CFTC Votes 3-2 to Approve New Limits on Commodity Speculation

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The U.S. derivatives regulator on Tuesday reintroduced a plan to curb commodity market speculation, reviving a crucial Wall Street reform after a judge knocked down an earlier version of its rules on position limits.

The Commodity Futures Trading Commission proposal will set caps on the number of contracts that a single trader can hold in energy, metal and agricultural markets, a measure aimed at capping speculation that some blamed for the spike in raw material and food prices prior to the 2008 financial crisis.
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Still, the plan could prove to be far less rigorous than feared by markets, data provided by the world's largest futures exchange the CME Group Inc showed.

The maximum position traders would be allowed to hold could in some cases dramatically rise rather than become tighter, the numbers showed, in one specific contract almost 10 times as much as is currently the case.
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While the redrafted rule eases a major irritant for big banks by lowering the thresholds for aggregating positions, it threatens to create a new rift with commodity merchants such as Cargill Inc looking to hedge certain transactions.
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More: http://www.mineweb.com/mineweb/content/en//mineweb-political-economy?oid=211602&sn=Detail

Looks like they've removed all the teeth.
 

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What the chart above shows is that after fluctuating around the low to mid $200 billion range for the past 5 years, in Q1 the amount of Commodities with a maturity of under 1 year exploded to a record $3.9 trillion!

Sadly, the OCC provides no actual explanation for why there was such an epic surge in commodity derivatives within the US banking system in the first quarter, so we decided to explore.

What we found is what those who have for years accused JPM of cornering the commodity markets, have known: because it is none other than JPMorgan's Commodity derivative book primarily in the <1 maturity bucket, which exploded from just $131 billion to a gargantuan and never before seen $3.8 trillion!

In fact as the chart below shows, while historically JPM has accounted for just over 50% of total commodity holdings among all US commercial banks, in the Q1 this number soared to a stratospheric 96% which by anybody's standards is the very definition of cornering the market!
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So in summary, this is what we do know:
  • in Q1, JPM cornered the commodity derivative market, with a total derivative exposure of just over of $4 trillion, an increase ot 1,691% from just $226 billion in one quarter!

What we don't know is:
  • why did the OCC decide to effectively eliminate its gold derivative breakdown by lumping it with FX,
  • why there was a 237% increase in the total amount of precious metals (which include gold) contracts in the quarter, from $22.4 billion to $75.6 billion
http://www.zerohedge.com/news/2015-...dity-derivative-market-and-time-we-have-proof
 

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Bron Suchecki says the OCC numbers ("237% increase in the total amount of precious metals") are not what they appear to be (ie. comparing apples to oranges - they changed the definitions between Q4 2014 and Q1 2015). He says, when you correct for this you see:
... a very dramatic decrease in bank gold derivative activity, as the impression most gold commentators give is that gold speculative derivative activity by banks is huge and increasing. A fair part of that decrease is the result of miners reducing their hedging (see here for a comparison of the miner hedge book versus OCC derivatives over time).
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http://research.perthmint.com.au/2015/06/30/precious-metal-derivatives-decline-29/
 

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So... the plot thickens...
On Tuesday I posted on the latest US Office of the Comptroller of the Currency’s (OCC) quarterly report and how it showed a reduction in total precious metal derivatives. I took Zero Hedge to task for jumping the gun on posting before seeking further information but now I have to admit I was guilty of that myself, the result being I was wrong to claim of a 29% reduction in precious metal derivatives.

Zero Hedge and I both made the same mistake, which was to assume that “precious metals” in Table 9 of the OCC’s report included gold, which I think is a reasonable assumption as “precious metals” is commonly understood to mean gold, silver, platinum and palladium. The OCC confirmed to me by email that Table 9 excludes gold and gave me a snapshot of a section of the call report where, at least to the banks filling out the form, it is clearly identified that the “precious metal” category should exclude gold.
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A small mercy is that we still have a continuing dataset for the white PMs (ie silver, platinum and palladium). Zero Hedge noted the 237% increase in this category, which is certainly unusual for these markets which are smaller and often less liquid than gold. A comparison of the Q4 and Q1 OCC reports reveals that 92% of the $53.1 billion increase in the notional value of white PM derivatives was attributable to Citibank, who increased from $3.9b to $53.0b.

