"The current proposed definition of 'deliverable supply' includes the quantity of the commodity meeting a contract's delivery specifications that a market participant could, with 'prudent planning,' procure during the relevant time period from available local supply, deliverable non-local supply, and comparable supply (based on factors such as product and location). The World Gold Council believes that the CFTC should update its definition of 'deliverable supply' to account for changes in the commodity markets over the last 20 years which have increased the complexities and products within the commodity markets.

"For example, 'exchanges for related positions' ('EFRPs') are transactions used by market participants in the futures exchanges to accommodate more flexible settlement options for physically settled commodity transactions. An EFRP consists of two discrete but related simultaneous transactions. One party to the EFRP must be the buyer of (or the holder of the long market exposure associated with) the related position and the seller of the corresponding exchange contract. The other party to the EFRP must be the seller of (or the holder of the short market exposure associated with) the related position and the buyer of the corresponding exchange contract. The related position (cash, OTC swap, OTC option, or other OTC derivative) must involve the commodity underlying the exchange contract, or must be a derivative, byproduct, or related product of such commodity that has a reasonable degree of price correlation to the commodity underlying the exchange contract.

"In the majority of circumstances, EFRPs (particularly exchange for physical transactions) make physical settlement of exchange-traded commodity futures and option contracts unnecessary, and therefore increasingly less common. Additionally, the exchange for physical transaction makes a commodity's futures contract substantially less vulnerable to a corner or squeeze because, in effect, the exchange for physical transaction has introduced flexibility to an otherwise limited physical settlement process.

"The World Gold Council encourages the CFTC to update the proposed definition of deliverable supply to reflect the more flexible settlement options for physically settled commodity transactions, and thereby expanding the definition of deliverable supply (and increase the applicable spot-month position limits). Furthermore, an updated definition of deliverable supply which accurately reflects the manner in which the current commodity markets function will reduce the threat of price volatility and manipulation, while promoting liquidity and encourage effective risk management.

"The CFTC's proposal to recalculate the position limits annually based on changes in open interest potentially may reduce the participation of market participants in the more deferred delivery months, particularly for long-term contracts that include positions in relatively illiquid deferred months.

"For example, a market participant may be wary of entering into a long-term transaction if the position limit that makes the trade permissible at one point in time may be reduced in the future. In order to secure financing for many mining projects, the World Gold Council’s members must be able to hedge price risk many years into the future. However, the uncertainty associated with floating position limits may inadvertently discourage market participants from providing the requisite long-term hedges which, in turn, would make it difficult for the World Gold Council's members to finance investments for crucial infrastructure projects. In general, the annual recalculation will make it difficult to hedge long-term transactions. This, in turn, likely will lead to more price volatility due to reduced liquidity."

The World Gold Council's letter to the CFTC has been posted at GATA's Internet site here --

http://www.gata.org/files/WGCtoCFTC-03-28-2011.pdf

-- but apparently not at the council's own Internet site. One has to wonder here whether the council is representing mining companies or their bankers instead.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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-- Posted Tuesday, 29 March 2011 | Digg This Article