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Commissioner Chilton’s Response to Reader Emails

By: Bart Chilton

-- Posted 31 March, 2009 | | Discuss This Article - Comments:

Thank you for your e-mail regarding silver.  As many know, I called for an open hearing, and then for the investigation, which was announced last September.  This is the first such investigation in many years.  It is detailed and deep, looking at many aspects of the markets.  The Commission has been briefed periodically on the investigation and I have had many additional meetings on the matter.  We are making progress and I am pleased that the investigation is ongoing.  That said, some believe that this is an open-and-shut matter, which can be resolved in days.  They are incorrect.  One thing I have repeatedly said is that I don’t want this to be a waste of taxpayer dollars.  That means getting it right and doing a thorough job – a job that if need be can be taken to court and successfully prosecuted.  I’m not suggesting we are going to file any charges—only that these are important matters and they need to be addressed in a comprehensive and professional manner.
I view my job as having a primary purpose—protecting consumers—all else follows.  I’ve tried to do all I can in that regard, most recently calling for cri minal autho rity to put folks who violate the Commodity Exchange Act in jail and trying to alert people to the large number of Ponzi and Ponzi-like schemes out there.
With specific regard to the commentary article from March 3rd that many have written to me about, I want to make several points.
First, the commentary refers to the concentration levels of the net shorts.  These positions that the CFTC includes in our Commitment of Traders report (COT) do not take into consideration all the positions held by the shorts that maybe used to hedge positions that they have with their customers—e.g. swaps, physical forward positions, lease positions, option contracts, etc.  Thus, it is not as if the short futures position represents the single position of a large trader, but rather represents a position taken as a result of looking at an aggregation of many trades—on and off-exchange.
Second, the commentary makes an attempt to calculate a “true net” concentrated short position for the top four largest net short traders.  The calculation was based on the COT (dated February 24).  The COT rep orted a concentration ra tio of 46.7% for the top four net short positions for futures only.  Staff has examined the calculations and has noted that the basic premise of the commentary is to inflate the reported ratio of 46.7% to “72.5% to 76%.”  It appears that this was basically accomplished by subtracting non-commercial and estimated commercial spread positions from the overall open interest (futures only).  The main argument of the commentary to be that “four or fewer traders controlling 72.5% or more of either the long side or short side of any regulated commodity futures market is a de facto manipulation.”
Again, I called for the investigation and I want ensure we are protecting consumers, but we also need some reality here and not spin things out of proportion.  Specifically, there is no strong reason to look at only the aggregate concentration percentage of the top four net short in isolation to determine whether or not there is a “manipulation.”  Looking at the aggregate percentage of a group of independent large commercial owners in isolation does not imme diately imply there is manipulation unless there is some evidence that all of these four traders are acting in collusion and trading together to influence the direction of the market. 
Don’t get me wrong, I am still concerned about concentration.  That is why I think we need some mandatory hard cap position limits for traders.  Currently we have only accountability levels.  These levels (which can be abrogated, and in fact are run through frequently) merely mean that the traders above the accountability levels are looked at more carefully.  I think we need to do more, and have said so publically.  I have taken the liberty of also pasting a recent news article on this matter for you further information.  It is interesting to note that all four of these commercial traders are members of the London Bullion Market Association and are established traders in the silver and other metal markets.  The positions represent not only proprietary positions but also customer positions as well.
Additionally, the percentages used in the commentary are for futures only, which was 46.7%, but if one were to look at futures and option positions combined the percentage was lower at 36.8%.  There is no real economic justification for subtra cting out the spread positions from the total open interest other than to inflate the reported concentration ratio.  Again, we need to look at facts here.  Stating a number much larger than the reported 46.7% and labeling that as the “true net” concen tration position is misleading, especially since the commentary’s derivation is largely based on making some questionable assumptions in addition to using an estimated commercial spread number.  With regard to the commercial spread number, since our COT report does not report commercial spread positions, only non-commercial spread positions, the commentary makes an attempt to calculate it.  The commentary also notes a caveat that “(p)lease remember that this methodology is peculiar to silver and is not applicable to all other commodities . . . .”  However, our staff ran the data to calculate the actual commercial spread, in addition to finding some minor mathematical errors when replicating the calculations, our staff found that the actual number was lower than the commercial spread estimated in the commentary.  Therefore, even if one were to accept that spread positions should be subtracted from the total open interest in calculating concentration ratios, the concentration ratio of the top four commercial net short was lower than the commentary’s estimation.
All of that said, I still believe that t here are many areas of inquiry that the CFTC needs to focus on—including but certainly not limited to concentration issues.  While I can’t give you details of our investigation, I can tell you that it is thorough and that we are making progress.
Thank you again for your e-mail.

Bart Chilton

-- Posted 31 March, 2009 | | Discuss This Article - Comments:

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