The Commodity Futures Trading Commission continues to receive additional comments on the controversial topic of speculative position limits. On Feb. 26, the Energy and Environmental Markets Advisory Committee held a public meeting to give commercial end-users and other participants in the energy markets an opportunity to comment on the CFTC’s position limits proposal. The meeting was organized by CFTC Commissioner Chris Giancarlo, who is the sponsor of this advisory committee and recently reconstituted the committee with new members.
During the day-long meeting, two out of the CFTC’s four commissioners indicated that they think the agency should move forward with the proposal. Commissioner Mark Wetjen noted that Dodd-Frank provides the agency with expanded authority to apply position limits and said that Congress wrote the law with the intention of requiring the agency to apply position limits. Commissioner Sharon Bowen commented that the agency cannot remain “in listening mode forever” and called for the rule to be finalized before the end of the year.
Chairman Tim Massad did not commit to a particular course of action, but emphasized that the CFTC is not trying to attack bona fide hedgers or “drive speculators out of the market.” He explained that Congress, in drafting Dodd-Frank, “directed us to implement limits to address the risk of excessive speculation,” but he stressed that he is “very committed” to making sure that the markets work for participants and making sure that people “can still engage in bona fide hedging.”
Volatility and speculation
The meeting started with a discussion of current volatility in the oil market and the degree to which that might be related to speculation. Giancarlo noted that the purpose of position limits is to “diminish, eliminate or prevent excessive speculation” and said that an analysis of current conditions would “augment” the CFTC’s assessment of the need for position limits.
Adam Sieminski, the administrator of the Energy Information Administration, the research arm of the U.S. Energy Department, discussed supply and demand fundamentals and described the decline of oil prices as function of supply-side factors such as the increase in U.S. production from fracking (Sieminski’s presentation slides). Erik Haas, director of market regulation at ICE Futures U.S., provided data showing that there is very little speculation in ICE’s natural gas and power markets (Haas’ presentation). Tom LaSala, chief regulatory officer at CME Group, discussed CFTC data on commitments of traders and argued that there has been no correlation between oil price movements and open interest held by swap dealers, “managed money,” or funds that invest in commodity indices (LaSala’s presentation).
Liquidity and regulation
One of the main themes of the meeting was the potential for position limits to harm liquidity in the energy markets. Several energy company representatives warned that liquidity already has been reduced by new regulations put in place over the last several years. Lael Campbell, director, governmental and regulatory affairs and public policy at Exelon, commented that it has become difficult to trade farther out in time because there are fewer participants willing to take the other side of the trade, and complained that the problem is not an excess of speculation but rather a lack of speculative interest.
Paul Hughes, manager of risk control at Southern Company, said there used to be “large ponds of liquidity” in the types of OTC swaps that the company is accustomed to using for its hedges, and added that these ponds have dried up. “The burden of excessive speculation that we were trying to relieve has become a burden of illiquidity on the hedgers,” said Hughes. Haas offered an additional perspective, saying that ICE is seeing participants leaving the futures markets because of higher costs and concerns about violating position limits. He added that ICE has seen a decrease in the number of speculators in its markets since it converted its swaps contracts into futures.
Bona Fide hedging
Several participants questioned the rationale behind the CFTC’s efforts to narrow the definition of bona fide hedging in order to prevent excessive speculation. Sue Kelly, president and chief executive officer of the American Public Power Association, questioned why CFTC intends to apply position limits to utilities owned by state and municipal entities and urged the CFTC to exempt the entire category of “special entities.” Joe Nicosia, a senior executive at Louis Dreyfus who represented the Commodity Markets Council, said the CFTC’s view of risk is too narrow and warned against constraining the ability of merchandizers to hedge their risks.
Several energy companies complained that many commonly used types of hedging transactions would not be eligible for hedge exemptions under the CFTC’s proposal and thus would become subject to position limits. Ron Oppenheimer, a senior executive at Vitol who represented the commercial energy working group, provided several detailed examples of these transactions and urged the CFTC to revise its proposal and treat these as bona fide hedging (Oppenheimer’s presentation). Other participants criticized the CFTC for attempting to limit the exemptions to a specified list of transaction types, saying this approach was far too restrictive.
“I don't know anyone with any electric utility that can even enumerate all the thousands upon thousands of ways that electric utilities have to hedge their operational risk,” commented Russ Wasson, a director at the National Rural Electric Cooperative Association. “I don't think that end users who are trying to hedge operational commercial risk should be second guessed or subject to being second guessed by the [CFTC] when all we're trying to do is keep the lights on.”
Position accountability
Another topic was the advantages of the current system of position accountability levels versus hard limits. Haas and LaSala described in detail how their exchanges—CME and ICE Futures US—use position accountability levels to prevent excessive speculation and argued that this approach has proven to be workable and effective. Under this approach, exchanges examine positions above a certain level on a case-by-case basis, and depending on the circumstances may order a market participant to reduce the position. William McCoy, a managing director at Morgan Stanley who represented FIA, argued that hard limits are too restrictive for contract months outside the spot month, and argued that the law provides the CFTC with the authority and the discretion to establish a less restrictive regime for non-spot months if it deems that to be appropriate.
Giancarlo Opening Statement
Agenda and Other Documents
List of Members and Associate Members of the Advisory Committee
FIA Statements and Regulatory Filings related to position limits
