The bill proposes a number of changes to ensure that prices at the pump reflect the fundamental supply and demand for oil, and not short-term price bubbles created by speculators and financial traders. More specifically, in a summary provided by the Senator's office, the bill:
Much of this legislation is aimed at commodity index funds, which have experienced explosive growth and are estimated to hold $300 billion in commodity positions. There are those that contend that the commodity index funds are "liquidity takers and not liquidity providers" and they deprive bona fide hedgers sufficient market liquidity and at the same time disrupt commodities futures markets and physical markets in ways that distort price discovery. Commodity markets exist for the purpose of providing producers and purchasers of physical commodities to hedge their risks, while financial speculators provide commodity markets participants with sufficient liquidity. Historically hedgers have made up about 70 percent of the market and financial speculators about 30 percent. With the advent of the commodity index funds, financial speculators have overwhelmed the commodity markets and have driven out bona fide physical hedgers. The percentage of participant position holders has reversed and speculators now hold 70 percent of the open interest while physical hedgers have declined to hold only 30 percent.
While the likelihood of passage for the Nelson bill is low (due to partisan politics) the CFTC needs to provide rules in response to the Dodd-Frank Act that restore the integrity of the commodity futures markets and ensure a level playing field for many of the financial contracts that trade on unregulated exchanges.
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