[Congressional Record (Bound Edition), Volume 162 (2016), Part 7]
[Extensions of Remarks]
[Pages 10057-10058]
[From the U.S. Government Publishing Office, www.gpo.gov]




 THE COMMODITY FUTURES TRADING COMMISSION'S POSITION LIMITS LITERATURE 
                                 REVIEW

                                 ______
                                 

                        HON. K. MICHAEL CONAWAY

                                of texas

                    in the house of representatives

                         Tuesday, June 28, 2016

  Mr. CONAWAY. Mr. Speaker, I rise today to submit into the 
Congressional Record an important document related to the ongoing work 
to finalize a position limits rulemaking at the U.S. Commodity Futures 
Trading Commission (CFTC). The document, an unpublished draft 
literature review prepared by the CFTC's Office of the Chief Economist 
(OCE), is titled ``Analysis of the Various Economic Studies Cited in 
Comment Letters in the Position Limits Rulemaking.''
  The House Committee on Agriculture (Committee) conducted oversight of 
research practices at OCE based on a report published by the CFTC's 
Office of Inspector General (CFTC OIG). As part of this oversight 
initiative, the Committee requested, obtained, and reviewed documents 
and information related to the CFTC OIG's report. As a result of its 
oversight efforts, the Committee obtained a literature review on 
position limits that was never finalized or circulated to the full 
commission.
  Having reviewed the draft literature review prepared by the CFTC's 
own economists, I believe it presents a comprehensive overview of the 
current state of economic research on excessive speculation and an 
objective analysis of the potential utility of position limits. The 
document discusses in detail the ongoing and vigorous debate among 
economists about what constitutes excessive speculation and what, if 
any, impact it might have on prices and volatility in the commodity 
futures markets. In addition, the document summarizes and provides a 
brief analysis of many of the most important academic studies cited by 
commenters and utilized by CFTC staff in drafting the proposed rule.
  On June 14, 2016, I requested that CFTC Chairman Massad make this 
document public because I believe the insights and information 
contained in this report will benefit the general public's 
understanding of and ability to comment on the proposed rule. On June 
17, 2016, Chairman Massad declined on the grounds that (i) the document 
was a summary of studies submitted during the comment period and, (ii) 
it was never intended to be public.
  The document, however, is much more than a summary of studies 
submitted during the comment period; it also is a wide-ranging 
examination of how to define excessive speculation, how to measure it, 
and how it may impact markets.
  For reference, I have included the entirety of the conclusion section 
here:

       Economists debate whether ``excessive speculation,'' 
     meaning a link between large speculation positions and 
     unwarranted price changes or price volatility, exists in 
     these regulated markets, and if so to what degree. The 
     question presented is a surprisingly difficult one to answer. 
     All the empirical studies on this question have drawbacks, 
     and none is conclusive. This inconclusivity is not 
     surprising. It is inevitable, given the economic 
     uncertainties that inhere in the data and the complexity of 
     the question. There are many theoretical and empirical 
     assumptions, and often multiple leaps of faith, that are 
     needed to transform and interpret raw market data into 
     meaningful and persuasive results. There is no decisive 
     statistical method for establishing evidence for or against 
     position limits in the commodity.
       Those that use Granger causality methodology tend to 
     conclude that there is no evidence of excessive speculation 
     or its consequences on price returns and price volatility, 
     and many industry commenters opposed to position limits used 
     this methodology. But that methodology is peculiarly 
     sensitive to model design choices, and above we have analyzed 
     designed modelling decisions that may have affected the 
     ultimate conclusions of these studies. Moreover, there are 
     countervailing Granger studies showing a link between large 
     speculative positions and price volatility. And studies such 
     as Cheng, Kirilenko, and Xiong, Convective Risk Flows in 
     Commodity Futures Markets (working paper 2012), indicate that 
     some Granger studies may mask the impact of excessive 
     speculation in times of financial stress.
       Those that use comovement and cointegration methods tend to 
     conclude there is evidence of deleterious effects of 
     ``excessive speculation.'' Yet comovement just tests for 
     correlation, not causation, and a correlation between large 
     financial trading in the commodity markets and price changes 
     and volatility could be driven by a common causal agent such 
     as macroeconomic factors.
       Those studies that use models of fundamental supply and 
     demand reach a whole host of divergent opinions on the 
     subject, each opinion only as strong as the many modelling 
     choices.
       In this way, the economic literature is inconclusive. Even 
     clearly written, well-respected papers often contain nuances. 
     It is telling that Hamilton, Causes and Consequences of the 
     Oil Shock of 2007-2008, Brookings Paper on Economic Activity 
     (2009), has been cited by both proponents and opponents of 
     position limits.
       What can be said with certainty is summarized in the 
     Commission's NPRM: that large speculative positions and 
     outsized market power pose risks to a well-functioning 
     marketplace. These risks may very well differ depending on 
     commodity market structure, but can in some markets cause 
     real-world price impacts through a higher risk premium as a 
     component of total price. There are also economic studies 
     indicating some correlation between increased speculation and 
     price volatility in times of financial stress, but this 
     correlation does not imply causation. There are studies 
     indicating that in certain markets, such as crude oil, or 
     certain time periods, such as times of financial stress, the 
     impact of excessive speculation may be greater. These 
     findings are all exceptions to the general rule that 
     increased participation of speculators should generally be 
     expected to lead to better price discovery and less 
     unwarranted price volatility.
       Comment letters on either side declaring that the matter is 
     settled in their favor among respectable economists are 
     simply incorrect. The best economists on both sides of the 
     debate concede that there is a legitimate debate afoot. This 
     analysis paper documents that the academic debate amongst 
     economists about the magnitude, prevalence, and pervasiveness 
     of the risk of outsized market positions has reputable and 
     legitimate standard-bearers for opposing positions.

