2010-1209
FR Doc 2010-1209[Federal Register: January 26, 2010 (Volume 75, Number 16)]
[Proposed Rules]
[Page 4143-4172]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja10-17]
[[Page 4143]]
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Part II
Commodity Futures Trading Commission
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17 CFR Parts 1, 20 and 151
Federal Speculative Position Limits for Referenced Energy Contracts and
Associated Regulations; Proposed Rule
[[Page 4144]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 20 and 151
RIN 3038-AC85
Federal Speculative Position Limits for Referenced Energy
Contracts and Associated Regulations
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is proposing to implement speculative position limits
for futures and option contracts in certain energy commodities. The
Commodity Exchange Act of 1936 (``CEA'' or ``Act'') gives the
Commission the authority to establish limits on positions to diminish,
eliminate or prevent excessive speculation causing sudden or
unreasonable fluctuations in the price of a commodity, or unwarranted
changes in the price of a commodity. In addition to identifying the
affected energy contracts and the position limits that would apply to
them, the notice of proposed rulemaking includes provisions relating to
exemptions from the position limits for bona fide hedging transactions
and for certain swap dealer risk management transactions. The notice of
proposed rulemaking also sets out an application process that would
apply to swap dealers seeking a risk management exemption from the
position limits, as well as related definitions and reporting
requirements. In addition, the notice of proposed rulemaking includes
provisions regarding the aggregation of positions under common
ownership for the purpose of applying the limits.
DATES: Comments must be received on or before April 26, 2010.
ADDRESSES: Comments should be submitted to David Stawick, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Comments also may be sent by
facsimile to (202) 418-5521, or by electronic mail to
[email protected]. Reference should be made to ``Proposed Federal
Speculative Position Limits for Referenced Energy Contracts and
Associated Regulations.'' Comments may also be submitted by connecting
to the Federal eRulemaking Portal at http://www.regulations.gov and
following comment submission instructions.
FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Acting Director of
Surveillance, (202) 418-5452, [email protected], David P. Van Wagner,
Chief Counsel, (202) 418-5481, [email protected], Donald Heitman,
Senior Special Counsel, (202) 418-5041, [email protected], or Bruce
Fekrat, Special Counsel, (202) 418-5578, [email protected], Division of
Market Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581, facsimile number
(202) 418-5527.
SUPPLEMENTARY INFORMATION:
I. Overview
The majority of futures and options trading on energy commodities
in the United States occurs on the New York Mercantile Exchange
(``NYMEX''), a designated contract market (``DCM'') that operates as
part of the CME Group.\1\ Energy commodity trading also takes place on
the Intercontinental Exchange (``ICE''), an Atlanta-based exchange that
operates as an exempt commercial market (``ECM'') and is, as of July
2009, a registered entity with respect to its Henry Financial LD1 Fixed
Price natural gas contract.\2\ NYMEX currently lists physically-
delivered and cash-settled futures contracts (and options on such
futures contracts) in crude oil, natural gas, gasoline and heating oil.
ICE lists a cash-settled look-alike contract on natural gas, and
options thereon, that settles directly to the settlement price of
NYMEX's physically-delivered natural gas futures contract.\3\
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\1\ The CME Group is the parent company of four DCMs: NYMEX, the
Chicago Board of Trade (``CBOT''), the Chicago Mercantile Exchange
(``CME''), and the Commodity Exchange (``COMEX'').
\2\ Under section 2(h)(7) of the Act, ECM contracts that have
been determined by the Commission to be significant price discovery
contracts (``SPDCs'') are subject to Commission regulation. 7 U.S.C.
2(h)(7). ECMs listing SPDCs (``ECM-SPDCs'') are also deemed to be
registered entities with self-regulatory responsibilities with
respect to such contracts. To date, ICE's Henry Financial LD1 Fixed
Price natural gas contract is the first and only ECM contract to
have been determined by the Commission to be a SPDC under section
2(h)(7) of the Act. 74 FR 37988 (July 30, 2009).
\3\ US-based traders also enter into various energy contracts
listed by the ICE Futures Europe Exchange (``ICE Futures Europe''),
a London-based exchange. These energy contracts include futures on
West Texas Intermediate (WTI) light sweet crude oil, a New York
Harbor heating oil futures contract and a New York Harbor unleaded
gasoline blendstock futures contract. All of the listed contracts
directly cash-settle to the price of NYMEX futures contracts that
are physically-settled. ICE Futures Europe is a foreign board of
trade (``FBOT'') and, unlike NYMEX and ICE, is not registered in any
capacity with the Commission. Instead, ICE Futures Europe and its
predecessor, the International Petroleum Exchange, have operated in
the US since 1999 pursuant to Commission staff no-action relief.
CFTC Staff Letter No. 99-69 (November 12, 1999). Since 2008, ICE
Futures Europe's no-action relief has been conditioned on, among
other things, the requirement that the Exchange implement position
limit requirements for its NYMEX-linked contracts that are
comparable to the position limits that NYMEX applies to its
contracts. CFTC Staff Letter No. 08-09 (June 17, 2008); CFTC Staff
Letter No. 08-10 (July 3, 2008). Generally, comparable position
limits for FBOT contracts that link to CFTC-regulated contracts
serve to ensure the integrity of prices for CFTC-regulated
contracts.
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ICE's Henry Financial LD1 Fixed Price natural gas contract and
virtually all NYMEX energy contracts are currently subject to exchange-
set spot-month speculative position limits that are in effect for the
last three days of trading of the respective contracts. Under an
exchange's speculative position limit rules, no trader, whether
commercial or noncommercial, may exceed a specified limit unless the
trader has requested and received an exemption from the exchange.
Outside of a contract's spot month, these energy contracts are subject
to exchange all-months-combined and single-month position
accountability rules. Under an exchange's position accountability
rules, once a trader exceeds an accountability level in terms of
outstanding contracts held, the exchange has the right to request
supporting justification from the trader for the size of its position,
and may order a trader to reduce or not increase its positions further.
As described in detail in section VI of this release, the
Commission is proposing to impose all-months-combined, single-month,
and spot-month speculative position limits for contracts based on a
defined set of energy commodities. Broadly described, the Commission's
proposal, for non-spot-month positions, would apply exchange-specific
speculative position limits to a set of economically similar contracts
that settle in the same manner. In addition, the Commission is
proposing to implement and enforce aggregate non-spot-month speculative
position limits that would apply across registered entities that list
substantially similar energy contracts. As discussed in the Paperwork
Reduction Act section of this notice of proposed rulemaking, should the
proposed regulations be adopted, the Commission estimates that the
total number of traders with significant positions that could be
affected by the proposed regulations would be approximately ten.
Particular data concerning the distribution of speculative traders
in a market and an analysis of market conditions and variables,
including open interest, can support a range of acceptable speculative
position limit requirements. The Commission, in structuring the
speculative position
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limit framework as proposed, has considered its recent and historical
actions in setting position limits, its continuous oversight of
exchange-set speculative position limit and accountability rules, its
experience in administering Commission-set speculative position limits
\4\ and its observations of energy commodity market conditions and
developments, particularly during the past four years. The Commission
notes that the proposed Federal speculative position limits on energy
contracts would be in addition to, and not a substitute for, a
reporting market's existing speculative position limit and
accountability requirements. Reporting markets, defined in Commission
regulation 15.00 to include DCMs and ECM-SPDCs, are self-regulatory
organizations with an independent responsibility for adopting and
implementing appropriate position limit and accountability rules.
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\4\ The Commission sets Federal speculative position limits for
certain agricultural commodities enumerated in section 1a(4) of the
Act. See 17 CFR 150.2.
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This notice of proposed rulemaking does not propose regulations
that would classify and treat differently passive long-only positions.
The Commission does, however, in section VIII of this notice, solicit
comment on specific issues related to large, passive long-only
positions. In particular, the Commission solicits comments on how to
identify and define such positions and whether such positions should,
including collectively, be limited in any way.
II. Statutory Background
Speculative position limits have been identified as an effective
regulatory tool for mitigating the potential for market disruptions
that could result from uncontrolled speculative trading. Section 4a(a)
of the Act, 7 U.S.C. 6a(a), which in significant part retains language
that was initially adopted in 1936, provides that:
Excessive speculation in any commodity under contracts of sale
of such commodity for future delivery made on or subject to the
rules of contract markets or derivatives transaction execution
facilities, or on electronic trading facilities with respect to a
significant price discovery contract causing sudden or unreasonable
fluctuations or unwarranted changes in the price of such commodity,
is an undue and unnecessary burden on interstate commerce in such
commodity.
Accordingly, section 4a(a) of the Act provides the Commission with
the following authority:
For the purpose of diminishing, eliminating, or preventing such
burden, the Commission shall, from time to time * * * proclaim and
fix such limits on the amounts of trading which may be done or
positions which may be held by any person under contracts of sale of
such commodity for future delivery on or subject to the rules of any
contract market or derivatives transaction execution facility, or on
an electronic trading facility with respect to a significant price
discovery contract, as the Commission finds are necessary to
diminish, eliminate, or prevent such burden.
Amendments introduced to the Act by the Futures Trading Act of 1982
supplemented this longstanding statutory framework for Commission-set
Federal speculative position limits by explicitly acknowledging the
role of the exchanges in setting their own speculative position
limits.\5\ The 1982 legislation also gave the Commission, under section
4a(5) of the Act, the authority to directly enforce violations of
exchange-set, Commission-approved speculative position limits in
addition to position limits established directly by the Commission
through orders or regulations.\6\ Thus, since 1982, the Act's framework
explicitly anticipates the concurrent application of Commission and
exchange-set speculative position limits. The concurrent application of
limits is particularly consistent with an exchange's close knowledge of
trading activity on that facility and the Commission's greater capacity
for monitoring trading and implementing remedial measures across
interconnected commodity futures and option markets.
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\5\ Futures Trading Act of 1982, Pub. L. No. 97-444, 96 Stat.
2299-30 (1983).
\6\ Section 4a(5) has since been redesignated as section 4a(e)
of the Act. 7 U.S.C. 4a(e).
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The Commodity Futures Modernization Act of 2000 (``CFMA'') \7\
introduced substantial changes to the CEA. Broadly described, the CFMA
established a principles-based approach to regulating the futures
markets, allowed for the implementation of exchange rules through a
certification process without requiring the exchanges to obtain prior
Commission approval, and delineated specific designation criteria and
core principles with which a DCM must comply to receive and maintain
designation. Among these, Core Principle 5 in section 5(d) of the Act
provides:
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\7\ Commodity Futures Modernization Act of 2000, Appendix E of
Public Law No. 106-554, 114 Stat. 2763 (2000).
Position Limitations or Accountability--To reduce the potential
threat of market manipulation or congestion, especially during
trading in the delivery month, the board of trade shall adopt
position limitations or position accountability for speculators,
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where necessary and appropriate.
Most recently the CEA was amended by the CFTC Reauthorization Act
of 2008.\8\ The 2008 legislation amended the CEA by, among other
things, adding core principles in new section 2(h)(7) governing SPDCs
traded on electronic trading facilities operating in reliance on the
exemption in section 2(h)(3) of the Act.\9\ The 2008 legislation
amended the Act to impose certain self-regulatory responsibilities on
ECM-SPDCs through core principles, as did the CFMA with respect to
DCMs, including a core principle that requires such facilities to
``adopt, where necessary and appropriate, position limitations or
position accountability for speculators in significant price discovery
contracts * * *'' \10\ The 2008 legislation also amended section 4a(e)
of the Act to incorporate references to ECM-SPDCs, thereby assuring
that violation of an ECM-SPDC's position limits, regardless of whether
such position limits have been approved by or certified to the
Commission, would constitute a violation of the Act that the Commission
could independently enforce.
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\8\ Food, Conservation and Energy Act of 2008, Public Law No.
110-246, 122 Stat. 1624 (June 18, 2008).
\9\ 7 U.S.C. 2(h)(3)-(7).
\10\ 7 U.S.C. 2(h)(7)(C)(ii)(IV).
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As mentioned above, the CFMA generally replaced the Act's exchange
rule approval process with a certification process. On a practical
level, this shift has tended to reduce the Commission's ability to more
directly shape the specific requirements of exchange-set speculative
position limit and accountability rules through approving such rules
prior to implementation. In light of this, the Commission's broad
authority to independently set position limits under CEA section 4a(a)
could be viewed as an increasingly important enabling provision that
allows the Commission to take the initiative in acting, when
appropriate, to bolster market confidence and curb or prevent excessive
speculation that may cause sudden, unwarranted, or unreasonable
fluctuations in commodity prices.
