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Long arm of CFTC's oversight of funds eyed

Agriculture.com Staff 11/12/2008 @ 9:35am

One of the core missions of the Commodity Futures Trading Commission (CFTC), the agency that oversees agricultural futures markets, is protecting the sanctity, effectiveness, and efficiency of the central price discovery process on futures exchanges, as described by Walter Lukken, CFTC's acting chairman, in recent Congressional testimony obtained by Successful Farming/Agriculture Online.

Lukken says if prices are not reflecting fundamental factors of supply and demand, the futures markets are not functioning properly and all Americans suffer.

With this year's historic run-up in energy and agricultural commodities, the CFTC's mission is being challenged to prove itself.

"If there is a lack of confidence in the validity of the price of a commodity, commercial participants will be less likely to manage risk in the futures markets," Lukken stated in his testimony to Congress. "Furthermore, those involved with commercial merchandising of a physical commodity, such as a utility or grain elevator, will be hesitant to forward-contract with customers if there is doubt about the basis of a price discovered on the futures markets."

For example, due to soaring prices and uncertainty as to why this is happening, some U.S. elevators have suspended hedge-to-arrive contracts due to increased margin calls on that class of contracts. And this does hurt the farmer, removing a popular risk-management tool.

One of the core missions of the Commodity Futures Trading Commission (CFTC), the agency that oversees agricultural futures markets, is protecting the sanctity, effectiveness, and efficiency of the central price discovery process on futures exchanges, as described by Walter Lukken, CFTC's acting chairman, in recent Congressional testimony obtained by Successful Farming/Agriculture Online.

Many market participants are hurriedly trying to figure out where the rubber meets the road on this issue.

In February 2008, the CFTC created the Energy Markets Advisory Committee to assist in ensuring that the nation's futures markets operate efficiently and that commodity prices are determined by fundamental forces of supply and demand, instead of abusive or manipulative practices.

Meanwhile, the U.S. House of Representatives passed a bill that would give the CFTC more authority in regulating the speculators involvement in futures markets.

The House-passed bill giving the CFTC more teeth on regulating the index funds would:

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