  While I have my own opinion about the utility of a position limits 
regime, my push to make this document public has nothing to do with a 
disagreement over the outcome of this specific policy debate. I believe 
that to make informed decisions it is important that lawmakers, policy 
makers, and the public have access to the best available information. 
This literature review, much like other whitepapers, studies, and 
analyses published by OCE, provides such information in a manner that 
is clear and understandable.
  It is my hope that this information will be used to continue to 
improve our understanding of derivatives markets and the regulatory 
rules we enact to govern them. For this reason, I am making this report 
public prior to the July 13 closing date of the comment period for the 
CFTC's position limits rulemaking.
  The cover memo, full literature review, and all of the correspondence 
between the CFTC and the Committee regarding this document are 
available on the Committee's website at http://agriculture.house.gov/
uploadedfiles/position_limits_analysis.pdf.
  I would like to also submit the following letters:

                                         House of Representatives,


                                     Committee on Agriculture,

                                    Washington, DC, June 14, 2016.
     Hon. Timothy G. Massad,
     Chairman, U.S. Commodity Futures Trading Commission, 
         Washington, DC.
       Dear Chairman Massad: The House Committee on Agriculture is 
     conducting oversight of research practices at the U.S. 
     Commodity Futures Trading Commission's (CFTC) Office of the 
     Chief Economist (OCE) based on a report published by the 
     agency's Office of Inspector General (OIG). As part of this 
     oversight initiative, the Committee requested documents and 
     information related to the OIG's report and discovered the 
     existence of a draft literature review on position limits 
     that was never finalized or circulated to the full 
     commission. I write to request that you direct CFTC staff to 
     finalize and make public this report for use in the 
     Commission's ongoing work on the position limits rulemaking.
       On February 18, 2016, the OIG published a report following 
     up on a 2014 review of OCE research programs. After 
     interviewing OCE economists, the OIG decided to expand its 
     review of OCE to include research topic selection due to 
     allegations that the Chief Economist has refused to permit 
     research on topics relevant to the agency's mission, 
     including position limits, and economists have begun limiting 
     their research proposals to non-controversial topics based on 
     a perception that the Chief Economist will not permit 
     research that may conflict with the official positions of the 
     CFTC.
       The OIG's findings were deeply troubling, and the Committee 
     requested documents and communications related to the OIG's 
     investigation for additional oversight. Among the documents 
     the Committee received was a draft literature review 
     summarizing and analyzing economic studies cited in comment 
     letters on the position limits rulemaking

