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Position-Limits Rule Toothless: Opinion

No one knows what it is that the Occupy Wall Street protesters actually want, if anything, to get them to go home.

But take one look at the rules for position limits that the Commodity Futures Trading Commission has rolled out for a vote on Tuesday and you know that their instincts that the game is fixed are right on the money.

This latest part of Dodd-Frank regulation is attempting to help limit the financial speculation that drove oil prices up during 2008 and are responsible for the more than $3.50 a gallon national gasoline average that we are experiencing today.

But Dodd-Frank has become a farce. The legislation was designed to end systemic risk. It was hoped to end moral hazard. It was written to curb speculation in markets that were never designed to be bet on.

But it has morphed into a political and legal dance between liberals looking to put a financial genie impossibly back into a bottle and a conservative group who never really admitted to anything functionally going wrong in the markets in the first place and an aversion to government meddling in business practices anywhere.

Let's have a closer look at the position limits rule. In my book, "Oil's Endless Bid" , I discussed extensively about the specific tools available to the CFTC in trying to curb speculation, reaching the conclusion that position limits were, at best, a weak hatchet hacking up a body where a scalpel was required.

Still, very strong position limits could have some effect in limiting some financial speculative participants in the oil markets. This rule won't do even much of that. It allows a healthy 25% of deliverable contracts as a limit in the spot month, and 2,500 contracts plus 2.5% of whatever open interest above 25,000 for back months.

For the cash-settled markets at the ICE, a trader could hold five times that amount of front month contracts. Even as weak as these limits are, most funds looking to accumulate size in oil will likely look outside the futures markets anyway, relying upon the OTC swaps market.
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