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Raising oil margins won't curb speculators -Bodman ^ | 05/22/2008 | Staff

Posted on 05/23/2008 12:47:21 PM PDT by Red Badger

WASHINGTON, May 23 (Reuters) - Significantly raising margin requirements on oil futures trading at the New York Mercantile Exchange (NMX.N: Quote, Profile, Research) would not rein in speculative investors and bring down crude prices, U.S. Energy Secretary Sam Bodman said on Friday.

Many U.S. lawmakers blame hedge funds, pension fund managers and other speculative investors for pushing up prices for crude oil and other commodities to record levels.

"I don't think that the margin requirements per se are going to have any impact on it," Bodman said in an interview on CNBC television.

Legislation is pending in the U.S. Senate that would require the Commodity Futures Trading Commission, which regulates NYMEX, to significantly raise the amount of money, or margin, that speculators have to put up to trade oil futures.

The bill does not specify how high margins should be increased, leaving it up to the CFTC to decide.

However, the CFTC has told Congress that, while more speculators are doing business in the futures markets, the agency has no evidence they have caused prices to rise.

When purchasing stocks, many brokerage firms require investors to have between 30 percent and 40 percent of the market value of the securities in margin accounts.

Margin requirements for futures are generally lower, less than 10 percent for many contracts, and often change depending on the volatility of the contracts.

Separately, Bodman said he supported broadening some regulatory powers of the CFTC, which this week was given new authority from Congress to monitor and collect more information on some of the energy trading going on in exempt commercial markets, such as the Intercontinental Exchange (ICE.N: Quote, Profile, Research). (Reporting by Tom Doggett; Editing by Walter Bagley)

TOPICS: Business/Economy; Government; News/Current Events
KEYWORDS: energy; energyprices; futures; market; oil; speculators
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To: Red Badger

You know, ever time we’ve gotten a huge equity bubble, the SEC has raised margin requirements for stocks. In the 1920’s, you could buy stocks on margin the way you buy futures today - on about a 10:1 leverage.

After the ‘29 crash, the margin requirements were raised significantly.

After the dot-bomb bubble imploded, the SEC (and brokers) raised the margin requirements on small, speculative stocks of companies with short trading histories. Now, it is the practice of my broker that they won’t allow you to buy stocks in thinly-traded companies with short listing histories without 100% cash to do so; ie, no margin loan on these stocks at all. Even on big, stable companies, I can get only 50% margin loans (ie, if I own $100K of IBM, my margin based on that position is $50K buying power).

There’s no reason why we shouldn’t raise margin requirements for futures. The people the commodities markets were originally meant to serve (ie, farmers and buyers of farm commodities) are being washed out of their hedge positions by the increasing margin requirements that are brought on by the rapid rise in the price of commodities outside supply/demand fundamentals.

21 posted on 05/23/2008 1:30:39 PM PDT by NVDave
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Could you give pointers or background on the IRC Sec 1056? I’m all ears, to quote H. Ross...

I completely and vehemently agree on enforcing the ERISA statutes. You and I both know that futures are risky, that huge losses can be had (as well as huge gains) and when funds like CalPERS get in there and lose huge amounts of money, they’re going to be hitting up the taxpayers (again!) to make them whole as a result of getting into markets where pension money has no business being.

Can you also explain the daily trading limits too? Or give me a pointer where I can learn on my own? Thanks

22 posted on 05/23/2008 1:33:49 PM PDT by NVDave
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To: Red Badger

I am simply shaking my head at the mind numbing ignorance being rattled around on this thread...

If you call your cable or phone company for service and end up at a call center in a Bombay suburb, what makes you think for a minutes that the speculative traders are going to keep trading on the NYMEX when you make it more difficult to trade there?

There are functioning commodities exchanges in at least 20 major cities around the world — three in the US alone. Making it more difficult to trade here in some kind of half mast attempt to bring down the price of oil will just move the action to London, Singapore, Hong Kong, or Johannesberg. C’mon, folks — we’re supposed to be the ones that actually think — let the dammed marxists run around raging against the machine...

If you want to reduce the price of oil, try strengtheneing the dollar. An increase to the fed rate from its current 2% to about 8% ought to cut the price of oil by 30% or more within the month.

{Got real quiet in here all of a sudden}

23 posted on 05/23/2008 1:35:41 PM PDT by L,TOWM (If the GOP is this desperate to lose, who am I to stand in their way?)
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We have no control over the Fed, unfortunately(?). Is it a good practice for the owners of the stock in oil companies to be trading futures in oil?........