III. Federal Speculative Position Limits
A. Historical Background
From the earliest days of federal regulation of the futures
markets, Congress made it clear that unchecked speculative positions,
even without intent to manipulate the market, can cause price
disturbances.\11\ To protect
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markets from the adverse consequences associated with large speculative
positions, Congress expressly authorized the Commodity Exchange
Commission (``CEC'') \12\ to impose speculative position limits
prophylactically.\13\ The Congressional endorsement of the Commission's
prophylactic use of position limits rendered unnecessary a specific
finding that an undue burden on interstate commerce had actually
occurred. Additionally, Congress closely restricted exemptions from
position limits to bona fide hedging transactions, initially defined as
sales or purchases of futures contracts offset by sales or purchases of
the same cash commodity.
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\11\ The Congressional finding that excessive speculation can
have detrimental consequences even without manipulative intent is
consistent with the series of studies and reports made to Congress
urging the adoption of measures to restrict speculative trading
notwithstanding the absence of ``the deliberate purpose of
manipulating the market.'' See e.g., Fluctuations in Wheat Futures,
69th Cong., 1st Sess., Senate Document No. 135 (June 28, 1926).
\12\ The CEC is the predecessor of the Commodity Exchange
Authority, which is, in turn, the predecessor of the Commission.
\13\ Requiring a specific demonstration of the need for position
limits is contrary to section 4a(a) of the Act, which provides that
the Commission shall set position limits from time to time, among
other things, to prevent excessive speculation. 7 U.S.C. 4a(a).
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In December of 1938, the CEC promulgated the first Federal
speculative position limits for futures contracts in grains (then
defined as wheat, corn, oats, barley, flaxseed, grain sorghums and rye)
after finding that large speculative positions tended to cause sudden
and unreasonable fluctuations and changes in the price of grain.\14\ At
that time, the CEC did not impose limits in the other commodities
enumerated in the 1936 Act.
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\14\ 3 FR 3145 (December 24, 1938).
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Over the following years, Federal position limits were extended to
various other commodities enumerated in the Act. However, no uniform
approach regarding speculative position limits was applied to those
enumerated commodities. In some cases (e.g., soybeans), a commodity
added to the Act's list of enumerated commodities was also added to the
roster of commodities subject to Federal speculative position limits.
In other cases (e.g., livestock products, butter, and wool),
commodities added to the list of enumerated commodities in the Act
never became subject to Federal position limits.
In 1974, Congress overhauled the CEA to create the CFTC and
simultaneously expanded the new agency's jurisdictional scope beyond
the enumerated agricultural commodities to include futures contracts in
any commodity. In expanding the CFTC's jurisdiction, Congress
reiterated a fundamental precept underlying the Act, namely, to
minimize or prevent the harmful effect of uncontrolled speculation.\15\
When the Commission came into existence in April 1975, ``various
contract markets [had] voluntarily placed speculative position limits
on 23 contracts involving 17 commodities.'' \16\ At that time,
``position limits were in effect for almost all actively traded
commodities then under regulation and the limits for positions in about
one half of these actively traded commodities had been specified by the
contract markets.'' \17\ Initially, the Commission retained the
position limits enacted by the CEC, as then in effect, but did not
establish position limits for any additional commodities.\18\ In the
years immediately following, the Commission implemented a few
relatively minor changes to position limit regulations, but undertook
no significant expansion of Federal speculative position limits.
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\15\ ``The fundamental purpose of the measure is to insure fair
practice and honest dealing on the commodity exchanges and to
provide a measure of control over those forms of speculative
activity which too often demoralize the markets to the injury of
producers and consumers and the exchanges themselves.'' S. Rep. No.
93-1131, 93rd Cong., 2d. Sess. (1974).
\16\ 45 FR 79831 (December 2, 1980).
\17\ Id. at 79832. ``Commodity Exchange Authority regulations
included limits for wheat, corn, oats, soybeans, cotton, eggs and
potatoes. Exchange rules included limits for live cattle, feeder
cattle, live hogs, frozen pork bellies, soybean oil, soybean meal,
and grain sorghums.'' (Id. n.1)
\18\ Pursuant to section 4l of the Commodity Futures Trading
Commission Act of 1974, all regulations previously adopted by the
Commodity Exchange Authority continued in full force and effect, to
the extent they were not inconsistent with the Act, as amended,
unless or until terminated, modified or suspended by the Commission.
Sec. 205, 88 Stat. 1397 (effective July 18, 1975).
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After the silver futures market crisis during late 1979 to early
1980, commonly referred to as ``the Hunt Brothers silver
manipulation,'' \19\ the Commission concluded that ``[t]he recent
events in silver * * * suggest that the capacity of any futures market
to absorb large positions in an orderly manner is not unlimited.'' \20\
Accordingly, in 1981 the Commission adopted regulation 1.61, which
required all exchanges to adopt and submit for Commission approval
speculative position limits in active futures markets for which no
exchange or Commission limits were then in effect.\21\ Although
regulation 1.61 directed the exchanges to implement position limit
rules, the pre-CFMA exchange rule approval process, on a practical
level, gave the Commission the ability to shape the requirements of
exchange-set position limit rules as measures that guarded against
excessive speculation in accordance with the purposes and findings of
section 4a(a) of the Act.
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\19\ See, In re Nelson Bunker Hunt et al., CFTC Docket No. 85-
12.
\20\ 45 FR 79831, at 79833 (December 2, 1980).
\21\ 46 FR 50938 (October 16, 1981).
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The next significant development occurred in 1986, when the
Commission undertook a comprehensive review of speculative position
limit policies, including position limit levels. During the
Commission's 1986 reauthorization, the CFTC's Congressional authorizing
committees suggested that this subject should be addressed. The Report
of the House Agriculture Committee stated:
[T]he Committee believes that, given the changes in the nature
of these markets and the influx of new market participants over the
last decade, the Commission should reexamine the current levels of
speculative position limits with a view toward elimination of
unnecessary impediments to expanded market use.\22\
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\22\ H.R. Rep. No. 624, 99th Cong., 2d Sess., at 4 (1986).
Subsequently, the Commission reviewed its Federal speculative
position limit framework and, in October 1987, adopted final amendments
that raised some of the Federal speculative position limits and revised
the general structure of the Federal speculative position limit
regulations.\23\ The amendments introduced in 1987 retained the then
current spot-month and individual month position limits but increased
the all-months-combined position limits. The revised limits, which had
historically been set on a generic commodity basis, established
position limits for each contract ``according to the individual
characteristics of that contract market,'' particularly ``the
distribution of speculative position sizes in recent years and recent
levels of open interest.'' \24\ In response to a petition by the CBOT,
the Commission also established position limits for CBOT soybean oil
and soybean meal contracts, which had been subject solely to exchange-
set position limits, to provide ``consistency with all other
agricultural commodities traded at the CBOT.'' \25\
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\23\ 52 FR 38914 (October 20, 1987).
\24\ Id. at 38917, 38919.
\25\ Petition for rulemaking of the CBOT, dated July 24, 1986,
cited in 52 FR 6814 (March 5, 1987).
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In 1992, the Commission issued proposed regulations adhering to the
principle that speculative position limits should be formulaically
adjusted based upon increases in the size of a contract's open interest
(in addition to the traditional standard of distribution of speculative
traders in a market).\26\
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The formula was thereafter ``routinely applied [hellip] as a matter of
administrative practice when reviewing proposed exchange speculative
position limits under Commission [regulation] 1.61.'' \27\
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\26\ 57 FR 12766 (April 13, 1992).
\27\ 63 FR 38525 (July 17, 1998).
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During this same time frame, the Commission began a process that
led to the adoption of position accountability rules for contracts that
were subject to exchange-set speculative position limits. Beginning in
1991, the Commission approved several exchange rules establishing
position accountability provisions in lieu of position limits for
certain contracts exhibiting significant trading volume and open
interest, a highly liquid underlying cash market and ready
opportunities for arbitrage between the cash and futures markets.\28\
An exchange's position accountability rules, as opposed to position
limits that bar traders from acquiring contracts that quantitatively
exceed a specific number of outstanding contracts, require persons
holding a certain number of open contracts to report the nature of
their positions, trading strategy, and hedging needs to the exchange,
upon the exchange's request.
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\28\ See, e.g., 56 FR 51687 (October 15, 1991) and 57 FR 29064
(June 30, 1992).
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In 1999, the Commission simplified and reorganized its speculative
position limit regulations to consolidate requirements for both
Commission-set limits and exchange-set limits under regulation 1.61 in
part 150 of the Commission's regulations. Regulation 150.5(e),
currently, and as initially adopted in 1999, establishes a ``trader
accountability exemption'' \29\ and generally codifies the position
accountability conditions that initially were imposed as a matter of
administrative practice beginning in 1991.\30\
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\29\ 64 FR 24038, at 24048 (May 5, 1999).
\30\ Regulation 150.5(e) provides that, for futures and option
contracts that have been listed for trading for at least 12 months,
an exchange may submit a position accountability rule, in lieu of a
numerical limit, as follows:
``(1) For futures and option contracts on a financial
instrument or product having an average open interest of 50,000
contracts and an average daily trading volume of 100,000 contracts
and a very highly liquid cash market, an exchange bylaw, regulation
or resolution requiring traders to provide information about their
position upon request by the exchange;
(2) For futures and option contracts on a financial instrument
or product or on an intangible commodity having an average month-end
open interest of 50,000 and an average daily volume of 25,000
contracts and a highly liquid cash market, an exchange bylaw,
regulation or resolution requiring traders to provide information
about their position upon request by the exchange and to consent to
halt increasing further a trader's positions if so ordered by the
exchange;
(3) For futures and option contracts on a tangible commodity,
including but not limited to metals, energy products, or
international soft agricultural products having an average month-end
open interest of 50,000 contracts and an average daily volume of
5,000 contracts and a liquid cash market, an exchange bylaw,
regulation or resolution requiring traders to provide information
about their position upon request by the exchange and to consent to
halt increasing further a trader's positions if so ordered by the
exchange, provided, however, such contract markets are not exempt
from the requirement of paragraphs (b) or (c) that they adopt an
exchange bylaw, regulation or resolution setting a spot month
speculative position limit with a level no greater than one quarter
of the estimated spot-month deliverable supply * * *'' 17 CFR
150.5(e).
Notably, the Commission's concerns regarding spot-month limits
were eventually mirrored by the CFMA, which provides in DCM Core
Principle 5 (section 5(d)(5) of the Act), that ``[t]o reduce the
potential threat of market manipulation or congestion, especially
during trading in the delivery month, the board of trade shall adopt
position limitations or position accountability for speculators,
where necessary and appropriate.''
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The reorganized rules also included new regulation 150.5(c), which
codified the Commission's 1992 formula for calculating Federal
speculative position limits based upon open interest, and applied it to
exchanges for their use in calculating the levels of exchange-imposed
numerical speculative position limits.\31\ The formula provided for
``combined futures and option speculative position limits for both a
single month and for all-months-combined at the level of 10 percent of
open interest up to an open interest of 25,000 contracts, with a
marginal increase of 2.5% thereafter.'' \32\ In initially proposing to
use this formula, the Commission noted that:
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\31\ The formulaic approach, initially developed by Blake Imel,
former Acting Director of the Division of Economic Analysis (the
Division has since been merged into the Division of Market
Oversight), was premised on limiting the concentration of positions
in the hands of one or a few traders by requiring a minimum number
of distinct market participants.
\32\ 64 FR 24038, at 24039 (May 5, 1999).
[I]ts large trader data indicates that limits based on open
interest as described above should accommodate the normal course of
speculative positions in agricultural markets. The levels derived
using this method of analysis generally are consistent with the
largest exchange-set speculative limits approved by the Commission
under Rule 1.61 for contract markets in agricultural commodities at
corresponding levels of open interest. However, the Commission,
based on its surveillance experience and monitoring of exchange and
Federal speculative position limits, is satisfied that the levels
indicated by this methodology, although near the outer bounds of the
levels which have been approved previously, nevertheless will
achieve the prophylactic intent of Section [4a] of the Act and
Commission Rule 1.61, thereunder [emphasis supplied].\33\
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\33\ 57 FR 12766, at 12771 (April 13, 1992).
The Commission also emphasized that particular data can result in a
range of acceptable speculative position limits, and that based on its
experience overseeing exchange-set speculative limits and its direct
administration of the Federal limits establishing ``a single-month and
all-month limits on futures positions combined with option positions on
a delta-equivalent basis of no more than ten percent of the combined
markets' open interest for contracts with combined open interest below
25,000'' was within the range of acceptable speculative position
limits.\34\ For those markets with combined average open interest
greater than 25,000 contracts, the Commission proposed a marginal
increase of 2.5% after noting that ``the size of the largest individual
positions in a market do not continue to grow in proportion with
increases in the overall open interest of the market.''\35\
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\34\ Id. at 12770.
\35\ Id.
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As noted above, Core Principle 5, introduced to the Act in 2000 by
the CFMA, requires DCMs to implement position limits or position
accountability rules for speculators ``where necessary and
appropriate.'' In 2001, the Commission established Acceptable Practices
for complying with Core Principle 5, set out in Appendix B to part 38
of the Commission's regulations.\36\ The Acceptable Practices
specifically reference part 150 of the Commission's regulations as
providing guidance on how to comply with the requirements of the Core
Principle.\37\ The CFMA, however, did not change the treatment of the
enumerated agricultural commodities, which remained subject to Federal
speculative position limits.