[[Page 10058]]

     that was sent to your office on June 30, 2015. The version we 
     have seen is labeled draft number 20, but does not appear to 
     have been submitted for final review within OCE after it was 
     shared with your office.
       I have reviewed the document, and I believe it presents a 
     comprehensive overview of the current state of economic 
     research on excessive speculation and an objective analysis 
     of the potential utility of position limits. The report 
     discusses in detail the ongoing and vigorous debate among 
     economists about what constitutes excessive speculation and 
     what, if any, impact it might have on prices and volatility 
     in the commodity futures markets. The authors of this report 
     raise important questions about whether position limits are 
     an effective tool for limiting the effects of excessive 
     speculation. They also highlight the market stabilizing 
     effects of speculative activity and suggest that suppressing 
     such activity may carry unintended risks, such as disruptions 
     to liquidity and price discovery.
       I appreciate your work on the recent supplement to the 
     proposed position limits rulemaking. Your proposal takes 
     steps towards addressing several of the concerns that have 
     been raised before both this Committee and your agency. As 
     stakeholders and market participants review the new language 
     and file their comments, this report, which puts the best 
     economic literature in context, may help clarify what can and 
     cannot be accomplished in the final rule.
       Position limits are a complex regulatory tool and their 
     impact on markets is uncertain. Given the sweeping nature of 
     this rulemaking and the intense debate it has provoked since 
     its inception, this even-handed report prepared by the 
     Commission's own economists should serve as an invaluable 
     resource for the Commission and the public. Therefore, the 
     Committee requests that you finalize this report before 
     continuing with the next steps in the rulemaking process.
       The Committee on Agriculture is the principal authorizing 
     committee for all matters related to agriculture and 
     commodity exchanges in the House of Representatives and 
     ``shall have general oversight responsibilities'' as set 
     forth in House Rule X.
       Please respond to this request in writing on or before June 
     24, 2016. Your response should specify the date by which the 
     literature review will be finalized and made public. If you 
     have any questions about this request, please contact Emily 
     Wong or Paul Balzano of the majority staff.
           Sincerely,
                                               K. Michael Conaway,
     Chairman.
                                  ____

                                            U.S. Commodity Futures


                                           Trading Commission,

                                    Washington, DC, June 17, 2016.
     Hon. K. Michael Conaway,
     Chairman, Committee on Agriculture, House of Representatives, 
         Washington, DC.
       Dear Mr. Chairman: I am writing in response to your letter 
     of June 14, 2016 regarding the U.S. Commodity Futures Trading 
     Commission's (``CFTC'' or ``Commission'') rulemaking 
     concerning position limits on derivatives.
       As you note in your letter, the position limits rulemaking 
     (``proposal'' or ``rule'') is a very important one. As with 
     all rulemakings, the Commission is following a transparent 
     and thorough process. No current Commissioner was in office 
     when the initial position limits rule was proposed, and 
     therefore we have taken the time to listen to market 
     participants and consider the proposal very carefully. The 
     Commission has made extensive efforts to ensure the public 
     has ample opportunity to comment on the proposal and has 
     extended the public comment period multiple times.
       As part of any rulemaking process, all comment letters are 
     made publicly available on the Commission's website. 
     Commission staff routinely summarize these comments, which 
     can be helpful to Commissioners and staff because comments 
     are often voluminous in detail. In the case of this rule, 
     some of the comment letters referenced studies regarding 
     position limits or related matters conducted by third 
     parties, including academic researchers, economists and trade 
     organizations. The draft document you mention in your letter 
     is a summary of studies submitted during the rulemaking 
     comment periods. A majority of these studies were submitted 
     prior to the publication of the proposed rule in December 
     2013 and were summarized and listed in that 2013 proposal.
       While staff summaries of public comments (or material 
     referred to in the comments) are internal Commission 
     documents and not themselves published as part of the final 
     rule, I can assure you that, consistent with normal practice, 
     any final rule will summarize the comments we receive, 
     including those comments that refer to third party studies, 
     just as was done for the proposed rule published in December 
     2013.
       I appreciate the complexity of the issues surrounding the 
     position limits rule, and the importance of thoroughly and 
     fully considering public comments. I have made it a priority 
     to finalize a position limits rule this calendar year and 
     believe we are making good progress toward that goal.
       If you have further questions, please contact me or Cory 
     Claussen.
           Sincerely,
                                                Timothy G. Massad,
     Chairman.

                          ____________________