24 posted on 05/23/2008 1:41:18 PM PDT by Red Badger ( We don't have science, but we do have consensus.......)
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My god, some one that actually knows something.

Watch out, man. Your going to get a lot of abuse from the people that get their economics lessons from ayn rand novels and newsletters from da misses (van misses that is). I have to laugh on most of these economics and markets threads. Laughing keeps from screaming in terror.

25 posted on 05/23/2008 1:43:22 PM PDT by L,TOWM (If the GOP is this desperate to lose, who am I to stand in their way?)
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To: Red Badger

lol you get the point

26 posted on 05/23/2008 1:43:53 PM PDT by boomop1
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To: taildragger

I don’t think raising it that high would be useful, at least not on everyone.

There are several different parties now in the commodities markets. Traditional commodities markets have had:

- producers, forward contracting and hedging
- consumers, forward contracting and hedging
- speculators, helping make a market along the way.

These people aren’t the problem, as they’ve always been in the markets.

The recent problem is caused by huge “commodity index funds” and “managed commodity futures” products which people are treating like stocks. Look at the ETF’s “DBA,” “DBC” and others like these.

Speculators are just that - speculators. They’re speculating that there is a price movement going to happen in the future based on some information, analysis or condition in the future that isn’t currently priced into the futures contracts traded on the market. That’s it. Once the price movement happens, a speculator will take profits and exit the position, or if the timeframe passes, the speculator might exit with a loss.

The recent “commodity index” funds and vehicles have brought HUGE amounts of money into the commodities markets that is trying to treat commodities as an “investment” - the way you or I might buy a SP-500 index fund.

This is the problem, IMO. Commodities are NOT an “investment.” Companies that make, consume, add value to or otherwise touch commodities might be an investment, but the commodity itself is simply not an investment. Look at gold. There’s all manner of people who keep talking about “gold as an investment.” When measured as an investment, gold’s track record is horrible. Yes, it has price spikes, but, as with all commodities, eventually more production comes into the market to capitalize on high prices and the prices come down again. The prices continue to go down until low-efficiency producers are pushed out of the market, the excess production capacity is removed from the market and the prices stabilize. Along the way, a commodity’s price might go up or down as a reflection of the currency used to buy or sell the commodity, but overall, there isn’t a net return to someone holding the commodity as an ‘investment’ the way there is for someone holding a stock in a good company or an index of stocks.

The commodity index ETF’s and other such instruments don’t settle their trades in the commodities markets the way a speculator, producer or consumer does. When the settlement date of a futures contract approaches, these commodity index ETF’s simply sell their current holdings (ie, settle in cash) and then they immediately buy contracts further out in time - ie, they roll the money forward, regardless of the price of the contracts in the future. This looks like demand and the market responds by raising prices out in the future, regardless of what production & consumption in those markets might be in the future.

27 posted on 05/23/2008 1:48:31 PM PDT by NVDave
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The closest I ever got to commodity trading was when I passed the Series 3 in 1984, while a trainee at EF Hutton. Two months after I passed the Series 7 and received my license, EFH pled guilty to those 2000+ counts of check kiting.

I don't know how much of the trading is taking place in ERISA accounts, but retirement plans have no business in such volatile markets.

I'm so wrapped up in corporate tax returns, that I have no desire for new "technical" discussions. However, I do appreciate the offer.

28 posted on 05/23/2008 1:50:02 PM PDT by Night Hides Not (John McCain is Lucy, McCainiacs are Charlie Brown, and the football is a secure border.)
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To: Red Badger
Is it a good practice for the owners of the stock in oil companies to be trading futures in oil?........

Depends on your perspective. If Marathon Oil owns a large block of their own stock, it would be a normal business practice for them to be "speculating" on oil to make sure they get delivery of their company's basic raw material.

CALPERS owning a large block of Exxon Common and playing oil futures contracts, well, maybe that's another story, but money tends to go where it can make a good profit. A previous post made a point about ERISA enforcement on pension plans and futures, but where does that stop? A blanket prohibition on Pensions or other institutions from investing in Hedge funds or natural resource ETFs? No one ever made the argument that capitalism is not messy or does not screw over a few people all the time or even most of the people some of the time. But the alternative is usually considered worse, unless you are a Marxist.

29 posted on 05/23/2008 1:51:59 PM PDT by L,TOWM (If the GOP is this desperate to lose, who am I to stand in their way?)
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While I agree enforcement of existing laws and modifications of other regs need to be done as well (something I doubt we’ll honestly see sadly). I don’t agree wholey that the money will all move to different markets. Surely some will, but if you raise the capital gain rate on such trades as well, guess what? Doesn’t matter where you made your profits, you are US based, you pay the tax... which is why the need is for raising of margin as well as increased capital gains rate on energy trades.

