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Time to give up on the CFTC

IMG Auteur
Published : May 24th, 2013
720 words - Reading time : 1 - 2 minutes
( 9 votes, 4.9/5 ) , 6 commentaries
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Gene Arensberg has an article out on the COMEX price smash where he concludes that:
"in order for the initial 124 tonne sale to have occurred “legally” it would have had to have been 14 traders, all with zero orders open, all acting simultaneously, all acting independently, in their own self-interest, without colluding with each other to “sell-for-effect” or conspiring to foment a price smash.

In actuality, the chances that there were 14 traders who held zero open orders all acting independently, all throwing their full allowable 3,000 contracts into the gold market within a few minutes of each other are infinitesimally small."

Gene notes that hedge members have a bona fide hedger exemption "to sell more than the limit, but not without filing paperwork with the exchange" which means that "whoever blew out the gold market on April 12 is already known to the CFTC (and what documentation they used to back up their trade)."

Now I would have thought that position limits would still apply to the person whom the hedger was executing for. A quick google search brought up this 20 page client update document from a law firm. Reading through the first few pages I was confronted by stuff like this:

"To qualify as a bona fide hedging transaction under the Final Rule, a transaction or position must (1) represent a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel, (2) be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, and (3) either (a) qualify as one of the eight enumerated bona fide hedging transactions under the Final Rule and arise from the potential change in the value of (x) assets a person owns, produces, manufactures, processes or merchandises or anticipates owning, producing, manufacturing, processing or merchandising, (y) liabilities a person owes or anticipates incurring or (z) services a person provides, purchases or anticipates providing or purchasing, or (b) qualify as a “passthrough swap.”"

Eyes glazing over? Same here, so I then proceeded to the scroll/skim through reading method. My lay person summary: plenty of loopholes for someone to do what they want and have the CFTC running around in circles.

Now you know why the CFTC investigation into silver has been going on for years without any result.

As I said in response to this question: Do you think Bart Chilton of the CFTC is imagining things when he says its happening, or maybe he wants to be loved by the Goldbug crowd?:

"Consider that the CFTC has to deal/manage/politic two types of market participants – producers, who want prices to be high and consumers, who want prices to be low. I have seen the theory that Bart’s role is to play to or appease the consumers, which in the case of PMs means they want high prices. I really don’t know if this is the case or he is just straight up. Either way he is often very careful in what he says, and keep in mind the difference between manipulation and suppression. Bart talks of manipulation, not suppression."

To that I'd add the CFTC has to deal with a complex set of rules and regulations. When regulations get this complex market fairness and transparency is actually harmed, and the only ones who benefit are those big enough to have lawyers able to work out the loopholes.

What the market needs is straightforward commonsense rules that everyone knows in advance, just like Kid Dynamite points out in this post on cancelling trades. Or just drop the pretence and go free-for-all law of the jungle.
Having interest rates this low doesn't help, as speculators have minimal cost in holding a position for a long time (until it blows up) or taking on large positions. This just adds to the volatility.
Time to give up on the CFTC being able to control this, just like Ted Butler did.

BTW, Perth Mint once had a new hire in our Treasury department suggest we should trade on COMEX. That got laughed at (and that was before MF Global). We will take our chances in the OTC market, where at least we can pick our counterparties, do due dilligence on them, and trade on our terms.
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Latest comment posted for this article
The Perth Mint refines 300 to 400 tonnes of gold a year, we make coins and bars and you think we can do that without a substantial amount of physical gold in work in progress inventory? That inventory backs the Certificate Program. See here for a rebutta  Read more
Bron Suchecki - 5/26/2013 at 7:49 AM GMT
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Bron is a shill for paper gold and paper silver, as exemplified by the Perth Mint Certificate Program.
This program will be exposed to be the fractional reserve bullion fraud that it is when paper and physical prices diverge,
and the Great Perth Mint Bullion Bank Run commences.

A dress rehearsal took place in 2008.

http://silverstockreport.com/2008/perth7.html
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The Perth Mint refines 300 to 400 tonnes of gold a year, we make coins and bars and you think we can do that without a substantial amount of physical gold in work in progress inventory? That inventory backs the Certificate Program. See here for a rebuttal of the idea that we would just keep investor's cash rather than buy gold http://goldchat.blogspot.com.au/2008/12/mint-has-no-gold-again.html
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#1 Who writes the regulations? That ought'a tell you something might go amiss.

