CFTC to up spec limits.

The Commodity Futures Trading Commission (CFTC) in March proposed an increase in speculative trading limits for Chicago Board of Trade agricultural contracts as well as wheat contracts at the Kansas City Board of Trade and Minneapolis Grain Exchange and cotton at the New York Board of Trade.

In 2004, the grain exchanges petitioned the CFTC to drop all speculative limits and, short of that, asked for expanded limits. While the CFTC in its rule proposal did not eliminate speculative limits, its proposed limits, in some cases, are greater than what the exchanges asked for. Single month limits in corn are currently 5,500 contracts. The CBOT requested they be upped to 10,000 and the CFTC proposed a limit of 13,500. While most managers rarely run into speculative limits some of the largest funds have had to go into the OTC market to execute their grain positions.

Agricultural-based Commodity Trading Advisor Richard Crow doesn't need higher limits but says that increased limits will, at times, increase volatility. "It will increase disequilibrium, which is good and bad."

Neal Kottke, chairman of Kottke Associates LLC, supports the increase and says that limits do not factor into market liquidity. "The market in total determines what the market will bear," Kottke says.

Barry Sims, director of operations for Abraham Trading Co., says the increase will not change how their program trades but adds, "The increase in spec limits will give us room to grow."

Kottke says that the increase could bring some business that had moved to the OTC market back to the exchanges.

CFTC-SEC CLOSE TO DEAL?

For managers who come under the regulatory oversight of both the CFTC and Securities and Exchange Commission, it is not news that the two agencies operate differently. The Commodity Futures Modernization Act, which lifted restrictions on single stock futures and narrow based indexes, forced the regulators to work cooperatively. That effort was a struggle and many people feel that the SEC's stubbornness in regard to allowing risk-based margining for the hybrid products is a reason they have not met expectations.

As the SEC moved to require registration of hedge fund managers, they further crossed regulatory lines and the CFTC would like the SEC to remain on its own side of the street.