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\36\ 17 CFR part 38, Appendix B, Core Principle 5(d)(5).
\37\ 66 FR 42256 (August 10, 2001).
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In 2005, the Commission increased the all-months-combined Federal
speculative position limits and reset the single-month levels to
roughly approximate the existing numerical relationship between all-
months-combined and single-month levels (i.e., arriving at the single-
month limits by setting them at about two-thirds of the relevant all-
months-combined limits), based generally on the 1992 open interest
formula (as incorporated into regulation 150.5(e)).\38\
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\38\ 70 FR 24705 (May 11, 2005).
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In 2008, Congress, in response to high prices and volatility in the
energy markets and concerns regarding excessive speculation on
unregulated energy exchanges, including ECMs, adopted the CFTC
Reauthorization Act of 2008 and amended two CEA provisions aimed at
curbing possible manipulation and excessive speculation
[[Page 4148]]
in the energy markets. Specifically, the 2008 legislation amended CEA
section 4a(e) to give the CFTC enforcement authority over position
limits certified by the exchanges and adopted new section 2(h)(7) to
apply a position limit and position accountability core principle to
ECM-SPDCs.\39\ Notably, the legislation also extended the Commission's
authority to set Federal speculative position limits, under CEA section
4a(a), to ECM-SPDCs.
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\39\ See 7 U.S.C. 2(h)(7)(C)(IV).
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B. Statutory Basis and Need for Energy Speculative Position Limits
Energy futures and option contracts have never been subject to
CFTC-set speculative position limits. These contracts began to attract
significant trading volumes in the early 1980s beginning with NYMEX's
New York Harbor No. 2 heating oil futures contract,\40\ followed by
NYMEX's gasoline futures contract in 1981 and crude oil futures
contract in 1983. NYMEX did not initially adopt position limits for
heating oil futures contracts. However, with the adoption of Commission
regulation 1.61, effective November 16, 1981, each exchange was
required to submit for Commission approval speculative position limits
for each actively traded futures contract. Thereafter, newly designated
contracts (e.g., NYMEX's crude oil futures contract in 1983) were
required to be accompanied by exchange speculative position limit rules
as a condition of designation.
---------------------------------------------------------------------------
\40\ The contract was designated in October 1974, but
significant volume first developed in 1980.
---------------------------------------------------------------------------
As noted above, in 1999 the Commission reorganized its speculative
position limit regulations to codify its earlier administrative
practice of allowing exchanges to adopt position accountability rules
in lieu of numerical position limits for positions outside of the spot
month. Currently, virtually all of NYMEX's energy futures and option
contracts and ICE's single SPDC contract are subject to exchange-set
position accountability rules during non-spot months and to hard
speculative position limits during spot months.
From 2007 to mid 2008, commodity prices generally, and energy
prices in particular, increased significantly and experienced unusual
volatility. As a result of this, Commission-regulated energy markets,
as well as the over-the-counter (``OTC'') energy swap markets over
which the Commission has no direct regulatory authority, were the
subject of numerous Congressional hearings \41\ and formal and informal
studies, including a preliminary review by an Interagency Task Force
chaired by CFTC staff. \42\ In the summer of 2009, the Commission held
three days of hearings ``to discuss energy position limits and hedge
exemptions'' (``Energy Hearings'').\43\ The Commission heard from 26
witnesses, including members of the U.S. House and Senate, swap
dealers, money managers, futures market participants (including
commercial hedgers), trade associations, exchanges, and consumer
advocates.\44\ In addition, a total of 5,281 email comments were
received (including some 1,200 identical emails from a single
commenter).\45\
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\41\ At the hearings, numerous witnesses expressed concern
regarding the impact on energy prices of speculation on commodity
futures markets, including particularly the price impact of trading
by swap dealers and index funds. Alternatively, many other witnesses
expressed the view that fundamental market conditions were the
primary driver of prices.
\42\ The Task Force included staff representatives from the
Departments of Agriculture, Energy and the Treasury, the Board of
Governors of the Federal Reserve, the Federal Trade Commission, and
the Securities and Exchange Commission. The Task Force looked at the
crude oil market between January 2003 and June 2008. The staff
members of the various agencies did not find direct causal evidence
for the general increase in oil prices between January 2003 and June
2008. Interagency Task Force on Commodity Markets, Interim Report on
Crude Oil (July 22, 2008).
\43\ Commodity Futures Trading Commission, ``CFTC to Hold Three
Open Hearings to Discuss Energy Position Limits and Hedge
Exemptions,'' CFTC Release 5681-09 (July 21, 2009).
\44\ See the following Commission Releases for a listing of
agendas and witnesses and related links:
5681-09 (July 21, 2009) http://www.cftc.gov/newsroom/
generalpressreleases/2009/pr5681-09.html;
5682-09 (July 27, 2009) http://www.cftc.gov/newsroom/
generalpressreleases/2009/pr5682-09.html;
and 5685-09 (July 31, 2009) http://www.cftc.gov/newsroom/
generalpressreleases/2009/pr5685-09.html.
\45\ Persons wishing to review these comments may contact the
Commission's Secretariat at [email protected].
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As with the Congressional hearings and market studies, there were
mixed opinions among the Energy Hearing participants as to the causes
of the price rises and market volatility. With respect to position
limits for energy commodities, a number of witnesses expressed concern
over the impact on energy prices of excessive speculation and supported
position limits.\46\ Others cautioned that such limits could be
ineffective, hurt market liquidity or distort the price discovery
process if not properly constructed.\47\
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\46\ ``This increase in volatility has been associated with a
massive increase in speculative investment in oil futures.'' Ben
Hirst, Senior Vice President and General Counsel for Delta Airlines;
``* * *[S]peculative trading strategies may not always have a benign
effect on the markets.'' Laura Campbell, Assistant Manager of Energy
Resources, Memphis Light, Gas & Water, on behalf of The American
Public Gas Association; ``That ability [to hedge heating fuel
costs], however, is now being undermined by an erratic market,
questionable investment tactics and purely speculative market
forces.'' Sean Cota, President, Cota & Cota, Inc. Hearings on Energy
Position Limits and Hedge Exemptions, July 28, July 29 and August 5,
2009, at the Commodity Futures Trading Commission.
\47\ ``If [limits] are set too tight, traders who possess
important market information and provide crucial liquidity are kept
away.'' Todd E. Petzel. Chief Investment Officer, Offit Capital
Advisors; ``Simply eliminating or limiting swap dealer hedge
exemptions will impair liquidity, have other unintended consequences
and would very likely not achieve the stated objective.'' Donald
Casturo, Managing Director, Goldman Sachs & Co.; ``Position limits
no matter how well meaning create real market migration risk and
pushing price discovery of agricultural, energy or metals markets to
overseas or other trading venues would be contrary to the purposes
of the Act.'' Mark D. Young, Kirkland & Ellis LLP. Hearings on
Energy Position Limits and Hedge Exemptions, July 28, July 29 and
August 5, 2009, at the Commodity Futures Trading Commission.
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As discussed above, section 4a(a) represents an explicit
Congressional finding that extreme or abrupt price fluctuations
attributable to unchecked speculative positions are harmful to the
futures markets and that position limits can be an effective
prophylactic regulatory tool to diminish, eliminate or prevent such
activity. Accordingly, Congress charged the Commission with
responsibility for setting contract position limits in any commodity to
prevent or minimize extreme or abrupt price movements resulting from
large or concentrated positions. Under the authority granted to it, the
Commission may impose speculative position limits without finding an
extant undue burden on interstate commerce resulting from excessive
speculation.\48\ Section 8a(5) of the Act also provides that the
Commission may make and promulgate such rules and regulations that in
its judgment are reasonably necessary to accomplish any of the purposes
of the Act.
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\48\ Moreover, the exchanges' independent responsibility to
monitor trading and implement position limits and position
accountability rules does not detract from or otherwise impair the
Commission's broad authority to impose speculative limits.
---------------------------------------------------------------------------
Large concentrated positions in the energy futures and option
markets can potentially facilitate abrupt price movements and price
distortions. The prevention of unreasonable and abrupt price movements
that are attributable to large or concentrated speculative positions is
a congressionally endorsed regulatory objective. This objective is
furthered by position limits, particularly given that the capacity of
any reporting market to absorb the establishment and liquidation of
large speculative
[[Page 4149]]
positions in an orderly manner is related to the relative size of such
positions and is not unlimited. Specifically, when large speculative
positions are amassed in a contract, or contract month, the potential
exists for unreasonable and abrupt price movements should the positions
be traded out of or liquidated in a disorderly manner. Concentration of
large positions in one or a few traders' accounts can also create the
unwarranted appearance of appreciable liquidity and market depth.
Trading under such conditions can result in greater volatility than
would otherwise prevail if traders' positions were more evenly
distributed among market participants.
Furthermore, concurrent trading in economically similar and
equivalent energy futures and option contracts on multiple exchanges
effectively creates a single but fragmented market for such contracts.
Because individual exchanges have knowledge of positions only on their
own trading facilities, it is difficult for them to assess the full
impact of a trader's positions on the greater market. As such,
monitoring and limiting positions through exchange-specific position
limits and through the enforcement of exchange position accountability
rules, though necessary and beneficial, may not sufficiently guard
against potential market disruptions.
For these reasons, the Commission is proposing to establish
reporting market-specific Federal speculative position limits for
futures and option contracts in certain energy commodities and
aggregate position limits that would apply across economically similar
contracts, regardless of whether such contracts are listed on a single
or on multiple reporting markets, to curb the impact of disruptive
excessive speculation.
IV. Exemptions and Account Aggregation
The Commission's current regulatory framework for Federal
speculative position limits consists of three elements, (i) the levels
of the Commission-set speculative position limits (discussed above),
(ii) certain exemptions from the limits (e.g., for hedging, spreading
or arbitraged positions), and (iii) the policy on aggregating related
accounts for purposes of applying the limits.
Commission regulation 150.3, headed ``Exemptions,'' lists certain
types of positions that may be exempted from (and thus may exceed) the
Federal speculative position limits delineated in regulation 150.2. In
particular, under regulation 150.3(a)(1), bona fide hedging
transactions, as defined in Commission regulation 1.3(z), may exceed
Commission-set position limits.\49\ The first two parts of the bona
fide hedging definition include a general definition of bona fide
hedging (see paragraph (z)(1)) and a listing of certain enumerated
hedging transactions in the agricultural commodities that are currently
subject to Federal position limits (see paragraph (z)(2)). Paragraph
(z)(3) of the definition provides flexibility to the Commission in
granting exemptions by permitting additional transactions to be
recognized as bona fide hedging upon a trader's request, made in
accordance with the application provisions of Commission regulation
1.47. Regulation 1.47 requires a person seeking a bona fide hedge
exemption under regulation 1.3(z)(3) to provide the Commission with
various information that will, among other things, ``demonstrate that
the purchases and sales are economically appropriate to the reduction
of risk exposure attendant to the conduct and management of a
commercial enterprise.'' \50\
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\49\ Commission regulation 1.3(z) provides:
``Bona fide hedging transactions and positions--(1) General
definition. Bona fide hedging transactions and positions shall mean
transactions or positions in a contract for future delivery on any
contract market, or in a commodity option, where such transactions
or positions normally represent a substitute for transactions to be
made or positions to be taken at a later time in a physical
marketing channel, and where they are economically appropriate to
the reduction of risks in the conduct and management of a commercial
enterprise, and where they arise from:
(i) The potential change in the value of assets which a person
owns, produces, manufactures, processes, or merchandises or
anticipates owning, producing, manufacturing, processing, or
merchandising,
(ii) The potential change in the value of liabilities which a
person owns or anticipates incurring, or
(iii) The potential change in the value of services which a
person provides, purchases, or anticipates providing or purchasing.
Notwithstanding the foregoing, no transactions or positions
shall be classified as bona fide hedging unless their purpose is to
offset price risks incidental to commercial cash or spot operations
and such positions are established and liquidated in an orderly
manner in accordance with sound commercial practices and, for
transactions or positions on contract markets subject to trading and
position limits in effect pursuant to section 4a of the Act, unless
the provisions of paragraphs (z)(2) and (3) of this section and
Sec. Sec. 1.47 and 1.48 of the regulations have been satisfied.
(2) Enumerated hedging transactions. The definitions of bona
fide hedging transactions and positions in paragraph (z)(1) of this
section includes, but is not limited to, the following specific
transactions and positions:
(i) Sales of any commodity for future delivery on a contract
market which do not exceed in quantity:
(A) Ownership or fixed-price purchase of the same cash commodity
by the same person; and
(B) Twelve months' unsold anticipated production of the same
commodity by the same person provided that no such position is
maintained in any future during the five last trading days of that
future.
