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Jeffrey H. HarrisCollins Chair in FinanceSouthern Methodist U
and U of Delaware
In the Aftermath of the Crisis: Evolution in Financial Regulation and Policy
October 10, 2010 National Association of Business Economists
Regulatory ChallengesFinancial Crisis—precipitated by
mortgagesCommoditiesPublic (mis)PerceptionsWorldwide Markets—Cooperation
◦IOSCO, OECD, IEA, etc.Financial/Product Market Overlap
◦SEC, EIA, FERC, Fed, etc. ◦On Exchanges and OTC
Perspective—futures markets robust
2
Dodd-FrankTitle VII—OTC Derivatives
◦Increase transparency, efficiency◦Mitigate counterparty risk◦Mitigate systemic risk
Requirements ◦Execution on swap execution
facilities (SEFs)◦Central clearing◦Public reporting◦CFTC/SEC/Fed-defined universe
Dodd-Frank (cont.)Position limits
◦Prevent excessive speculation◦Prevent manipulation◦Ensure market liquidity◦Ensure price discovery
Swap dealers◦Capital requirements◦Margin requirements◦CFTC/SEC/Fed-defined universe
Sources of Commodity Price Changes
Uncertainty/Risk Management?Animal Spirits/Excessive
Speculation?Traders?
◦OTC swaps◦Speculators—”Massive Passives”
Commodity Index Traders ETFs
5
What We Know: Data Available
Large Trader Data—at CFTC.gov weekly◦End of day positions
Commercial◦Producer/Merchant◦Swap Dealers (Index Funds)
Non-commercial◦Managed Money (Hedge Funds)◦Others
What We Know: Market GrowthIncreased participation
◦Hedge funds◦Swap Dealers
Commodity Index Funds OTC swaps
◦Exchange Traded Funds (ETFs—metals, energy)
Relatively stable mix over time
7
Economic Studies“Fundamentals, Trader Activity and
Derivative Pricing”◦Buyuksahin, Haigh, Harris, Overdahl, and Robe
Focus on Swap Dealer participation◦From commodity index trading in nearby
futures◦From OTC positions in back-dated futures
Cointegration of Crude Oil futures prices◦Result in “better” pricing for hedgers in 1-year
and 2-year contractsSupports the notion that markets should
encourage broad participation
“Massive Passives”Hedge FundsCommodity Index Funds*
◦Little relation between price changes and position changes --Aulerich et al. (2010)
◦Weak Inverse relation between price changes and position changes In-flows (+) Rebalancing (-)
◦During the “roll period” Push nearby prices down, next nearby up
◦Rebalancing, provide liquidityOTC swapsETFs
300
320
340
360
380
400
420
440
30
50
70
90
110
130
150
170
12/3
12/1
312
/23
1/2
1/12
1/22 2/
12/
112/
21 3/2
3/12
3/22 4/
14/
114/
21 5/1
5/11
5/21
5/31
6/10
6/20
6/30
7/10
7/20
7/30 8/
98/
198/
29 9/8
9/18
9/28
10/8
10/1
810
/28
11/7
11/1
711
/27
12/7
12/1
712
/27
Pric
e
NYMEX WTI Crude Oil Commodity Index ValuesQuarterly Equivalent Contracts vs. Daily Price
WTI Crude Oil Price(Nearby NYMEX Future in $/bbl)
11
UNG (United States Natural Gas Fund) Tracking Error
UNG Performance Apr 18, 2007 to Sep 16, 2010: -87% ($50.77 to $6.75)
NatGas Prompt Contract Performance: -46% ($7.497 to $4.062)
Dodd-Frank ChallengesRule writing/enforcement burdenSquare peg/round hole with OTC
markets?Position limits—expand Federal
role, enter politics?CFTC/SEC/Fed coordination
◦Consumer Protection
