Florida senator seeks coalition to press action on oil market speculation

“I do not propose that we raise margin requirements on businesses that engage in the hedging of legitimate risk.  But I invite you to join me in sending the attached letter to Gary Gensler, the Chairman of the CFTC, urging him to act quickly to raise the margin requirements imposed specifically on purely speculative oil futures contracts,” it states.

Margin requirements refer to the money that investors must put up to participate in the markets.

Here’s Nelson’s whole letter:

Dear Colleague,
 
The latest spike in oil prices is further evidence that our energy markets are no longer governed by actual supply and demand.  Speculators, again, are seizing on political turmoil to drive the price of oil to unwarranted levels.  This time, it’s Egypt and Libya. 
 
Data from the Commodity Futures Trading Commission (CFTC) reveals that just since the protests began in Egypt in January speculators have increased their betting on future oil price increases by more than 35 percent, while legitimate hedgers have reduced their holdings of oil futures by more than 20 percent.  The loser in this game of profit-gouging by speculators is the American consumer.  Higher gasoline prices mean less money for other things.  And at the end of the day, the big loser is America’s economy.
 
Last year, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress empowered the CFTC to rein in excessive speculation to keep the commodities markets from flying off the rails.  Unfortunately, the commission has yet to finalize new rules to govern speculative position limits.  Meantime, speculators continue to buy $100 worth of oil futures with just $6 down.   
 
I believe the commission already has an extremely effective tool at its disposal it could use to discourage excessive energy speculation and bring down gas prices – the authority to impose higher margin requirements for oil futures contracts.  The current system – in which ordinary investors put down 50 percent to buy stock, while speculators have to post only six percent to buy a futures contract in oil and other commodities – clearly is skewed.
 
Today, these kinds of margin requirements are not set by federal regulators, but rather by the exchanges themselves.  For the same reason we don’t let pharmaceutical companies approve their own drugs, we shouldn’t let futures exchanges self-regulate by setting their own margin requirements.  It defies logic. 
 
Fortunately, in Section 736 of the Dodd-Frank bill, Congress removed the broad statutory restriction that prohibited the CFTC from setting margin requirements.  Section 736 authorizes the CFTC to call for higher margin requirements in order to protect the financial integrity of the futures trading markets.  Now is the time to exercise that authority.  Under the bill, these new margin requirements could take effect as soon as July, but the CFTC must begin the rulemaking process now.
 
I do not propose that we raise margin requirements on businesses that engage in the hedging of legitimate risk.  But I invite you to join me in sending the attached letter to Gary Gensler, the Chairman of the CFTC, urging him to act quickly to raise the margin requirements imposed specifically on purely speculative oil futures contracts. 
 
I hope you will join me in this effort.
 
Sincerely,
 
 
Bill Nelson