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.
Here, the rules also attempt to control limits on swaps except, oops, the CFTC is still unclear what a swap really is. Without a strong definition, it is likely that the entire position limit rule will fall uselessly around the real accumulators of financial oil. When this fairly toothless rule passes, which it likely will, it still will not be immediately applied to the markets. Much more likely is that the entire commission will have to reconvene across the street from where their hearing to approve is now taking place, in the federal courts. That's because this rule is almost assured to end up legally challenged by the advocacy groups of the banks and exchanges, led by the Futures Industry Association (FIA). And don't think, even with the mandate supplied by the Dodd-Frank regulations, that the court will likely uphold the rule. With a strongly Republican packed federal bench, it is possible that the commission will be asked to empirically prove speculative manipulation in the oil markets in 2008, a practical impossibility. If that happens, the commission will be back to square one. Of course, the ins and outs of the maneuverings on position limits on oil elude most if not all of the protesters at Occupy Wall Street. But the environment that allows the Dodd-Frank laws to erode into impotent regulations clearly does not. They know intuitively that nothing is really being done to assure that the disaster of 2008 doesn't happen again. They sense the financial games played with oil and other commodities are biased towards the players with money and influence to the detriment of consumers and just plain people. And they're right.