30 posted on 05/23/2008 1:54:38 PM PDT by HamiltonJay
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The nut of the problem there might be that we’ve passed the point where the Treasury or Fed can do much about the dollar with the political situation as it exists.

31 posted on 05/23/2008 1:57:41 PM PDT by NVDave
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The point where it should stop is where the risk for pension benefits outweighs the returns they could make. The job of a pension fund is to invest money used to pay retirement benefits, not to maximize profits to enrich some young turk who wants his 2-and-20.

Once a pension fund has achieved a level of return to guarantee the obligations of the fund to the beneficiaries, just what point is there in taking on more risk to achieve greater gains?

Because if the fund loses money (lets say that they lose so much money they’re not able to meet their obligations), guess who is on the hook?

You, me and every other taxpayer.

32 posted on 05/23/2008 2:02:06 PM PDT by NVDave
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Ironically, raising margin requirements could actually push UP oil prices by inadvertently aiding the “speculators,” which really these days are pension funds like CalPERS and Hermes (UK).

They buy packaged commodity index deals structured for them by the big investment bank, which are “fully funded.” In other words, Calpers puts up the entire price of the futures contract, of which 5% gets put “down” for the margin requirement and the rest is invested in treasury bils, etc. Raising the margin requirement would only trivially reduce the actual return for the index fund investment.

On the other hand, raising margin requirements would devastate the real speculators, who are needed to come in as shorts against the overwhelmingly “long” positions of the pension funds. Bottom line, sharply fewer sellers and just as many buyers. Result: more price increases.

The deck is stacked against the sellers, who mostly are still subjected to position limits whereas the pension fund “longs” are exempted since they go thru swaps dealers who are treated by the CFTC as if they were “commericals.” The game is heavily rigged to the long side.

The dirty little secret is that the government likes high oil prices (to screw the Chinese). You could claim the givernment ain’t smart enough to rig a market this big. But if you have the Ruskies, the Saudis and the oil majors by the balls, and can channel enough government-run pension money into the market, you can run prices to the moon and back at whim by tinkering with a few of these arcane market regulations. The truth is that the gummint can’t be this STUPID as to let these terribly flawed policies continue in effect for years and year while market prices go crazy. Its a bidness plan.

BTW, I wonder what the REAL story is behind all those CalPERS honchos bailing out recently en masse. Maybe they couldn’t take the guilt of what they’ve been asked to do.

33 posted on 05/23/2008 2:04:03 PM PDT by Tenega
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To: NVDave
Section 1056, aka the 'Rostenkowski Rule', originated in the Tax Reform Act of 1986. This Act curtailed the use of devices such as 'butterfly straddles' (don't ask ...g!) as tax avoidance devices, among many other provisions.

Rostenkowski was chairman of House Ways and Means committee, and from Chicago, just coincidentally. CBT and CME approached him while the bill was being drafted, and pointed out (quite accurately) that they were going to take a huge hit in volume if the Act just barred out the practice of interyear tax spreading. Rostenkowski then inserted 1056 into the IRS code -- didn't bother telling anyone about it, either (cute, no?).

What it says, boiled down to plain English, is this: ANY futures trade, whether profitable or losing, is subject to tax treatment as follows, 60% long-term cap gains, 40% short-term cap gains.

Think about this for a minute. Let's say I'm a day-trader (I'm not; that's like shooting craps with the other guy's dice). Suppose, on one of my trades, I buy June SP (that's S&P 500 Index) at 10:00am and sell it back 8 pts higher at 10:05am. I've made $2000 less commissions, call it $1900 or so, and 60% of that is taxed as long-term gain, or at something like 5% after the Bush tax cuts. So, under 1056, 5 minutes has become equal to six months (well, 60% of it, at least...g!)

Now, as it happens, I trade principally in futures options and the term of a typical trade is more like 3 wks or a month. The same tax treatment applies to these trades.

The Regress should have the IRS suspend 1056 for large specs in energy mkts, taxing their trading profit at whatever the applicable rate would otherwise be.

Unlike raising margins, which can only be done on US exchanges (and not SIMEX or DUBEX or London), suspending 1056 will affect the big specs' worldwide income, no matter where they trade. And some number of them will find something else to trade, at the favourable tax rates, rather than energies.

