Excessive speculation in commodities: some Dodd-Frank remedies Steve Suppan Civil Society Forum April 15, 2011

Overview Derivatives market price formation vs. price transmission to retail food prices Basic concepts in commodity futures markets Market deregulation and the food and energy price crisis of 2008 and of 2011 The derivatives title of the Dodd-Frank Act The outlook for CFTC implementation of Dodd-Frank

Some basic concepts in commodity futures market price formation Forward contracting Futures contract characteristics Bona fide commercial hedgers Traditional speculators Price discovery process Daily reporting to CFTC; the CoT report Excessive speculation and price distortion Position limits and CFTC surveillance

The rise of the Index Speculator:

Dark markets: tools of deregulation and the agricultural and energy price crisis Commodity Futures Modernization Act of 2000 – market self-regulation >700 “No Action letters” on position limits Exempting OTC trades from daily reporting Capital reserve waiver for six TBTF banks “Long only” OTC commodity index funds Unreported swaps vs. Reported futures

Major derivatives title provisions of Dodd-Frank Mandatory clearing of most OTC swaps (few bilateral or off-exchange “dark” deals) No exempt commodities (e.g. Enron Loophole or ECMs) Real-time reporting of all trade data CFTC enforced aggregate position limits CFTC investigation trigger = to SEC’s Authorizes 100% increase in CFTC resources

Wall Street and LaSalle Street fight back: the Outlook for Dodd-Frank implementation >$300 m. campaign vs. Dodd-Frank High and ineffective position limits proposed Threat of trade and operations “migration” Proposed clearing exemption for “commercial risk” defined as all financial risk Slash CFTC budget 34% (House only) Commercial hedgers, NGOs, unions fight back (CMOC, AFR)