(ii) Purchases of any commodity for future delivery on a
contract market which do not exceed in quantity:
(A) The fixed-price sale of the same cash commodity by the same
person;
(B) The quantity equivalent of fixed-price sales of the cash
products and by-products of such commodity by the same person; and
(C) Twelve months' unfilled anticipated requirements of the same
cash commodity for processing, manufacturing, or feeding by the same
person, provided that such transactions and positions in the five
last trading days of any one future do not exceed the person's
unfilled anticipated requirements of the same cash commodity for
that month and for the next succeeding month.
(iii) Offsetting sales and purchases for future delivery on a
contract market which do not exceed in quantity that amount of the
same cash commodity which has been bought and sold by the same
person at unfixed prices basis different delivery months of the
contract market, provided that no such position is maintained in any
future during the five last trading days of that future.
(iv) Sales and purchases for future delivery described in
paragraphs (z)(2)(i), (ii), and (iii) of this section may also be
offset other than by the same quantity of the same cash commodity,
provided that the fluctuations in value of the position for future
delivery are substantially related to the fluctuations in value of
the actual or anticipated cash position, and provided that the
positions in any one future shall not be maintained during the five
last trading days of that future.
(3) Non-enumerated cases. Upon specific request made in
accordance with Sec. 1.47 of the regulations, the Commission may
recognize transactions and positions other than those enumerated in
paragraph (z)(2) of this section as bona fide hedging in such amount
and under such terms and conditions as it may specify in accordance
with the provisions of Sec. 1.47. Such transactions and positions
may include, but are not limited to, purchases or sales for future
delivery on any contract market by an agent who does not own or who
has not contracted to sell or purchase the offsetting cash commodity
at a fixed price, provided that the person is responsible for the
merchandising of the cash position which is being offset.'' 17 CFR
1.3(z).
\50\ 17 CFR 1.47(b)(2).
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In addition to regulation 150.3(a)(1)'s bona fide hedging
exemption, regulation 150.3(a) includes two other exemptions from the
Federal speculative position limits. Regulation 150.3(a)(3) exempts
``spread or arbitrage positions between single months of a futures
contract * * * outside of the spot-month, in the same crop year * * *
.'' Subject to various conditions, regulation 150.3(a)(4) exempts
positions ``[c]arried for an eligible entity as defined in regulation
150.1(d), in the separate account or accounts of an independent account
controller, as defined in regulation 150.1(e) * * * .'' Eligible
entities include mutual funds, commodity pool operators and commodity
trading advisors. Entities claiming this exemption are required, upon
call by the Commission, to provide information supporting their claim
that the account controllers for
[[Page 4150]]
these positions are acting independently.
Also, in order to achieve the intended effect of the Federal
speculative position limits, Commission regulation 150.4, headed
``Aggregation of positions,'' requires the Commission and the exchanges
to treat multiple accounts subject to common ownership or control as if
they are held by a single trader. Such accounts are typically
considered to be under a common ownership if one or more traders have a
10% or greater financial interest in the accounts and do not otherwise
qualify for an exemption from aggregation, such as the independent
account controller exemption discussed above. The aggregation standards
are applied in a manner calculated to aggregate related positions. For
example, each participant with a 10% or greater financial interest in
an account must aggregate the entire position of that account--not just
the participant's fractional share--together with other positions that
the participant may independently hold. Likewise, a commodity futures
or option contract pool comprised of many traders is allowed only to
hold positions as if it were a single trader. The Commission also
treats positions that are not commonly owned, but are traded pursuant
to an express or implied agreement, as a single aggregated position for
purposes of applying the Federal speculative position limits.
Exceptions to the aggregation standards exist for certain pool
participants, such as limited partners and shareholders that cannot
exercise control over the positions of the pool.
V. Bona Fide Hedge Exemptions
Prior to 1974, the CEA included a limited statutory hedging
definition that applied only to agricultural commodities. When the
Commission was created in 1974, the Act's definition of commodity was
expanded. At that time, Congress was concerned that the limited hedging
definition, even if applied to newly regulated commodity futures, would
fail to accommodate the commercial risk management needs of market
participants that could emerge over time. Accordingly, Congress, in
section 404 of the Commodity Futures Trading Commission Act of 1974,
repealed the statutory definition and gave the Commission the authority
to define bona fide hedging.
The Commission exercised this authority in 1977 by adopting
regulations 1.3(z) and 1.47.\51\ Those regulations have remained
unchanged since 1977. By the mid 1980s, new concerns had emerged. Under
the Commission's definition, bona fide hedge transactions ``normally
represent a substitute for transactions to be made or positions to be
taken at a later time in a physical marketing channel,'' and are
``economically appropriate to the reduction of risks in the conduct of
a commercial enterprise.'' \52\ This aspect of the hedging definition
proved to be ill fitted to the economic realities of financial futures.
Portfolio managers utilize the financial futures markets to add
incremental income to managed assets, to manage overall risk, or to
rebalance a portfolio. Indeed, futures market positions are often
acquired entirely as an alternative to cash market transactions (in
view of the lower transaction costs, speed, and minimal price impact),
rather than as a temporary substitute for positions that will later be
taken in the underlying cash market.
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\51\ 42 FR 42748 (August 24, 1977).
\52\ 17 CFR 1.3(z)(1).
---------------------------------------------------------------------------
In 1986, in response to concerns raised in testimony regarding the
constraints on investment decisions imposed by position limits, the
House Committee on Agriculture, in its report accompanying the
Commission's 1986 reauthorization legislation, instructed the
Commission to reexamine its approach to speculative position limits and
its definition of hedging.\53\ Specifically, the Committee Report
``strongly urge[d] the Commission to undertake a review of its hedging
definition * * * and to consider giving certain concepts, uses, and
strategies `non-speculative' treatment * * * whether under the hedging
definition or, if appropriate, as a separate category similar to the
treatment given certain spread, straddle or arbitrage positions * * *''
\54\ The Committee Report singled out four categories of trading and
positions that the Commission should recognize as non-speculative: (i)
``Risk management'' trading by portfolio managers as an alternative to
the concept of ``risk reduction;'' (ii) futures positions taken as
alternatives to, rather than as temporary substitutes for, cash market
positions; (iii) other positions acquired to implement strategies
involving the use of financial futures including, but not limited to,
asset allocation (altering portfolio exposure in certain areas such as
equity and debt), portfolio immunization (curing mismatches between the
duration and sensitivity assets and liabilities to ensure that
portfolio assets will be sufficient to fund the payment of
liabilities), and portfolio duration (altering the average maturity of
a portfolio's assets); and (iv) certain options trading, in particular
the writing of covered puts and calls.\55\
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\53\ House Committee on Agriculture, Futures Trading Act of
1986, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44-46 (1986).
\54\ Id. at 46.
\55\ Id.
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The Senate Committee on Agriculture, Nutrition and Forestry, in its
report on the 1986 CFTC reauthorization legislation, also directed the
Commission to reassess its interpretation of bona fide hedging.\56\ The
Commission heeded Congress's recommendation, and its staff issued
interpretive statements directing that risk management exemptions be
included as speculative position limit exemptions in addition to the
existing exemptions for hedging, arbitrage and spreading.\57\ The
interpretive statements recognized new types of ``risk reducing'' and
``risk shifting'' strategies in financial futures (including ``dynamic
asset allocation strategies'') as falling within the bona fide hedging
category.
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\56\ Senate Committee on Agriculture, Nutrition and Forestry,
Futures Trading Act of 1986, S. Rep. No. 291, 99th Cong., 2d Sess.
at 21-22 (1986). Specifically, the Senate Committee directed the
Commission to consider ``whether the concept of prudent risk
management [should] be incorporated in the general definition of
hedging as an alternative to this risk reduction standard.'' Id., at
22.
\57\ See, Clarification of Certain Aspect of the Hedging
Definition, 52 FR 27195 (July 20, 1987); Risk Management Exemptions
from Speculative Position Limits Approved under Commission
Regulation 1.61, 52 FR 34633 (September 14, 1987).
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The next significant change in trading patterns and practices in
derivatives markets involved an influx of new traders into the market
seeking exposure to commodities as an asset class through passive,
long-term investment in commodity indexes as a way of diversifying
portfolios that might otherwise be limited to equities and debt
instruments.\58\ New market participants included commodity index
traders (including pension and endowment funds, as well as individual
investors participating in commodity index-based funds or trading
programs) and swap dealers seeking to hedge price risk from OTC trading
activity (frequently opposite those same commodity index traders).
---------------------------------------------------------------------------
\58\ The argument has also been made that commodities act as a
general hedge of liability obligations that are linked to inflation.
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The development of the OTC swaps industry, over which the
Commission generally has no regulatory authority, is related to the
exchange-traded futures and options industry in that a swap agreement
\59\ can either compete with or
[[Page 4151]]
complement regulated commodity futures and options trading.\60\ Market
participants often enter into OTC swap agreements because, unlike more
standardized futures contracts, they can be customized to match
particular hedging or price exposure needs. Swap dealers, often
affiliated with a bank or other large financial institution, act as
swap counterparties to both commercial firms seeking to hedge price
risks and speculators seeking to gain price exposure. Swap dealers, in
turn, utilize the more standardized futures markets to manage the
residual risk of their swaps book.\61\ In addition, some swap dealers
also deal directly in the merchandising of physical commodities.
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\59\ A swap agreement is typically a privately negotiated
exchange of one asset or cash flow for another asset or cash flow.
In a commodity swap, at least one of the assets or cash flows is
related to the price of one or more commodities.
\60\ The bilateral contracts that swap dealers create can vary
widely, from terms tailored to meet the needs of a specific
customer, to relatively standardized contracts.
\61\ Because swap agreements can be highly customized, and the
liquidity for a particular swap contract can be low, swap dealers
may also use other swap agreements and physical market positions, in
addition to futures, to offset the residual risks of their swap
book.
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In accordance with the above-discussed Congressional
recommendations, market developments, and the Commission's recognition
of a risk management exemption for financial futures, beginning in
1991, the Commission staff extended the concept of risk management
exemptions from speculative position limits by granting bona fide hedge
exemptions, in various agricultural futures markets subject to Federal
speculative position limits, to a number of swap dealers who were
seeking to manage price risks on their books arising from swap dealing
activities. The first such hedge exemption involved J. Aron, a large
commodity merchandising firm that engaged in commodity related swaps as
a part of a commercial line of business. The firm, through an
affiliate, wished to enter into an OTC swap transaction with a
qualified counterparty (a large pension fund) involving an index based
on the returns afforded by investments in exchange-traded futures
contracts on certain non-financial commodities meeting specified
criteria.\62\ The commodities making up the index included contracts in
certain agricultural commodities subject to Federal speculative
position limits. As a result of the swap, J. Aron would have, in
effect, been going short the index. In order to protect itself against
this risk, the firm planned to establish a portfolio of long futures
positions in the commodities making up the index, in such amounts as
would replicate its exposure under the swap transaction. By design, the
index did not include contract months that had entered the delivery
period and J. Aron, in replicating the index, stated that it would not
maintain futures positions based on index-related swap activity into
the spot month (when physical commodity markets are most vulnerable to
manipulation and attendant price fluctuations). With this risk
mitigation strategy, the firm's composite return on its futures
portfolio would have offset the net payments that the dealer would have
been required to make to the pension fund counterparty.
---------------------------------------------------------------------------
\62\ The commodities comprising such indexes may include the
agricultural commodities subject to Federal speculative position
limits, as well as energy commodities, metals and world agricultural
commodities (e.g., coffee, sugar, and cocoa).
---------------------------------------------------------------------------
The futures positions J. Aron required to cover its exposure on the
swap agreement's agricultural component would have been in excess of
certain Federal speculative position limits. Accordingly, the firm
requested, and the staff granted, a hedge exemption for those futures
positions, that offset risks directly related to the OTC swap
transaction.
Subsequently, the Commission staff granted a number of similar
hedge exemptions, pursuant to delegated authority, in other cases where
the futures positions clearly offset risks related to swap agreements
or similar OTC positions involving both individual commodities and
commodity indexes. These non-traditional ``hedges'' were all subject to
specific limitations to protect the marketplace from potential ill
effects. The limitations required: (i) The futures positions to offset
specific price risk; (ii) the dollar value of the futures positions to
be no greater than the dollar value of the underlying risk; and (iii)
the futures positions to not be carried into the spot-month.\63\
---------------------------------------------------------------------------
\63\ 72 FR 66097, at 66099 (November 27, 2007).
---------------------------------------------------------------------------
In 2006, Commission staff issued two no-action letters involving
another type of index-based trading.\64\ Both cases involved trading
that offered investors the opportunity to participate in a broadly-
diversified commodity index-based fund or program (``index fund''). The
futures positions of these index funds differed from the futures
positions taken by the swap dealers who had earlier received
exemptions. The swap dealer positions were taken to offset OTC swaps
exposure that was directly linked to the price of an index. For that
reason, Commission staff granted hedge exemptions to those swap dealer
positions. On the other hand, in the index fund positions described in
the no-action letters, the price exposure resulted from a promise or
obligation to track an index, rather than from holding an OTC swap
position whose value was directly linked to the price of an index.
