall.40 

Given the prominence of crude oil in recent public discussions on 

speculation, we will focus on crude oil as an example of energy commodities when 

contrasting it with the agricultural contracts subject to federal limits. As should be 

clear, crude oil energy production is not noticeably affected by environmental 

factors such as rain and weather conditions. In addition, crude oil energy 

production is generally not restricted to seasonal periods but instead tends to occur 

in a generally continuous manner. 

The commercial physical market liquidity at the Cushing delivery point 

allows for title transfer of a substantial portion of world oil production every day— 

at least the equivalent of 10% of world physical delivery. There are hundreds of 

significant commercial entities that directly participate in this market. Thus, the 

sheer size of the physical market for crude oil is substantially greater than that for 

the agricultural contracts under federal limits. 

In addition, the supply of crude oil can be identified and is thus knowable 

and dependable. In a technical sense, supply capacity for crude oil is not subject to 

significant volatility; there are no drought years for crude oil that will restrict 

available supply. Instead, while the available supply for crude can change over 

time, that change is largely a function of the price that can be obtained for that 

commodity, although there can be a lag time because crude exploration and drilling 

can involve a multi-year process. It should be noted that crude can be subject to 

commercial decisions affecting supply, such as decisions made by oil cartels. 

26 

 

40 We recognize, however, that seasonal constraints on supply and vulnerability to growing conditions 

alone are insufficient to explain the different treatment as other commodities, such as coffee and 

cocoa, are similarly impacted, yet are not subject to federal limits. 

 
 

27 

 

With regard to the physical or cash markets for crude and for these 

agricultural contracts, it is also worth noting that the U.S. is the world’s largest 

consumer of grains (both as feed for livestock and for human consumption) and of 

crude oil. However, the U.S. is the primary supplier to other markets of grains, but 

is by contrast a net importer of crude oil. 

In addition, there is substantial additional commercial market liquidity in the 

OTC derivative market that directly references the futures market delivery 

mechanism for crude oil. It may well have even higher turnover than the 

underlying commercial physical market. By contrast, the OTC markets for 

agricultural contracts subject to federal limits are still largely undeveloped. 

As noted, the crude oil market is much larger than agricultural markets. In 

terms of value of annual international turnover (analogous to GNP as a measure of 

national output), agricultural commodities have been: 

• Corn: 2006-7 $85 billion; 2007-8 $131 billion; 2008-9 $126 billion;

• Soybean: 2006-7 $56 billion; 2007-8 $82 billion; 2008-9 $77 billion;

• Wheat: 2006-7 $93 billion; 2007-8 $145 billion; 2008-9 $172 billion;

• In comparison, the annual turnover for crude oil has been: 2006 $1.87 

trillion; 2007 $2.17 trillion; 2008 $2.99 trillion. 

Commercial markets in crude oil trade in significant multiples of the underlying 

physical production. The commercial market for oil trades at least 5-10 times the 

underlying physical supply. Therefore, it is essential not to artificially constrain 

the overlaying futures market, which provides transparency and liquidity for the 

commercial market to perform. 

 Finally, it may be worth noting that crude oil is listed out for trading for much 

longer than the grain contracts. Specifically, crude oil futures are listed nine years 

forward using the following listing schedule: consecutive months are listed for the 

current year and the next five years; in addition, the June and December contract 

months are listed beyond the sixth year. Additional months will be added on an 

annual basis after the December contract expires, so that an additional June and 

December contract would be added nine years forward, and the consecutive 

months in the sixth calendar year will be filled in. By contrast, grain contracts 

typically are listed out in consecutive months for three years with certain key or 

pivot months then listed for the fourth year.