|
Obama anti-speculation plan questioned Paris-based International Energy Agency says requiring higher trading margins could cause more oil price volatility, not less Wesley Loy For Petroleum News
The Paris-based International Energy Agency is questioning a key aspect of President Obama’s recently announced plan to curb oil market manipulation.
Some political leaders have blamed speculators for high retail gasoline prices.
The Obama administration on April 17 called on Congress to give the Commodity Futures Trading Commission authority to direct exchanges to raise margin requirements for traders as a way to prevent excessive speculation or manipulation and reduce price volatility in oil markets.
But the IEA, in its latest monthly Oil Market Report, says raising margins might have just the opposite effect.
Margins explained In a May 14 press release on the new Oil Market Report, available only to subscribers, the IEA explained how margins work and why Obama’s proposal might backfire.
“All futures exchanges — such as the Chicago Mercantile Exchange — have a clearing house, which intermediates all transactions and acts as guarantor of all trades that it has accepted from its members,” the press release said.
“In order to prevent defaults by traders, clearing houses require that whenever an individual or a company wishes to buy or sell any form of futures contract on the market, they must pay a ‘margin,’ which serves as collateral or as a ‘good faith’ deposit given by the trader to the broker, ensuring the necessary funds are there in case of a default.
“At present, margins in commodity futures markets are relatively low, typically less than 10% of the value of the contract. Some policy makers argue that these low margins make it relatively cheap to speculate, which will lead to greater price volatility in futures markets.
“The U.S. government’s proposed rule ... is that significantly increasing the margin that has to be paid with every trade will act as a deterrent to aggressive speculation as traders will not want to take the risk of losing a large amount of money they put down as collateral. This will, the government contends, reduce price volatility and prevent excessive speculation.
“The OMR, however, argues that this measure will limit the participation of certain traders, hedgers and cash constrained small speculators due to higher trading costs. This will leave the playing field open only to large traders with a small diversity of views.
“In such a situation, the OMR believes that far from reducing volatility in oil markets, increasing the margin cost may well lead to a rise in volatility.”
Other Obama proposals The IEA describes itself as an autonomous organization working to ensure reliable, affordable and clean energy. It has 28 member countries, including the United States and Canada.
Raising margin requirements was one component of the five-part plan the White House rolled out April 17 to crack down on manipulation in oil markets.
The plan includes a request that Congress fund more “cops on the beat” at the CFTC to oversee oil futures market trading.
The president also wants funding for information technology upgrades at the CFTC to “strengthen monitoring of energy market activity.”
And the administration proposed “a ten-fold increase in maximum civil and criminal penalties for manipulative activity in oil futures markets.”
For more details on the Obama plan, go to http://1.usa.gov/IXpqUs.
| 