Commission staff believed that this difference was significant enough
that the index fund positions would not qualify for a hedge exemption.
Nevertheless, because the index fund positions represented a legitimate
and potentially useful investment strategy, Commission staff granted
the index funds no-action relief, subject to certain conditions
intended to protect the futures markets from potential ill effects.
These conditions required: (i) The positions to be passively managed;
(ii) the positions to be unleveraged (so that financial conditions
should not trigger rapid liquidations); and (iii) the positions to not
be carried into the delivery month.
---------------------------------------------------------------------------
\64\ CFTC Letter 06-09 (April 19, 2006); CFTC Letter 06-19
(September 6, 2006).
---------------------------------------------------------------------------
Prompted by concerns regarding the growing market presence of swap
dealers and commodity index traders who use futures markets to manage
risks related to OTC trading activity, in June and July of 2008, CFTC
staff issued a special call for information from swap dealers and index
traders. Based upon information collected from its special call, the
Commission published on September 11, 2008, a ``Staff Report on
Commodity Swap Dealers and Index Traders with Commission
Recommendations'' (the ``September 2008 Report''). Most relevant to the
Commission's proposed rulemaking is the Report's recommendation that
the Commission consider the elimination of bona fide hedge exemptions
for swap dealers and the creation of a new, limited risk management
exemption for the activities of swap dealers and commodity index
traders.\65\
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\65\ The Report also made a number of other recommendations for
Commission action, including: (1) Removing swap dealers from the
commercial category in the Commitments of Traders Reports (``COT
Reports'') and creating a new swap dealer classification for
reporting purposes; (2) Developing and publishing a new periodic
supplemental report based on OTC swap dealer activity; (3) Creating
a new CFTC Office of Data Collection dedicated to the collection and
publication of COT Report data; (4) Establishing more detailed
reporting standards for large traders; and (5) Conducting a review
of swap dealers' futures trading activity to ensure that it is
sufficiently independent of any affiliated commodity research. The
Commission has largely addressed the Report's recommendations
regarding COT Reports. The Commission has been publishing a new
Disaggregated COT Report (``DCOT Report'') for twenty-two different
physical commodity markets since September 4, 2009 and expanded the
DCOT Report to the remaining physical markets on December 4, 2009.
The Commission also began publishing on September 4, 2009 a new
quarterly report of Index Investment Data which shows for swap
dealers and index funds their index investments in commodity markets
in terms of notional values and equivalent futures positions. The
Commission continues to study the viability of the September 2008
Report's other recommendations regarding the creation of an Office
of Data Collection, the establishment of more detailed reporting
standards for large traders and a review of the relation of swap
dealers' futures trading and commodity research activities.
September 2008 Report, at 6.
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[[Page 4152]]
In March of 2009, the Commission published a ``Concept Release on
Whether to Eliminate the Bona Fide Hedge Exemption for Certain Swap
Dealers and Create a New Limited Risk Management Exemption from
Speculative Position Limits.''\66\ The concept release reviewed the
underlying statutory and regulatory background, as well as relevant
regulatory history and marketplace developments, and posed a number of
questions designed to help inform the Commission's decision as to: (i)
Whether to proceed with the recommendation to eliminate the bona fide
hedge exemption for swap dealers and replace it with a conditional
limited risk management exemption; and (ii) if so, what form the new
limited risk management exemptive regulations should take and how they
might be implemented most effectively.
---------------------------------------------------------------------------
\66\ 74 FR 12282 (March 24, 2009).
---------------------------------------------------------------------------
In response, the Commission received letters from 30 commenters,
including futures exchanges, agricultural trade associations, financial
industry trade associations, money management firms (including swap
dealers), other market participants and various other interested
parties. The comments were about equally divided between those who
favored eliminating the bona fide hedge exemption for swap dealers (or
restricting the exemption to positions offsetting swap dealers'
exposure to traditional commercial market users) and those who favored
retaining the swap dealer hedge exemption in its current form, or some
variation thereof.\67\ Similar views on hedge exemptions were also
expressed at the Commission's Energy Hearings in July and August
2009.\68\ As discussed below, the proposed regulations would not
recognize futures and option transactions offsetting exposure acquired
pursuant to swap dealing activity as bona fide hedges. Accordingly,
swap dealers would not be allowed to seek bona fide hedge exemptions
for such positions. Instead, however, upon compliance with several
conditions including reporting and disclosure obligations, the proposed
regulations would allow swap dealers to seek a limited exemption from
the proposed speculative position limits for the major energy
contracts.
---------------------------------------------------------------------------
\67\ The comments are available for review on the Commission's
Web site at http://www.cftc.gov/lawandregulation/federalregister/
federalregistercomments/2009/09-004.html.
\68\ Also in August 2009, Commission staff withdrew CFTC Letters
06-09 and 06-19, which had granted staff no-action relief to two
index funds (with passively managed positions) from complying with
the Federal speculative position limits otherwise applicable to
futures and option contracts in wheat, corn and soybeans.
---------------------------------------------------------------------------
VI. The Proposed Regulations
A. Overview
The proposed regulations seek to implement an integrated
speculative position limit framework for exchange listed natural gas,
crude oil, heating oil, and gasoline futures and option contracts. In
addition to identifying the affected energy contracts with
particularity, the proposed regulations would establish aggregate and
exchange-specific speculative position limits, including provisions
relating to exemptions from the proposed limits and related application
and reporting requirements. The proposed regulations provide position
limit exemptions for bona fide hedging transactions, certain swap
dealer risk management transactions, and positions that remain, in
their totality, in compliance with the applicable limits once option
contracts that comprise a portion of a trader's overall position are
delta-adjusted by a demonstrably appropriate risk factor. The proposed
regulations key the setting of position limits to deliverable supplies
and open interest. In addition, they seek to apply position limits to a
set of readily identifiable contracts. By doing so, the proposed
regulations intend to establish an objective and administerial process
for fixing specific position limits and identifying the contracts to
which they apply without relying on the Commission's exercise of
discretion.
As discussed in detail below, the proposed spot-month limits
generally are a function of the estimated deliverable supply for
physically-settled contracts. The logic behind limiting positions based
on deliverable supply is readily apparent since, for example, traders
with sufficiently large positions can squeeze shorts and thereby
distort the price of the deliverable commodity. In contrast, the
proposed (non-spot) single-month and all-months-combined position
limits would limit positions to a specific percentage of overall
trading activity as represented by open interest. As such, the link
between open interest and the proposed non-spot-month position limits
may not be as readily apparent as the link between spot-month limits
and estimated deliverable supply.
To illustrate how a formula based on open interest would restrict
the ability of any single trader to disrupt market operations through
the acquisition and liquidation of large speculative positions, it may
be helpful to consider a framework in which there are no exemptions
from position limits and there exists a single contract with an open
interest level of 1,000 contracts. With these simplifications in place,
a position limit that is set at 10% of open interest, given an assumed
open interest level of 1,000 contracts, would be 100 contracts (i.e.,
10% of 1,000 contracts). Thus, the position limit, at the assumed open
interest level of 1,000 contracts, would mean that there must, at a
minimum, be 10 independent long and 10 independent short traders.\69\
If there were 9 traders on either side of the market, then at least one
trader would necessarily hold more than 100 contracts. That trader
would hold such positions in violation of the contract's position
limit.
---------------------------------------------------------------------------
\69\ The concept of independence is important because the
positions of a group of traders acting pursuant to a common plan
would be aggregated as if the positions were traded by a single
person.
---------------------------------------------------------------------------
Alternatively, if the position limit is set at a lower percentage
of the contract's assumed open interest level of 1,000 contracts, then
the minimum number of independent traders needed as market participants
would be higher. For example, a position limit that is set at 2.5% of
the assumed open interest level of 1,000 contracts would be 25
contracts (i.e., 2.5% of 1,000 contracts). Accordingly, the minimum
``size of the trading crowd'' under this scenario would be 40 long and
40 short traders (40 traders each with 25 contract positions would
equal the given open interest level of 1,000 contracts). Therefore,
position limits that are formulaically set as a percentage of open
interest can prevent any single trader from acquiring excessive market
power if structured properly as one part of a comprehensive speculative
position limit framework.
B. Identifying Referenced Energy Contracts
As proposed, the speculative position limits would apply only to
referenced energy contracts. Proposed regulation 151.1 defines
referenced energy contracts to mean one of four enumerated contracts--
the NYMEX Henry Hub natural gas contract, the NYMEX Light Sweet crude
oil contract, the NYMEX New York Harbor No. 2 heating oil contract, and
the NYMEX New York Harbor gasoline blendstock (RBOB) contract--and in
addition, any other contract that is exclusively or partially based on
the referenced
[[Page 4153]]
contracts' commodities and deliverable at locations specified in the
proposed regulations. Basis contracts and diversified commodity index
futures that are based on such contracts' commodities, however, would
not be considered to be referenced energy contracts and, therefore,
would not be subject to the proposed speculative position limits.
Basis contracts, as defined in proposed regulation 151.1, are
futures or option contracts that are cash settled based on the
difference in price of the same commodity (or substantially the same
commodity)\70\ at different delivery points. These basis contracts have
been excluded by the Commission from the speculative position limits
because they price the difference between the same commodity in two
different locations and not the underlying commodity itself.\71\
Similarly, contracts based on diversified commodity indexes, defined in
proposed regulation 151.1 as commodity indexes that are comprised of
contracts in energy as well as non-energy commodities, are excluded
because they may not involve a separate and distinct exposure to the
price of a referenced energy contract's commodity.\72\
---------------------------------------------------------------------------
\70\ A commodity may be considered ``substantially the same,''
for instance, if it is of the same grade and quality. If a commodity
meets an underlying referenced energy contract's deliverable grade
and quality specifications, then such commodity presumptively is
substantially similar.
\71\ It should also be noted that, although a grade may be
substantially similar to a referenced energy contract's commodity,
this is not sufficient to render a futures or option contract a
referenced energy contract. In order to be included as a referenced
energy contract, a substantially similar commodity must also be
deliverable at a referenced energy contract's delivery point(s).
\72\ Examples of diversified commodity indexes include the S&P/
Goldman Sachs Commodity Index, the Thomson Reuters/Jefferies CRB
Index and the Dow Jones-UBS Commodity Index.
---------------------------------------------------------------------------
C. Determining Aggregate All-Months-Combined and Single-Month Position
Limits
The current Federal speculative position limits of regulation 150.2
apply only to specific futures contracts (and on a futures-equivalent
basis) specific option contracts. Historically, all trading volume in a
specific contract tended to migrate to a single contract on a single
exchange. Consequently, speculative position limits that applied to a
single contract and options thereon effectively applied to a single
market. The current speculative position limits of regulation 150.2 for
certain agricultural contracts follow this approach.
In 2005, when the Commission last amended the agricultural
speculative position limits of regulation 150.2, it codified the
Commission's practice of grouping positions in a limited set of
contracts on the same exchange with substantially identical terms for
the purpose of applying the Federal agricultural speculative position
limits.\73\ This limited grouping of positions extended only to regular
and mini-sized contracts on the same exchange, such as the CBOT Corn
and Mini-Corn futures contracts, and did not extend to contracts that
were cash settled to physically delivered contracts. At that time and
subsequently in 2007 (in a notice of proposed rulemaking that was
subsequently withdrawn), the Commission considered but refrained from
adopting additional position grouping requirements for the agricultural
contracts enumerated in regulation 150.2.\74\
---------------------------------------------------------------------------
\73\ 70 FR 24705 (May 11, 2005).
\74\ See, 70 FR 12621 (March 15, 2005); 72 FR 65483 (November
21, 2007).
---------------------------------------------------------------------------
With the advent of look-alike energy contracts that are listed on
different registered entities and contracts that are based on other
contracts in an attempt to isolate different energy price risks, most
prominently contracts traded at NYMEX and ICE, applying a speculative
position to a specific energy contract, and its smaller sized
counterpart, if any, without consideration of other directly or highly
related contracts could result in applying a position limit only to a
very limited segment of a broader regulated market. Accordingly, the
proposed regulations would, for positions outside the spot month, apply
the proposed Federal speculative position limits aggregately on and
across reporting markets to capture a broader segment of the open
interest that comprises the market for the referenced energy contracts.