In an email response to Nick Laird of Sharelynx.com who questioned this dramatic change, the OCC confirmed the figures were correct and provided the following screenshot of Citibank’s schedule RC-R as proof.

<img>

This reveals that almost all of the increase was in Citibank’s centrally cleared derivative contracts (circled in red) rather than in OTC markets (in green), which total $3,786m, very close to Citibank’s Q4 figure of $3,901m. That does make me wonder if the red figures are a fat finger and belong in a different row.

Bloomberg note that “Citigroup has been expanding in derivatives as it rebuilds trading businesses that suffered after the financial crisis led the firm to take a government bailout” and that it has “pursued a risk-managed expansion off of a low base to bring the firm in line with competitors” so maybe Citibank has been active in the white metals as part of this “rebuilding”. ...

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As to Citibank having a notional $53 billion worth of white PMs derivatives on their books, industry sources tell me that “Citibank are not that active in PGMs so if the figure is real, it would have to be silver and it would have to be something very unusual.” I have an email in to my precious metals contact at Citibank but he is on leave at the moment so no response at the time of this post. I’m not expecting a comment as Citibank declined to comment on the OCC report to Bloomberg, but I’ll post any update/explanation if I get it.
http://research.perthmint.com.au/2015/07/02/mea-culpa-on-occ-derivatives/
 

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There is definitely something to this...
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So to summarize: as we reported first (and we would be delighted if other so called financial experts dedicated as much effort to digging through the primary data as they have to desperately try to disprove our article), JPM has indeed cornered the OTC commodity market, with its $4 trillion in "Other" commodity derivatives which amount to 96% of total. ...

However, another big question remains: just what is Citigroup - not, not JPMorgan - with the Precious Metals category.

Here is the chart showing Citigroup's Precious Metals (mostly silver now that gold is lumped in with FX), exposure over the past 4 years. Of note: the 1260% increase in Precious Metals derivative holdings in the past quarter, from just $3.9 billion to $53 billion!

<chart>

For those of a skeptical bent the proof can be found in Citi's own call report, which can be seen here as of March 31, 2015 vs December 31, 2014.

Another way of showing what Citi just did with the "Precious Metals" derivative category, is the following chart which shows Citi's total PM derivative exposure as a percentage of total.

<chart>

Soaring from just 17.4% to over 70%, there is just one word for what Citigroup has done to what the Precious Metals ex Gold (i.e., almost exclusively silver) derivatives market.

Cornering.

So, the question then is: just what is Citigroup doing with its soaring Precious Metals (excluding gold) exposure, and why is such a dramatic place taking place at precisely the time when not only JPM is cornering the entire "Other" Commodity derivatives market in the form of a whopping $4 trillion in derivatives notional, but in the quarter after none other than Citigroup itself was responsible for drafting the swaps push-out language in the Omnibus bill.

<img>

And also: how is it legal that JPM is solely accountable for 96% of all commodity derivatives while Citigroup is singlehandedly responsible for over 70% of all "precious metals" derivatives? Surely even by the most lax standards this is illegal, but what makes the farce even greater is that all of this taking place out of FDIC-insured entities!

The final question, which we are absolutely certain will remain unanswered, is whether any of these dramatic surges have anything to do with the recent move in precious metals prices, or rather the complete lack thereof, even as Europe is on the verge of its first member officially exiting the Eurozone, and China's stock market is suffering its worst market crash since 2008. Oh, and we almost forgot: with both JPM and Citi now well over 50% of the derivatives market in two critical categories, who is the counterparty!?
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http://www.zerohedge.com/news/2015-...ous-metals-derivative-exposure-just-soar-1260

 
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