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Writing goes on the wall for Chocfinger-style commodity bets

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The days of bold, Chocfinger-type bets on soft commodities look numbered.

NYSE Liffe, the operator of the London markets in derivatives for crops such as cocoa, coffee and feed wheat, has unveiled plans to limit the positions that investors can take.

The proposals, which mirror those already in place on US exchanges, would cap at 7,500 contracts the position that can be held in cocoa and robusta coffee at expiry, 5,000 contracts in white sugar, and 2,000 contracts in wheat.

"Positions must be managed to be at or below the limit by the close of business on the expiry day of the contract month for the cocoa and white sugar futures contracts," and fall within the ceiling earlier in the process for coffee and wheat.

Cocoa hoard

The measures would appear to spell an end to the type of position-building that Armajaro commodity fund Anthony Ward engaged in two years in a cocoa buying spree that helped drive prices to a 33-year high, and ended with him taking delivery of 240,100 tonnes of the bean.

This deal, which earned him the nickname Chocfinger, was not the first time he had built a huge position in London cocoa, even though it accounted for virtually all Europe's deliverable supplies.

Nor was it the largest, with Mr Ward taking on 300,000 tonnes of beans 16 years ago.

From late this year, when the rules are set to be introduced, he will have to satisfied with a fraction of that, with the position limits equivalent to 75,000 tonnes for cocoa and coffee, if more generous for sugar (250,000 tonnes) and wheat (200,000 tonnes) which have different contract specifications.

'Manipulation of the contract'

But that will help NYSE Liffe avoid the hot water it got into with cocoa users after Mr Ward's 2010 trade, which processors said was evident of a "market lacking of transparency and control", and represented "clearly a manipulation of the contract".

"As from the moment a market becomes purely a vehicle for speculation, it loses its usefulness," users including Noble Resources, Natra Cacao and Albrecht & Dill Trading said, claiming to be "shocked" by Mr Ward's dealings.

The move also comes in the face of pressure from the G20 group of leading nations and from the European Commission for formal curbs on commodity positions, as opposed to the process NYSE Liffe currently operates.

"Under its existing arrangements, the exchange… holds discussions with both short and long position holders to ensure than any tension is limited so that expiry and delivery may be carried out in an orderly fashion," the exchange said.

Elbow room

Not that campaigners for strong regulation have got things all their own way.

The exchange will allow raised position limits, for holders, for example, let down by counterparty going bust.

And the restrictions for contracts outside delivery month are more generous too.

Furthermore, it reminded commercial investors that, like it or not, speculators were a viable source of liquidity too.

"Commercial imperatives must be balanced against the fact the exchange's commodity contracts are not only counterparts to the physical markets, but are also regulated investments on a regulated market," NYSE Liffe said.


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