Proposed regulation 151.2(b)(1) would establish aggregate all-
months-combined and single-month speculative limits for positions held
outside the spot month. The proposed framework premises its limits on
open interest levels, and would establish speculative position limits
aggregately, that is, across contracts of different classes on a single
exchange and across all reporting markets listing the same referenced
energy contracts. As defined in proposed regulation 151.1, contracts of
the same class outside of the spot month include all referenced energy
contracts (including option contracts on a futures-equivalent basis) on
a single reporting market that are based on the same commodity and
settled in the same manner. As proposed, NYMEX's crude oil financial
calendar spread option, last day financial futures and options thereon,
and light sweet crude oil e-mini contracts, as cash-settled NYMEX
contracts, would all be grouped together as contracts of the same
class. NYMEX's physically-settled light sweet crude oil contract,
however, would be in a different class because the contract is
physically-settled as opposed to being a financial futures contract
like the contracts listed above. Similarly, ICE's natural gas SPDC,
although financially-settled and related to NYMEX's natural gas
contracts, would be in a different class because it is on a different
exchange. As discussed more fully below, categorizing the referenced
energy contracts in this manner allows for the application of aggregate
and class-specific speculative position limits and permits for the
netting of positions as appropriate.
In fixing aggregate all-months-combined and single-month position
limits across contract classes, that is, for related contracts of
different classes on and across the exchanges, the Commission would
initially identify the referenced energy contracts that are based on
the same commodity but that constitute a distinct class of contracts
because, for example, they are cash-settled as opposed to physically-
settled, or because they are listed on different reporting markets. The
Commission next would calculate each class's average combined futures
and delta-adjusted option month-end open interest for all months listed
on a reporting market during the most recent calendar year as the first
reference point (``class single-exchange gross open interest value'').
The proposed regulations would subtract the open interest generated
from spread contracts, as defined in regulation 151.1, from the class
single-exchange gross open interest value to arrive at a ``class
single-exchange final open interest value.'' Proposed regulation 151.1
would define spread contracts as either a calendar spread contract or
an inter-commodity spread contract.\75\ Open interest generated from
[[Page 4154]]
spread contracts, as defined in proposed regulation 151.1, is not
included in the class single-exchange final open interest value because
spread contracts may be indicative of nominal commodity price
exposures. Traders on both sides of spread contracts, as defined by the
proposed regulations, hold a single position composed of two highly
correlated legs. Therefore, open interest from such contracts may be
excluded from the base open interest value that is used to calculate
speculative position limits. Although excluded from the class single-
exchange final open interest value that, as discussed below, is used to
set the aggregate all-months-combined and single-month position limits,
such contracts, unlike basis contracts and contracts based on
diversified commodity indexes, are nonetheless referenced energy
contracts and therefore are attributable to traders for the purposes of
determining a trader's compliance with, for example, the proposed
single-month speculative position limits.
---------------------------------------------------------------------------
\75\ More specifically, proposed regulation 151.1 defines
``calendar spread contracts'' as contracts that are settled based on
the difference between the settlement prices in one expiring month
of a referenced energy contract and another month's settlement price
for the same referenced energy contract. The proposed regulations
would define ``inter-commodity spread'' contracts as contracts that
are based on the price difference between the settlement price of a
referenced energy contract and another commodity contract. An
example of a calendar spread contract is the NYMEX Crude Oil
Calendar Spread Financially Settled Option Contract (WA). This
contract represents an option to assume positions in two different
NYMEX Light Sweet crude oil futures contracts distinguished by
opposite positions in different delivery months. An example of an
inter-commodity spread representing the price difference between two
referenced commodities would be the NYMEX heating oil crack spread
swap futures (HK) contract, which represents the price difference
between two referenced energy contracts, the NYMEX New York Harbor
No. 2 heating oil futures settlement price minus the NYMEX Light
Sweet crude oil futures settlement price. A different example of an
inter-commodity spread would be the NYMEX Mars (Argus) vs. WTI
spread calendar swap (YX) which represents the Mars midpoint price
from Argus Media minus the NYMEX Light Sweet crude oil futures first
nearby contract month settlement price.
---------------------------------------------------------------------------
The following table lists the contracts, grouped by class, which
would be used to determine a class's single-exchange final open
interest value as described above:
Contract List Without Spread Contracts
----------------------------------------------------------------------------------------------------------------
Individual All months
Spot-month month combined
conversion conversion conversion
factor factor factor
Class of contract Contract name Contract code relative to relative to relative to
referenced referenced referenced
energy energy energy
contract contract contract
----------------------------------------------------------------------------------------------------------------
Crude Oil/Physical Delivery/ Light Sweet Crude CL........... 1 1 1
NYMEX. Oil Futures.
Light Sweet Crude LO........... 0 1 1
Oil Option.
Crude Oil/Cash-Settled/NYMEX.. Crude Oil WS........... 1 1 1
Financial
Futures.
Crude Oil Last 26........... 1 1 1
Day Financial
Futures.
Crude Oil Option 6F........... 0 1 12
on Calendar
Strip.
Crude Oil Option 6E........... 0 1 3
on Quarterly
Futures Strip.
Daily Crude Oil CD........... 0 1 1
Option.
E-mini Crude Oil QM........... \1/2\ \1/2\ \1/2\
Futures.
NYMEX Crude Oil XK........... 0 \1/5\ \1/5\
Backwardation/
Contango (B/C)
Index.
NYMEX Crude Oil XC........... 0 \1/5\ \1/5\
MACI Index.
NYMEX Crude Oil 4T........... 1 1 1
Minute-Marker
Calendar Month
Swap Futures.
NYMEX Crude Oil 6C........... 1 1 1
Minute-Marker
Futures.
WTI Average Price AO........... 0 1 1
Option.
WTI Calendar Swap CS........... 1 1 1
Futures.
WTI Look-Alike LC........... 0 1 1
Option.
Gasoline/Physical Delivery/ RBOB Gasoline RB........... 1 1 1
NYMEX. Futures.
RBOB Gasoline OB........... 0 1 1
Option.
Gasoline/Cash-Settled/NYMEX... E-mini RBOB QU........... \1/2\ \1/2\ \1/2\
Gasoline Futures.
NYMEX RBOB 5T........... 1 1 1
Gasoline Minute-
Marker Calendar
Month Swap
Futures.
NYMEX RBOB 6R........... 1 1 1
Gasoline Minute-
Marker Futures.
RBOB Gasoline RA........... 1 1 1
Average Price
Option.
RBOB Gasoline 1D........... 1 1 1
BALMO Swap
Futures.
RBOB Gasoline RL........... 1 1 1
Calendar Swap
Futures.
RBOB Gasoline RT........... 1 1 1
Financial
Futures.
RBOB Gasoline 27........... 1 1 1
Last Day
Financial
Futures.
RBOB Gasoline RF........... 0 1 1
Look-Alike
European Option.
Heating Oil/Physical Delivery/ Heating Oil OH........... 0 1 1
NYMEX. Option.
New York Harbor HO........... 1 1 1
No. 2 Heating
Oil Futures.
Heating Oil/Cash-Settled/NYMEX E-mini Heating QH........... \1/2\ \1/2\ \1/2\
Oil Futures.
Heating Oil AT........... 1 1 1
Average Price
Option.
Heating Oil BALMO 1G........... 1 1 1
Swap Futures.
Heating Oil MP........... 1 1 1
Calendar Swap
Futures.
Heating Oil BH........... 1 1 1
Financial
Futures.
Heating Oil Last 23........... 1 1 1
Day Financial
Futures.
Heating Oil Look- LB........... 0 1 1
Alike Option.
NYMEX Heating Oil 7T........... 1 1 1
Minute-Marker
Calendar Month
Swap Futures.
[[Page 4155]]
NYMEX Heating Oil 6H........... 1 1 1
Minute-Marker
Futures.
Natural Gas/Physical Delivery/ Henry Hub Natural NG........... 1 1 1
NYMEX. Gas Futures.
Henry Hub Natural ON........... 1 1 1
Gas Option.
Natural Gas/Cash-Settled/NYMEX Daily Natural Gas KD........... 0 1 1
Option.
E-mini Henry Hub NP........... \1/4\ \1/4\ \1/4\
Natural Gas
Penultimate
Financial
Futures.
E-mini Natural QG........... \1/4\ \1/4\ \1/4\
Gas Futures.
Henry Hub Natural HH........... 1 1 1
Gas Last Day
Financial
Futures.
Henry Hub Natural E7........... 1 1 1
Gas Last Day
Financial Option.
Henry Hub Natural LN........... 1 1 1
Gas Look-Alike
Option.
Henry Hub Natural HP........... 1 1 1
Gas Penultimate
Financial
Futures.
Henry Hub Natural NN........... \1/4\ \1/4\ \1/4\
Gas Swap Futures.
Natural Gas 6J........... 0 \1/4\ 3
Option on
Calendar Futures
Strip.
Natural Gas 4D........... 0 \1/4\ 1 \3/4\
Option on Summer
Futures Strip.
Natural Gas 6I........... 0 \1/4\ 1 \1/4\
Option on Winter
Futures Strip.
Natural Gas/Cash-Settled/ICE.. Henry Hub Natural H............ \1/4\ \1/4\ \1/4\
Gas Swap.
----------------------------------------------------------------------------------------------------------------
Once a class single-exchange final open interest value is
determined, under the proposed regulations, the Commission would sum
this value for all related classes on and across all reporting markets
to arrive at an ``aggregated market open interest value'' as a third
reference point for each of the four referenced energy contracts. The
proposed regulations would establish an all-months-combined aggregate
position limit that is fixed by the Commission at 10% of the aggregated
open interest value discussed above, up to 25,000 contracts, with a
marginal increase of 2.5% thereafter.\76\ This proposed formula is
similar to the formula provided in current regulation 150.5(c).
---------------------------------------------------------------------------
\76\ Proposed regulation 151.2(e)(3) provides that the result of
the formula is rounded up to the nearest one hundred to calculate
the level of the limit.
---------------------------------------------------------------------------
The proposed regulations would set the single-month aggregate
position limit at two-thirds of the position limit fixed for the all-
months-combined aggregate position limit. This means that the aggregate
all-months-combined position limit level would be 150% of the aggregate
single-month position limit level. As previously discussed, in 2005 the
Commission increased the all-months-combined Federal speculative
position limits and reset the single-month levels to approximate the
then existing ratio between all-months-combined and single-month levels
(i.e., arriving at the single-month limits by setting them at about
two-thirds of the relevant all-months-combined limits). The proposed
regulation's reliance on this approach for determining single non-spot-
month limits is therefore consistent with prior Commission
determinations.
As proposed, the intent of the aggregate position limits is to
permit for the netting of positions in a referenced energy contract's
different classes on a single exchange and across the exchanges for the
purpose of determining compliance with the aggregate all-months-
combined and aggregate single-month speculative position limits.
Accordingly, no trader would be permitted to hold net long or net short
referenced energy contract positions that, when combined with net long
or net short positions in the same referenced energy contract on
another exchange, would exceed the aggregate all-months-combined and
aggregate single-month speculative position limits.
D. Single-Exchange Limits
In order to prevent the excessive concentration of positions in a
particular class of contracts, for each reporting market separately,
the proposed regulations would also establish an all-months-combined
position limit that would apply specifically to contracts of the same
class at the lower of the aggregate position limit for a referenced
energy contract or 30% of a class's single exchange final open interest
value. Accordingly, for the purpose of applying these exchange and
class-specific speculative position limits, netting would only be
permitted between contracts of the same class.
For each reporting market separately, the proposed regulations also
would establish a single-month position limit for contracts of the same
class that would be two-thirds of the all-months-combined position
limit fixed for that class of contracts. Thus, the single-month limit
on each reporting market for a class of contracts would be no greater
than 20% of a class's single exchange final open interest value (i.e.,
two-thirds of 30% of a class's single exchange final open interest
value).
Proposed regulation 151.2 also establishes a minimum position limit
for a reporting market of 5,000 contracts or 1% of the aggregated open
interest value, whichever is greater. The Commission notes that the
5,000 contract level is consistent with its guidance on acceptable
practices for exchanges setting all-months-combined position limits for
newly listed energy contracts in current regulation
[[Page 4156]]
150.5(b)(3). Levels set by reference to the 1% of aggregated open
interest value and the 5,000 contract limit are intended to give newly
listed contracts or contracts with low open interest the opportunity to
attract liquidity. The concentration of positions held by a single
trader on a particular reporting market, such as a market marker,\77\
given the minimal impact that such trading may have on commodity
prices, is acceptable because such levels promote innovation and
competition.
---------------------------------------------------------------------------
\77\ A market maker is a trader that quotes both a buy and a
sell price in an attempt to profit from the spread.
---------------------------------------------------------------------------
In addition to the above mentioned position limits, as proposed, a
trader's positions in contracts of the same class in a single month on
a reporting market, measured on a gross basis, would be limited to no
greater than two times the all-months-combined class position limit
fixed for that reporting market. A limit on a trader's gross positions
in a single month would serve to prevent sudden or unreasonable
fluctuations or unwarranted changes in commodity prices that could
arise from traders holding large positions that would otherwise net out
(e.g., offsetting positions in last trading day and penultimate
contracts of the same class for the same month) for the purpose of
applying the class single-month position limits.
