In an ongoing effort to promote “transparency” in the marketplace, the Commodity Futures Trading Commission (CFTC), which is the U.S. regulatory agency governing the futures markets, has recently expanded its weekly Commitments of Traders Report.
Back in January 2007 the CFTC had already created a new report, called the Supplemental Report to include a category for Commodity Index Traders (CIT). This category drew from both the commercial and non-commercial sectors and was limited to only the agricultural commodities.
The new report, called the Disaggregated Commitments of Traders report, expands the categories of traders from the previous “Commercial” and “Non-Commercial” designations out of the regular COT report. Unlike the supplemental report, the new one covers some non-agricultural commodities, namely the energies and metals, as well as lumber. The four new categories are:
For the most part, the first two categories come out of the traditional “Commercial” category, while the last two would have been considered “Non-Commercials” in the regular COT reports. A brief description of each category follows:
Producer/Merchant/Processor/User
According to the CFTC, this group consists of entities that “predominantly engage in the production, processing, packing or handling of a physical commodity and uses the futures markets to manage or hedge risks that associated with those activities.” This category of trader is what was traditionally considered a commercial trader or hedger.
Swap Dealers
The CFTC states that a swap dealer is an entity that “deals primarily in swaps for a commodity and uses the futures markets to manage or hedge the risk associated with those swaps transactions.” Unlike the producer/merchant processor/user, the swap dealer is not hedging position in the physical commodities; instead he is hedging a financial position that is linked to a physical commodity. According to the CFTC, the swap dealer’s counterparties could be speculators, such as hedge funds, or traditional commercial clients that are managing risk associated with dealings in the physical commodity. It could also include commodity index traders or CITs.
Managed Money
According to the CFTC, a money manager can be a commodity trading advisor (CTA), a commodity pool operator (CPO) or and unregistered fund identified by the CFTC. (This could include hedge funds and non-U.S. entities.) Money managers trade on behalf of clients and are what we have referred to as “funds” or “traditional trend-following funds.”
Other Reportables
Any reportable trader that does not fit into the previous three categories will be included here.
There is still a “Nonreportable” category, consisting of those traders that are small enough that they aren’t required to report their positions to the CFTC. This group is the same in both the traditional COT Report and the new, Disaggregated COT Report.
What the New Report Tells Us
The CFTC began releasing the new, Disaggregated COT report on September 4, 2009. This afternoon (October 20, 2009) they have released historical data back to June 2006. This PDF contains a summary report and charts
This data provides a clearer indication of the levels of participation by the different types of traders. The net long or net short position of “Managed Money” should give us an indication for the direction or the perceived direction of the market by the traditional trend-following fund traders. What is the short-term trend for these traders? Is this position at an extreme? The historical charts will help answer some of this these issues.
The charts should also indicate whether commercial interest in a given market is high enough compared with the index fund participation.
We will also monitor the swap dealer category to see if CITs and hedge funds become dominant in any one market. CIT and hedge funds are passive investors, and the general trend in this category is important, as short-term gyrations are not dictated as much by price movements in an individual commodity as by the general direction of all commodities or specific groups of commodities.
For example, if individual investors see inflation ahead, they are likely to purchase an index of commodity prices as a security. The manager of this index fund will either add to or liquidate long positions in the commodities depending on the flow of investor funds.
The PDF’s table and charts show the net position held in various commodities by different categories of traders. It may be useful to understand the total open interest in a given market to determine whether the position if significant or not.
We will be incorporating the new data in our daily analysis immediately.
