As widely reported, the Commodity Futures Trading Commission (CFTC) on Thursday approved publishing proposed position limit rules for public comment. The proposal was published in the face of opposition from Commissioner Sommers and a strong statement from Commissioner Dunn indicating the need to see proof of excess speculation prior to the implementation position limits.  This proposal from the CFTC represents a disappointing step in the wrong direction. If approved, it would impose unnecessary and unwarranted limits on the ability of market participants to utilize our energy, metals and agricultural markets to hedge their risks.

Position limits do have a place – CME Group currently employs position limits in its agricultural commodities as well as a combination of position limits and position accountability standards in its energy and metals contracts. Even though the proposal is backed by good intentions, we fear rigid position limits across U.S. markets – particularly outside of the spot months – could have severe negative consequences. As CME Group’s executive chairman, Terry Duffy, stated last month in testimony before the House Committee on Agriculture in Washington, position limits “are not a costless palliative.”

The end result of the CFTC’s proposed rules would have the unfortunate unintended consequence of pushing participants out of the best-regulated and most transparent markets, into less-regulated, more opaque markets that carry greater risk, or preventing participants from efficiently hedging their risks in the first place. Rather than hard limits, we believe exchange position accountability rules are the most effective and appropriate tool for addressing any concerns with respect to large positions in a contract prior to the expiration period.  We can, and do, utilize position limits and appropriate hedge exemptions during the expiration period for our energy and metals contracts.

There is a very fine line here because speculators provide important liquidity and are essential to the orderly functioning of futures markets. They provide critical liquidity that promotes more effective price discovery and more efficient transfer of price risk. Without them, liquidity in our markets would be substantially reduced, having the perverse effect of introducing greater volatility and substantial increases in the costs to corporations, farmers and individuals seeking to manage their risk.

Let’s consider this in real-world terms – which often get buried in regulatory discussions. If market participants are unable to lay off their risk, they will plant fewer crops or make fewer loans – negatively impacting supply. By hedging fuel costs, airlines and shipping companies are able to provide more route and delivery options without charging exorbitant prices.

Put in more general terms, if hedging becomes too onerous or too expensive because of position limits and overly restrictive hedge exemptions, participants may choose not to, or be unable to, hedge their risk at all, and that not only increases costs to consumers, but adds risk to our financial system. .

Thomas LaSala is the Chief Regulatory Officer and a managing director at CME Group.