Cotton Futures Prices Not Manipulated

Cotton Futures Prices Not Manipulated

After a 20-month study, the Commodity Futures Trading Commission concluded there was no market manipulation which resulted in the huge spike in cotton prices in 2008.

The CFTC could find no one reason for the large increase in cotton prices, but said it was probably a great number of factors which ended in the failure of two of the top cotton producers in America.

At the time of the crazy price swings, cotton contracts were traded on the IntercontinentalExchange's Futures U.S., which used to be called the New York Board of Trade.

This was good to hear as the government can't protect grownups from losing money when they invest, and it shouldn't have wasted all this time checking into this when you consider that a lot of commodities surged in price during that time period such as copper, oil and wheat. It's called supply and demand.

Here were some of the conclusions of the CFTC:

- The trading activity of the largest longs was not consistent with activity that would cause an increase in the price of cotton futures or options.

- Many market participants active in the futures and option markets before futures prices reached limit up were cotton merchants, who held significant short positions. They would not benefit financially from manipulating the price of cotton.

- During critical time periods before futures prices reached limit up, no participant in the option market had a significant long position or sold a significant existing option position.

- The merchants with large short positions were hedged, holding sufficient physical cotton to deliver against their contracts. There was no shortage of physical cotton, certificated stocks were rising. Little interest in March contract.

Per the report, some of the reasons for the increase in prices included the increase in commodity prices, tight credit, migration to electronic trading from pit trading, large market participants and limits on cotton market prices.

Cotton Futures Prices Not Manipulated

CFTC Trading Limits Regulation

U.S. Commodity Futures Trading Commission trading limits?

IntercontinentalExchange Inc. and CME Group Inc. shares plunged on Wednesday following news that the U.S. Commodity Futures Trading Commission is planning to propose huge trading limits on oil, natural gas and maybe other commodities.

CFTC Chairman Gary Gensler said Tuesday the CFTC will hold hearings this summer to consider imposing position limits for "all commodities of finite supply." The agency will also review whether swap dealers, index traders and exchange-traded fund managers should be allowed to get around those limits through special hedge exemptions.

Raymond James analyst Patrick O'Shaughnessy said that the news has been dragging down shares as investors are scared about how far the government could go with regulation.

"ICE is being hit by a double whammy," O'Shaughnessy said. "There are concerns about earnings, and you have multiple compression taking place because people are concerned about what the government could do next.

"It's changing the rules in the middle of the game."

Investors are similarly concerned about CME, he said.

While O'Shaughnessy said the initial market selloff seems to be an overreaction, J.P. Morgan analyst Kenneth B. Worthington said he views the reaction as "logical," given the recent runup in ICE shares, its valuation and the beginning of the seasonally slow summer.

"While concerns with regard to Gensler's actions will likely cap valuation for both ICE and CME near term, we believe regulatory fears are overblown," Worthington said in a note. "We expect ICE stock could head lower but suggest investors buy on the dip this summer."

He added that he doesn't think ICE trading will be hurt by regulations and said Gensler's investigation into position limits, hedge exemptions and transparency could be good for "market "integrity." However, Worthington said if "regulation gets restrictive, the new CFTC chairman risks lower liquidity and higher volatility in commodities markets."

O'Shaughnessy said the CFTC has jurisdiction over ICE's West Texas crude and natural gas products, which is about a quarter of its revenue. If the trading limits go through, he said, they could lower ICE's revenue by about 3% to 4%.

But O'Shaughnessy said the larger concern is whether London could take similar actions -- which could lower revenue by an additional 4% to 5% -- and whether the U.S. government could take further steps.

In a worst case scenario, CME -- which is completely regulated by the CFTC -- would lose about 3% to 4% of its revenue from the changes, he said.

U.S. Commodity Futures Trading Commission