Clear enough, I hope.

Now, as to trading limits. In most American futures mkts, there is a maximum amount that a mkt's price can change during a session, and this is called ''the limit''. US Energy futures mkts, though, have a peculiar practice -- when a mkt reaches ''limit bid'' (i.e. no more sellers at or below the daily limit), the exchange effectively calls ''time out!'', lets everyone catch their breath for 15 or 30 minutes, and then reopens with higher daily limits.

Effectively, on a given day, there is NO maximum limit. This needs to change, and another change should be implemented, too.

When a mkt touches -- just touches -- limit bid or offered, the trading rules need to be changed. For hedgers and small specs, no change, enter any order(s) they like. For big specs, though, in the case of limit bid, they should be prohibited from bidding for the remainder of the session if they entered the session with a long position. They can sell (offer) all they like, but they would be prohibited from buying, even if the mkt traded lower away from the limit bid price.

Also, as a sidebar, the daily limits in energies should be shrunk, and subject to the same type of consecutive-limit expansion we see on CME and CBT (which is now owned by CME). Told you it was a bit technical.

Hope I've answered your Qs clearly, and good trading to you!

34 posted on 05/23/2008 2:36:13 PM PDT by SAJ
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To: Tenega
Yep, quite right. The abuses of customised index products is rampant...but then again, we're talking about such folks as Goldman Sachs, so what the hell do you expect, eh?

Simple solution. CALPERS, et al., have no effing business in spec mkts in any case. Just enforce ERISA (what?! the gov't ENFORCE something except when convenient? Shocking, simply shocking! Cue Claude Rains...), and hit them over the head with ''prudent man'' doctrine.

Won't happen, of course. But it should.

35 posted on 05/23/2008 2:39:21 PM PDT by SAJ
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To: HamiltonJay
Yes, but your scheme shoots both the sheep AND the wolves.

You would raise taxes both on hedgers and on small specs, NEITHER of whom are contributing to the problem. Until you limit your notions to suspending IRS Section 1056 for big specs (Form 50 filers) only, you'll get no support from me.

Also, don't kid yourself m'friend. I've known personally half a dozen of these hot-money fund managers, and they'll liquidate a position in one country and re-establish the same or an equivalent position in a different country in less time than it takes to drink a cup of coffee. And they'll do it even faster if they'v a positive economic incentive -- such as vastly higher margins -- to do so. And they'll do it TO A MAN, because their performance reviews depend considerably on not letting their competitors get the jump on them.

To think otherwise is perhaps pleasant, but it's a bloody pipe dream. That ain't the way THIS world works, mate.

36 posted on 05/23/2008 2:45:26 PM PDT by SAJ
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To: NVDave
You know, ever time we’ve gotten a huge equity bubble, the SEC has raised margin requirements for stocks.

Right, and they've been ooohhh so effective./sarcasm

There’s no reason why we shouldn’t raise margin requirements for futures.

No reason, other than it won't work.

37 posted on 05/23/2008 2:59:07 PM PDT by curiosity
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Von Mises was a genius. He understood markets thoroughly, as well as and goobermint's distaste for free markets.

We have these price dislocations today because of goobermint actions, not despite goobermint's best efforts.

I trust you've heard the clip, which has been played EVERYWHERE, of the idiot Maxine Waters for once honestly saying what she wants to do to oil companies (and presumably the rest of the economy). If not, don't miss it -- she and her ilk **intend** to try to destroy the economy. Her own words, on the floor of the Regress, clear as a bell.

Regulation is necessary, because some number of mkt participants will try to cheat others, and they must be stopped. That, however, is no longer the purpose of regulation, except perhaps incidentally, when the goobermint finds it convenient.

38 posted on 05/23/2008 2:59:45 PM PDT by SAJ
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Gentlemen et-al, futures have and never will be my speciality, Thanks for the education. My Best, Taildragger

39 posted on 05/23/2008 3:24:44 PM PDT by taildragger (The Answer is Fred Thompson, I do not care what the question is.....)
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Many thanks for the info.

I’m familiar with butterflies, straddles and strangled from books on options I have. I don’t use too many complex option strategies in trading stocks, but I’m somewhat aware of them.

Now I see what you’re advocating and how it would help. Being off-shore in the Caymans would offer no sanctuary for the funds, unless they never wanted to repatriate their earnings.

I’m always happy to meet another trader, even tho I don’t trade futures. Any info you’d like to toss my way will be gladly received. Thanks for your time...

40 posted on 05/23/2008 3:40:14 PM PDT by NVDave
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