The following table groups contracts by the classes in which they
would be included under the proposed regulations:
Contract List with Spread Contracts
----------------------------------------------------------------------------------------------------------------
Individual All months
Spot-month month combined
conversion conversion conversion
Contract factor factor factor
Class of contract Contract name code relative to relative to relative to
referenced referenced referenced
energy energy energy
contract contract contract
----------------------------------------------------------------------------------------------------------------
Crude Oil/Physical Delivery/ Light Sweet Crude CL 1 1 1
NYMEX. Oil Futures.
Light Sweet Crude LO 0 1 1
Oil Option.
Heating Oil Crack HC -1 -1 -1
Spread Option.
RBOB Gasoline Crack RX -1 -1 -1
Spread Option.
WTI Calendar Spread WA 1 1 0
Option.
Crude Oil/Cash-Settled/NYMEX. Crude Oil Financial 7A 1 1 1
Calendar Spread
Option.
Crude Oil Financial WS 1 1 1
Futures.
Crude Oil Last Day 26 1 1 1
Financial Futures.
Crude Oil Option on 6F 0 1 12
Calendar Strip.
Crude Oil Option on 6E 0 1 3
Quarterly Futures
Strip.
Daily Crude Oil CD 0 1 1
Option.
E-mini Crude Oil QM \1/2\ \1/2\ \1/2\
Futures.
Gulf Coast No. 2 RD -1 -1 -1
(Platts) Crack
Spread Swap Futures.
Gulf Coast No. 6 MG -1 -1 -1
Fuel Oil (Platts)
Crack Spread Swap
Futures.
Gulf Coast ULSD CF -1 -1 -1
(Argus) Crack
Spread Swap Futures.
Gulf Coast ULSD GY -1 -1 -1
(Platts) Crack
Spread Swap Futures.
Gulf Coast Unl 87 CK -1 -1 -1
(Argus) Crack
Spread Swap Futures.
Gulf Coast Unl 87 1J -1 -1 -1
(Platts) Crack
Spread BALMO Swap
Futures.
Gulf Coast Unl 87 RU -1 -1 -1
(Platts) Crack
Spread Swap Futures.
Heating Oil Crack 3W -1 -1 -1
Spread Average
Price Option.
Heating Oil Crack 1H -1 -1 -1
Spread BALMO Swap
Futures.
Heating Oil Crack HK -1 -1 -1
Spread Swap Futures.
Mars (Argus) vs. WTI YX -1 -1 -1
Spread Calendar
Swap Futures.
Mars (Argus) vs. WTI YV -1 -1 -1
Spread Trade Month
Swap Futures.
New York Harbor ML -1 -1 -1
Residual Fuel
(Platts) Crack
Spread Swap Futures.
New York Ultra Low YU -1 -1 -1
Sulfur Diesel
(ULSD) Crack Spread
Swap.
NYMEX Crude Oil XK 0 \1/5\ \1/5\
Backwardation/
Contango (B/C)
Index.
NYMEX Crude Oil MACI XC 0 \1/5\ \1/5\
Index.
NYMEX Crude Oil 4T 1 1 1
Minute-Marker
Calendar Month Swap
Futures.
NYMEX Crude Oil 6C 1 1 1
Minute-Marker
Futures.
RBOB Gasoline Crack 3Y -1 -1 -1
Spread Average
Price Option.
[[Page 4157]]
RBOB Gasoline Crack 1E -1 -1 -1
Spread BALMO Swap
Futures.
RBOB Gasoline Crack RM -1 -1 -1
Spread Swap Futures.
WTI Average Price AO 0 1 1
Option.
WTI Calendar Swap CS 1 1 1
Futures.
WTI Look-Alike LC 0 1 1
Option.
WTS (Argus) vs. WTI FF -1 -1 -1
Spread Calendar
Swap Futures.
WTS (Argus) vs. WTI FH -1 -1 -1
Spread Trade Month
Swap Futures.
Gasoline/Physical Delivery/ RBOB Gasoline RB 1 1 1
NYMEX. Futures.
RBOB Gasoline Option OB 0 1 1
RBOB Gasoline ZA 1 1 0
Calendar Spread
Option.
RBOB Gasoline Crack RX 0 1 1
Spread Option.
Gasoline/Cash-Settled/NYMEX.. Chicago Unleaded 3C -1 -1 -1
Gasoline (Platts)
vs. RBOB Gasoline
Spread Swap Futures.
E-mini RBOB QU \1/2\ \1/2\ \1/2\
Gasoline Futures.
Group Three Unleaded A8 -1 -1 -1
Gasoline (Platts)
vs. RBOB Spread
Swap.
Gulf Coast Gasoline 4F -1 -1 -1
(OPIS) vs. RBOB
Gasoline Spread
Swap Futures.
Gulf Coast Unl 87 UZ -1 -1 -1
(Argus) Up-Down
Swap Futures.
Gulf Coast Unl 87 1K -1 -1 -1
(Platts) Up-Down
BALMO Swap Futures.
Gulf Coast Unl 87 RV -1 -1 -1
(Platts) vs. RBOB
Gasoline Spread
Swap Futures.
Los Angeles CARBOB JL -1 -1 -1
Gasoline (OPIS)
Spread Swap Futures.
New York Harbor RZ -1 -1 -1
Conv. Gasoline
(Platts) vs. RBOB
Gasoline Swap
Futures.
NY RBOB (Platts) vs. RI -1 -1 -1
NYMEX RBOB Gasoline
Spread Swap Futures.
NYMEX RBOB Gasoline 5T 1 1 1
Minute-Marker
Calendar Month Swap
Futures.
NYMEX RBOB Gasoline 6R 1 1 1
Minute-Marker
Futures.
RBOB Gasoline RA 1 1 1
Average Price
Option.
RBOB Gasoline BALMO 1D 1 1 1
Swap Futures.
RBOB Gasoline RL 1 1 1
Calendar Swap
Futures.
RBOB Gasoline Crack 3Y 1 1 1
Spread Average
Price Option.
RBOB Gasoline Crack 1E 1 1 1
Spread BALMO Swap.
RBOB Gasoline Crack RM 1 1 1
Spread Swap Futures.
RBOB Gasoline RT 1 1 1
Financial Futures.
RBOB Gasoline Last 27 1 1 1
Day Financial
Futures.
RBOB Gasoline Look- RF 0 1 1
Alike European
Option.
RBOB Gasoline vs. RH 1 1 1
Heating Oil Swap
Futures.
Heating Oil/Physical Delivery/ New York Harbor No. HO 1 1 1
NYMEX. 2 Heating Oil
Futures.
Heating Oil Option.. OH 0 1 1
Heating Oil Calendar FA 1 1 0
Spread Options.
Heating Oil Crack HC 0 1 1
Spread Option.
Heating Oil/Cash-Settled/ Chicago ULSD 5C -1 -1 -1
NYMEX. (Platts) vs.
Heating Oil Spread
Swap.
E-mini Heating Oil QH \1/2\ \1/2\ \1/2\
Futures.
Group Three ULSD A6 -1 -1 -1
(Platts) vs.
Heating Oil Spread
Swap Futures.
Gulf Coast Jet JU -1 -1 -1
(Argus) Up-Down
Swap Futures.
Gulf Coast Jet W7 -1 -1 -1
(OPIS) vs. Heating
Oil Spread Swap
Futures.
Gulf Coast Jet 1M -1 -1 -1
(Platts) Up-Down
BALMO Swap Futures.
Gulf Coast Jet ME -1 -1 -1
(Platts) vs.
Heating Oil Spread
Swap Futures.
Gulf Coast Low YL -1 -1 -1
Sulfur Diesel (LSD)
(Platts) Up-Down
Spread Swap Futures.
Gulf Coast ULSD US -1 -1 -1
(Argus) Up-Down
Swap Futures.
[[Page 4158]]
Gulf Coast ULSD 5Q -1 -1 -1
(OPIS) vs. Heating
Oil Spread Swap
Futures.
Gulf Coast ULSD LT -1 -1 -1
(Platts) Up-Down
Spread Swap Futures.
Gulf Coast ULSD 1L -1 -1 -1
(Platts) Up-Down
Swap Futures.
Heating Oil Arb : HA 1 1 1
NYMEX Heating Oil
vs. ICE Gasoil.
Heating Oil Average AT 1 1 1
Price Option.
Heating Oil BALMO 1G 1 1 1
Swap Futures.
Heating Oil Calendar MP 1 1 1
Swap Futures.
Heating Oil Crack 3W 1 1 1
Spread Average
Price Option.
Heating Oil Crack 1H 1 1 1
Spread BALMO Swap
Futures.
Heating Oil Crack HK 1 1 1
Spread Swap Futures.
Heating Oil BH 1 1 1
Financial Futures.
Heating Oil Last 23 1 1 1
Day Financial
Futures.
Heating Oil Look- LB 0 1 1
Alike Option.
Los Angeles CARB KL -1 -1 -1
Diesel (OPIS)
Spread Swap Futures.
Los Angeles Jet JS -1 -1 -1
(OPIS) Spread Swap
Futures.
Los Angeles Jet Fuel MQ -1 -1 -1
(Platts) vs.
Heating Oil Spread
Swap Futures.
NY Jet Fuel (Argus) 5U -1 -1 -1
vs. Heating Oil
Spread Swap Futures.
NY Jet Fuel (Platts) 1U -1 -1 -1
vs. Heating Oil
Swap Futures.
NY ULSD (Platts) vs. UY -1 -1 -1
NYMEX Heating Oil
Spread Swap Futures.
NYMEX Heating Oil 7T 1 1 1
Minute-Marker
Calendar Month Swap
Futures.
NYMEX Heating Oil 6H 1 1 1
Minute-Marker
Futures.
RBOB Gasoline vs. RH -1 -1 -1
Heating Oil Swap
Futures.
ULSD (Argus) vs. 7Y -1 -1 -1
Heating Oil Spread
Swap Futures.
Natural Gas/Physical Delivery/ Henry Hub Natural NG 1 1 1
NYMEX. Gas Futures.
Henry Hub Natural ON 1 1 1
Gas Option.
Henry Hub Natural IA 1 1 0
Gas Calendar Spread
Options.
Natural Gas/Cash-Settled/ Daily Natural Gas KD 0 1 1
NYMEX. Option.
E-mini Henry Hub NP \1/4\ \1/4\ \1/4\
Natural Gas
Penultimate
Financial Futures.
E-mini Natural Gas QG \1/4\ \1/4\ \1/4\
Futures.
Henry Hub Natural HH 1 1 1
Gas Last Day
Financial Futures.
Henry Hub Natural E7 1 1 1
Gas Last Day
Financial Option.
Henry Hub Natural LN 1 1 1
Gas Look-Alike
Option.
Henry Hub Natural HP 1 1 1
Gas Penultimate
Financial Futures.
Henry Hub Natural NN \1/4\ \1/4\ \1/4\
Gas Swap Futures.
Henry Natural Gas G4 1 1 0
Financial Calendar
Spread Option.
Natural Gas Option 6J 0 \1/4\ 3
on Calendar Futures
Strip.
Natural Gas Option 4D 0 \1/4\ 1 \3/4\
on Summer Futures
Strip.
Natural Gas Option 6I 0 \1/4\ 1 \1/4\
on Winter Futures
Strip.
Natural Gas/Cash-Settled/ICE. Henry Hub Natural H \1/4\ \1/4\ \1/4\
Gas Swap.
----------------------------------------------------------------------------------------------------------------
E. Spot-Month Classes of Contracts
An energy contract that is in its spot month, pursuant to industry
practice and as defined in proposed regulation 151.1, is a futures
contract that is ``next to expire during that period of time beginning
at the close of trading on the trading day preceding the first day on
which delivery notices can be issued to the clearing organization of a
registered entity.'' \78\ In practice, the spot-month for the major
energy contracts generally is
[[Page 4159]]
three days in duration. In view of the heightened potential for
manipulation, corners, squeezes as well as excessive speculation during
this concentrated period of time, only those contracts that expire on
the same day would be deemed to be contracts of the same class under
the proposed regulations. This would mean that, for example, during the
spot month, a cash-settled last trading day contract would not be in
the same class as a cash-settled penultimate contract. The most
significant impact of defining a class of contracts in a narrower
manner during the spot-month is to prohibit the netting of spot-month
contracts that expire on different days for the purpose of applying the
proposed speculative position limits. By way of example, a trader that
is 4,000 contracts long in a cash-settled last trading day contract,
and 4,000 contracts short in a cash-settled penultimate contract on the
same exchange in a referenced energy contract, would be subject to
spot-month position limits for each contract and would not be deemed to
be holding a flat position. In contrast, outside the spot month, each
leg of this spread would be considered to be in the same class and
therefore subject to netting for the purpose of applying the proposed
class all-months-combined and single-month position limits.
