CFTC: No Manipulation in March 2008 Cotton Price Rise
January 12, 2010 By Gregory Meyer
FinancialTimes.com
US regulators found no evidence of manipulation in a March 2008 price rise that shook the cotton industry.
The staff report by the Commodity Futures Trading Commission, released on Tuesday, said multiple forces – from the credit crunch to exchange rules – collided to catapult prices above $1 a pound. The rise saddled traders with hundreds of millions of dollars in margin calls, eventually forcing some old-line merchants out of business.
The CFTC, which is considering a crackdown on institutional investment in commodities, also refrained from blaming investors who passively track commodity indices for the price jump.
Between mid-February and early March 2008, cotton futures prices gained about 30 percent. The commission said that as prices continued to rise, cotton merchants worried about getting credit to maintain collateral against their futures holdings began to reduce their selling positions, effectively buying them back. On the morning of March 3 2008, “the pressure resulting from traders seeking to reduce their short exposure in an abbreviated period of time” boosted cotton prices until the futures market locked at its daily fluctuation limit.
These traders then shifted to cotton options markets, causing prices to spiral even higher as other traders were reluctant to jump into an unpredictable market, the report said. Merchants which failed to reduce holdings received margin calls from brokers based on ICE Futures US exchange rules, adding to the forced liquidation, and momentarily pushing prices even higher, the CFTC said. The report said index trackers, who generally buy and hold commodities, did not sell as prices were spiking.
CFTC commissioner Bart Chilton separately said that these funds constituted “dead liquidity” that may have contributed to volatility.
The National Cotton Council said “the influence of index and commodity funds in the market remains a problem”.
(Story found in orginal format here.)
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