Position Limits On Metals Futures Would Make Markets Less Viable--Triland's Strait

25 March 2010, 6:00 p.m. EST
By Terry Wooten
Of Kitco News


Washington (Kitco News) --Limits on U.S. metals futures contracts would make those markets less viable to all users and would darken price transparency by forcing markets back to over the counter trade, Richard Strait of Triland USA told the U.S. Commodity Futures Trading Commission Thurday.

Strait said he believed that position limits on the U.S. futures contracts would have no effect on the overall global market pricing as only a fraction of metals traded worldwide are through the global futures markets.

"Supplies of all metals (except platinum) traded on U.S. exchanges can be supplied easily from domestic and foreign sources," Strait said. "Therefore to assume controlling the trading on U.S. futures markets, by applying position limits to protect market integrity is misguided."

Strait said such a mandate would have the negative effect of rendering U.S. markets increasingly illiquid, resulting in lack of market transparency. He said futures exchanges have established surveillance mechanisms and have hands-on knowledge that give them the ability to regulate their contracts by applying position limits as needed.

"It is therefore my opinion that this responsibility should remain ...in the hands of the exchanges themselves" Strait said. "in the misguided event position limits are mandated to the US metals futures products, they should be applicable to the spot month only and not be applicable to spread positions and only on a needed basis." He said market irregularities in metals are almost always temporary and centered around spot month trading.

Strait said that to a bona fide hedger, exchanges are meant to be buyers and sellers of last resort while speculators supply needed liquidity. Both are equally important factors in functioning markets and will continue to be  factor in all commodity markets with or without position limits on futures contracts.

"The only difference will be that in the event of strict mandated position limits, they will seek commercial refuge in less regulated offshore markets or the global over the counter market that lack centralized clearinghouse protection," he said.

In reply to a question from a commissioner if the silver contract at the COMEX division of the New York Mercantile Exchange needed to be revised,  Strait said it did not, that silver's futures trading woes are "not a contract problem." He emphasized that the silver market is mostly over the counter and is strong in London. "I don't think there is a need for another futures market in silver," he said.

Strait expressed concern about ETFs in strategic metals such as platinum and palladium. "There seems to be a need for better oversight of the approval process of ETFs, citing the new ETFs in platinum and palladium," he said. "These are thin markets with limited supply," he said, emphasizing they are strategic metal commodities with growing high tech applications in civilian, aerospace and military areas.

In response to a question from a CFTC commissioner,  Strait said it was "insane"  to take a complex group of metals such as platinum and palladium and  put them into an ETF. He said it artificially drives the price up "and puts these very important metals in the hands of people who can trade in an E*Trade  account."

--By Terry Wooten of Kitco News, twooten@kitco.com