The chief regulator of the nation’s commodity markets will unveil early next week a set of policy changes to address public and political concerns that market malfunctions may be contributing to rising food and energy prices, according to people who have been briefed about the agency’s plans.
The new regulatory steps will be announced by the Commodities Futures Trading Commission, which oversees exchanges that play a central role in establishing worldwide prices for commodities ranging from corn to crude oil.
The announcement may also shed some light on a commission investigation into a spike in cotton prices this year, these people said. They discussed the proposal on the condition that they not be named because the agency is still completing its plans.
The agency has been wrestling for more than a year over farm industry demands that it examine the role that new financial investors are having in the futures markets, especially those who are investing through commodity index funds.
As commodity prices have risen over the last several years, these funds have become an increasingly large player in the commodity futures markets, rising from a stake of roughly $13 billion in 2003 to an estimated $250 billion this year.
Unlike traditional commodity investors, these index funds do not both buy and sell commodity futures — they only buy, reflecting investors’ desire for a stake in a rising market.
That lopsided trading pattern has generated complaints — most recently at a hearing last week before the Senate Committee on Homeland Security and Governmental Affairs — that index investors are artificially driving up commodity prices at the expense of consumers.
One Senate witness proposed that federally regulated pension funds, a major source of index fund investments, should be forbidden from investing in commodities because of the impact on consumers.
The commission has already taken steps to gather more market data about the role of index funds, and it has held off approving several rule changes that would have given those funds more leeway to invest in commodity futures contracts. It was considering relaxing its rules for index traders early last year before the sharp run-up in commodity prices.
But against a backdrop of growing political pressure, it is expected to outline additional measures to address this burgeoning mode of investment, although those steps may fall short of the more sweeping measures sought by the index funds’ critics.
At the Senate hearing last week, Jeffrey Harris, the commission’s chief economist, cautioned that the agency has not found any empirical evidence to support the view that financial speculators are systematically driving food and energy prices higher.
Harris noted that there have been sharp price increases even for commodities that are not included in commodity indexes and are therefore not affected by index trading.
The percentage of index trading has remained relatively constant even as prices have increased, he said, and the two products whose futures trading is most dominated by index trading, live cattle and hog futures, have actually experienced declining prices over the last year.
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Nevertheless, the commission is clearly under pressure to demonstrate that it is actively watching for any manipulative trading that may be affecting the prices of products that are part of the household budget for most Americans. One way it can do that is through its investigative and enforcement operations.
The commission confirmed Thursday that it has been holding a six-month investigation into potentially manipulative trading that affected energy prices.