#2 All of this could be minimized by simple rules. 20% down and the contract MUST be held for 30 days minimum or delivery. Failure to hold the contract for 30 days or until delivery shall be penalized by a fine equal to no less than 100% of the contract price. In the case of multiple violations, the fine shall be no less than 3X the total price of all the contracts combined.

Problem solved.

In this age of do nothing speculative profiteering, we tend to forget the real reason a futures market exists. And if you don't know why, you have no business in the market.
Oh and if you do know why, you probably shouldn't be in the market either.
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The faster you get rid of cancerous cells the higher the chances of patients survival. We are the patients and those in current financial system set up by the Anglo American have gone cancerous. The world need not suffer if we decide to seek treatment immediately. Time to wake up and take action. Remove the 1% to save the 99%
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Two of the most important financial regulators in the country have a message for Congress: We need more money.

At a hearing before the Senate Banking Committee Tuesday morning, Securities and Exchange Commission Chairman Mary Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler told lawmakers that the demands on their agencies to expand oversight are growing, but that their pocketbooks are not.

“We’re way underfunded at the CFTC,” Gensler told lawmakers, after a question on the subject from Senator Chuck Schumer (D- N.Y.). “Imagine if, all of a sudden, there are eight times the number of teams on the [football] field, but only seven refs,” Gensler said. “There would be would be mayhem on the field. The fans would lose confidence.”

Similarly, Gensler said, investors are losing confidence when when mayhem breaks out in the financial markets as a result of lax oversight. “They feel that the market is unfair.”

SEC chief Schapiro echoed the point: “We’ve been asked to take on very significant new responsibilities,” she said. Though the SEC has made progress in hiring new staffers and improving its technological capabilities, Schapiro conceded that, in some areas, the efforts haven’t gone far enough.

“We’re still way outgunned by the firms we regulate in terms of technology,” she said.

The inadequacy of the SEC budget is an issue that Schapiro has raised in the past, and one that sits at the heart of criticism that the regulator is not able to fully monitor and regulate financial markets. Last month, a number of former SEC enforcement lawyers told The Huffington Post that the SEC is playing catch-up in some of its oversight. “The SEC just doesn’t have the resources to be everywhere — to regulate and to be the cop on the beat,” Paul Berger, a former associate director of the SEC’s enforcement division who left in 2006 for the law firm Debevoise & Plimpton told The Huffington Post at the time.

The Senate Banking Committee convened Tuesday’s hearing in the wake of trading losses JPMorgan Chase disclosed two weeks ago, resulting from bad bets the bank made on credit derivatives. Since those losses were initially disclosed, the amount lost has risen from $2 billion to $3 billion, according to some estimates.

On the question of the JPMorgan losses specifically, Schapiro told legislators that her agency will look into the “appropriateness and completeness” of the bank’s financial reporting.

Since JPMorgan disclosed those losses, the question of what steps regulators could take to avoid similar losses in the future has been central to the ongoing debate over the future of financial regulation.

At Tuesday’s hearing, CFTC chief Gensler suggested greater regulation of derivatives could help. “The more transparent markets are, the harder it is to misunderstand the risk you have,” he said.

That echoes comments made by one of his predecessors, Formef CFTC chair Brooksley Born. One of the earliest U.S. officials to warn of the dangers of unregulated derivatives, Born recently told The Huffington Post: “Derivatives regulation is absolutely necessary for the safety of our financial system. Something like [the JPMorgan loss], or something many times worse, could happen at any time, and we don’t know about it. Nobody knows.”

But Gensler also suggested a need for stricter regulation of hedging and proprietary trading by banks. Sloppy hedging strategies have been blamed for the losses at JP Morgan. Making sure that banks hedge risk without turning those hedging operations into money-making units in their own right (which critics have accused JPMorgan of doing in this case) is a core goal of the so-called Volcker Rule. That rule, part of the Dodd-Frank financial-reform act, would ban proprietary trading by federally-insured banks and is set to take effect this summer. Without stricter oversight, Gensler said, banks “are tempted to swing for the fences” in an effort to turn a profit.
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There was something about your post that caused me to think that something was amiss in the state of Denmark. It took me a while to figure it out. The key was in this sentence: "The Senate Banking Committee convened Tuesday’s hearing in the wake of trading losses JPMorgan Chase disclosed two weeks ago, resulting from bad bets the bank made on credit derivatives." JPM released that info a year ago. The meeting at which these 2 testified took place on May 22, 2012. At the hearing which took place this past Tuesday, Jack Lew was the only witness.

My suspicion is that this piece was written a year ago by someone other than yourself. i've not bothered to see if it could be located in that i have far better things to do with my time. If my suspicion is false, you have my apology.
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