Kemp: Limits Of Analysis On Commitments Of Traders

Kemp: Limits Of Analysis On Commitments Of Traders
The precise interactions between different types of commodity traders and their impact on price formation remain largely unknown.

Trader classifications can change over time, either because the nature of their business changes, or because the CFTC receives additional information about their activities.

The CFTC does not publish information on how individual traders are classified so there is no way of knowing for certain where major banks' and trading companies' positions are classified in the reports.

ICE Futures Europe performs its own classification exercise for traders with positions in Brent and gasoil and attempts to use the same criteria as the CFTC.

But since the CFTC does not share its classifications with outsiders, even the exchanges, there is no way to know whether ICE and the CFTC classify the same traders in the same way.

Transparency

The current classification used by the CFTC and ICE, and its focus on traders rather than trades, severely limits the usefulness of the data for analysing the relationships between futures positions and prices.

But exchanges and many market participants have opposed the disclosure of more detailed information on the grounds that it would create an unnecessary reporting burden for market users.

"Although some users seek still greater granularity in the COT reports, it is important to recognise that the COT report is intended to be a tool that informs market users and the public by providing, in appropriately broad brushstrokes, a picture of the composition of the futures markets," CME Group wrote in 2009.

"It is not designed as a surveillance tool for regulatory authorities who have access to detailed position data, as well as other data, for each reportable account, and who are able to obtain additional information." (Letter from CME Chief Executive Officer Craig Donohue to CFTC Secretary David Stawick, dated Oct. 1, 2009)

"In the light of the transparency that already exists ... it does not appear that initiatives that would require significant operational or reporting changes in order to provide still finer granularity to COT reports would add sufficient value to justify the imposition of these burdens on market participants."

But the broad brushstrokes employed in the commitments of traders reports necessarily limit the accuracy of any analysis of futures prices and markets based on them.

COT reports can therefore only ever provide an approximate guide to what is happening in the oil market, and their interpretation remains as much an art as a science.


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