---------------------------------------------------------------------------
\78\ For a contract that does not allow trading concurrently
with the issuance of delivery notices, spot-month means ``the
futures contract next to expire during that period of time beginning
at the close of trading on the third trading day preceding the last
trading day.'' For a contract that cash-settles based on the price
of one or more physically-delivered contracts, spot-month means
``the period of time that is the spot-month for such physically-
delivered contracts.'' The Commission intends the spot-month for
options on futures contracts to be the same period of time as for
the underlying futures contract.
---------------------------------------------------------------------------
F. Determining and Complying With the Proposed Spot-Month Limits
For physically-delivered contracts, a spot-month position limit
would be fixed by the Commission at one-quarter of the estimated
deliverable supply for a spot-month class of contracts. This proposed
formula is consistent with current regulation 150.5(b) and the
Acceptable Practices for Core Principle 5, in Appendix B to part 38,
and the Commission's Guideline No. 1, in Appendix A to part 40.
Proposed regulation 151.2(d) would require a reporting market listing
physically-delivered contracts to submit to the Commission an estimate
of deliverable supply for its contracts by December 31st of each
calendar year. The Commission, in setting the spot-month limits, would
take into consideration the estimates of deliverable supply provided by
the reporting markets and would base its own determination of
deliverable supply on data submitted by the reporting markets unless
the Commission has a basis for questioning the accuracy of the
submitted data, in which case the Commission would derive its own
estimates of deliverable supply.
For cash-settled contracts based on the prices of physically-
delivered futures contracts, the proposed regulations would establish a
default spot-month position limit equal to that of the cash-settled
contract's physically-delivered counterpart. The proposed regulations
would allow a trader to acquire or hold positions in a spot-month class
of contracts, pursuant to reporting market rules specifically
implemented to address such positions, that is five times greater than
the default spot-month limit upon satisfying certain conditions. A
trader would be permitted to hold positions under this conditional-
spot-month limit only if that trader does not hold a position in any
physically-delivered referenced energy contract to which its cash-
settled positions are linked in the spot month and satisfies the
reporting requirements of proposed regulation 20.00.
Proposed regulation 20.00 sets forth reporting requirements for
persons that would acquire positions in a referenced energy contract
pursuant to the conditional-spot-month position limit of proposed
regulation 151.2(a)(2). Specifically, this regulation would require
such persons to file a completed CFTC Form 40 and Part A of new CFTC
Form 404. CFTC Form 40, among other things, facilitates the
Commission's identification of the persons controlling the trading of
an account. Part A of new CFTC Form 404 would collect information on: A
trader's spot and forward positions priced in relation to the relevant
referenced energy contract or the contract's underlying commodity; the
trader's spot and forward positions in contracts priced to a cash
market index that includes quotations or prices for spot or forward
contracts in the referenced energy contract's underlying commodity; the
trader's positions in swaps priced in relation to the referenced energy
contract or the contract's underlying commodity; and the trader's
positions in other physically or financially settled contracts related
to the trader's positions held pursuant to the conditional-spot-month
position limit. The collection of this information would facilitate the
Commission's surveillance program with respect to detecting and
deterring trading activity that may tend to cause sudden or
unreasonable fluctuations or unwarranted changes in the prices of the
referenced energy contracts and their underlying commodities during the
spot-month.
G. Exemptions and Related Requirements
1. Bona Fide Hedges
Proposed regulation 151.3(a) would establish three exemptions for
the following transactions and positions: (i) Bona fide hedging
transactions generally consistent with paragraphs (1) and (2) of
regulation 1.3(z); (ii) swap dealer risk management transactions
outside of the spot-month that are held to offset risks associated with
certain swap agreements; and (iii) positions that would be in
compliance with the speculative position limits when adjusted by an
appropriate contemporaneous risk factor.
As proposed, a reporting market may establish an exemption process
for traders holding positions in proprietary accounts that are shown to
be bona fide hedging positions consistent with, but that may differ
from (to the extent such differences are consistent with commercial
activity in the physical energy markets), paragraphs (1) and (2) of
regulation 1.3(z). As is currently the case for traders seeking
exemptions from exchange-set spot-month position limits applicable to
the referenced energy contracts, the Commission intends for traders
seeking such bona fide hedging transactions to apply to a reporting
market for exemptions from the applicable spot and non-spot-month
limits. The Commission would audit this process to ensure that the
reporting markets act appropriately in reviewing and acting on trader
bona fide hedge exemption requests. In this manner, the Commission
would also enable a reporting market to act expeditiously on exemption
requests.
Under the proposed regulations, traders holding positions pursuant
to a bona fide hedge exemption would generally be prohibited from also
trading speculatively. If bona fide hedging positions outside the spot
month exceed twice an otherwise applicable all-months-combined or
single-month position limit, then such traders would also be prohibited
from holding positions as swap dealers. In contrast, however, traders
holding positions in the spot-month pursuant to a bona fide hedge
exemption would not be prohibited from holding positions speculatively
outside the spot month. The intent of this proposed exception is to not
affect liquidity generated by speculative trading outside the spot
month that would otherwise be prohibited by virtue of a trader's need
to invoke a hedge exemption to exceed the lower spot-month position
limits.
These ``crowding out'' provisions would restrict a trader
controlling large positions used for hedging from also entering into
large speculative positions or large swap dealer risk management
positions. The proposed regulations would not impede a trader's ability
to engage in bona fide hedging in any way,
[[Page 4160]]
but would limit a trader's ability to acquire swap dealer risk
management positions or speculative positions when that trader holds
very large positions pursuant to a bona fide hedge exemption.
Proposed regulation 20.01 sets forth reporting requirements for
persons that would acquire positions pursuant to the bona fide hedge
exemption of proposed regulation 151.3(a)(1). Specifically, this
section would require such persons to file a completed CFTC Form 40 and
Part B of new CFTC Form 404. Part B of CFTC Form 404 would collect
information on: The quantity of stocks owned of the commodity that
underlies the relevant referenced energy contract and its products and
by-products; the ownership of shares of an investment vehicle that
holds or owns the referenced energy contract or the commodity that
underlies the referenced energy contract and its products and by-
products; the quantity of fixed price purchase and sale commitments on
the relevant referenced energy contract's commodity; and, for
anticipatory hedging transactions, annual sales or requirements for the
preceding three complete fiscal years and anticipated sales or
requirements of such commodity for the period hedged. For cross-hedge
positions, traders would be required to report the relevant commercial
activity in terms of the actual or anticipated quantity of the cross-
hedged commodity, and on a converted basis, equivalent positions in the
relevant referenced energy contract. The Commission notes that this
proposed data collection is consistent with data currently collected in
grain and cotton markets using CFTC Forms 204 and 304, respectively,
pursuant to part 19 of the Commission's regulations.
2. Swap Dealers
Swap dealers can perform an important economic function by taking
on risks to accommodate the specific hedging and risk management needs
of various customers. Swap dealers often are able to aggregate and
standardize these otherwise particularized risks, and in turn, enter
into commodity futures and option contracts to manage them.
Accordingly, under the regulations as proposed, swap dealers may apply
to the Commission for an exemption from the proposed speculative
position limits for positions held outside of the spot month to manage
the risks associated with swap agreements entered into to accommodate
swap customers. Proposed regulation 151.1 would define ``swap
agreement'' to have the same meaning as in current Commission
regulation 35.1(b)(1).\79\ Proposed regulation 151.1 would also define
``swap dealer'' to mean ``any person who, as a significant part of its
business, holds itself out as a dealer in swaps, makes a market in
swaps, regularly engages in the purchase of swaps and their resale to
customers in the ordinary course of a business, or engages in any
activity causing the person to be commonly known in the trade as a
dealer or market maker in swaps.''
---------------------------------------------------------------------------
\79\ 17 CFR 35.1(b)(1).
---------------------------------------------------------------------------
The proposed swap dealer exemption would be limited to twice an
applicable all-months-combined or single non-spot month speculative
position limit. Further, traders would be required to aggregate
positions held as swap dealer risk management transactions with net
speculative positions for the purpose of determining compliance with
the proposed Federal speculative position limits. As with bona fide
hedgers that hold positions in excess of the proposed limits, swap
dealers holding large positions pursuant to the proposed swap dealer
exemption would be unable to also take on positions as speculators. In
effect, this proposed ``crowding out'' provision would restrict a
trader controlling a large position used for swap risk management from
also entering into large speculative positions.
Proposed regulation 1.45 sets forth the application procedure for
swap dealers that would seek an exemption from the proposed Commission-
set speculative position limits. Specifically, this regulation would
require a person to file a completed CFTC Form 40, an initial
application and an annual update to certify that the person remains a
swap dealer, as defined in proposed regulation 151.1. The exemption
would require the applicant to consent to the publication of the fact
that such person received a swap dealer exemption from the Commission.
Such publication would be made only once a year and would not include
the identity of a swap dealer that first received an exemption within
the six calendar months preceding a publication. Furthermore, the
publication would not include any information that would disclose the
specific commodities for which the swap dealer has sought an exemption.
In this regard, the Commission reiterates that it will protect all
proprietary information in accordance with the Freedom of Information
Act and part 145 of the Commission's regulations, headed ``Commission
Records and Information.'' In addition, the Commission emphasizes that
section 8(a)(1) of the Act strictly prohibits the Commission, unless
specifically authorized otherwise by the Act, from making public ``data
and information that would separately disclose the business
transactions or market positions of any person and trade secrets or
names of customers.'' \80\
---------------------------------------------------------------------------
\80\ See 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------
Proposed regulation 20.02 sets forth reporting requirements for
persons who would receive a swap dealer limited risk management
exemption pursuant to proposed regulation 151.3(a)(2). Specifically,
the proposed regulation would require swap dealers to file monthly a
completed Form 404 Part C with the Commission and with any registered
entity on which the swap dealer's referenced energy contract positions
are listed. The monthly report would include, for each day, swap
positions based upon the commodity underlying the referenced energy
contracts that are held in proprietary and customer accounts and a
summary of dealing and trading activity in swaps based upon the
commodity underlying the referenced energy contracts. Furthermore,
proposed regulation 20.02 would require the swap dealer to file a
supplemental report whenever it establishes a larger position in
referenced energy contracts than previously reported. In addition to
the above reporting requirements, traders that receive a swap dealer
limited risk management exemption must also maintain complete books and
records relating to their swap dealing activities (including
transaction data) and make such books and records, along with a list of
counterparties to customer swap agreements that support and
substantiate the need to offset swap agreement risks on reporting
markets, available to the Commission upon request.
3. Exemptions for Delta-Adjusted Positions
The Commission understands that option risk factors continuously
change with movements in the price of an underlying futures contract.
As the price of the underlying futures contract changes, a trader
offsetting the risk of an options position through a delta-neutral
position in the underlying futures contract may need to adjust the
futures position substantially on an intra-day basis to maintain a risk
neutral position. As currently defined in regulation 150.1, delta-
neutrality is recognized by reference to the previous day's risk
factor. Proposed regulations 151.3 and 20.03 would set forth the
exemption and reporting requirements for persons whose positions would
have exceeded the Federal speculative position limit
[[Page 4161]]
for a referenced energy contract when adjusted by the previous day's
risk factors (deltas), but that would not exceed such a limit when
positions are calculated using an appropriate contemporaneous risk
factor. The reporting requirements, as proposed, would include the
submission of complete position data to demonstrate that such positions
remained within an otherwise applicable speculative position limit when
adjusted by an appropriate and contemporaneous risk factor.
H. Account Aggregation
Proposed regulation 151.4 would establish account aggregation
standards specifically for positions in referenced energy contracts.
Under the proposed standards, the Federal position limits in referenced
energy contracts would apply to all positions in accounts in which any
person, directly or indirectly, has an ownership or equity interest of
10% or greater or, by power of attorney or otherwise, controls trading.
Proposed regulation 151.4 includes a limited exemption for positions in
pools in which a trader that is a limited partner, shareholder or
similar person has an ownership or equity interest of less than 25%
unless the trader in fact controls trading that is done by the pool.
Proposed regulation 151.4 would also treat positions held by two or
more persons acting pursuant to an express or implied agreement or
understanding the same as if the positions were held by, or the trading
of the positions were done by, a single person. Accordingly, the
proposed regulations would aggregate positions in accounts at both the
account owner and controller levels.
In contrast to the disaggregation exemptions of current regulations
150.3(a)(4) and 150.4, eligible entities (such as mutual funds,
commodity pool operators and commodity trading advisors) and futures
commission merchants will not be permitted to disaggregate positions
pursuant to the independent account controller framework established in
part 150 of the Commission's regulations. The current account
disaggregation exceptions for the agricultural contracts enumerated in
regulation 150.2, may be incompatible with the proposed Federal
speculative position limit framework, however, and used to circumvent
its requirements.
The proposed framework sets high position levels that are at the
outer bounds of the largest positions held by market participants,
permits for the netting of positions across reporting markets and
within contracts of the same class and in addition, includes a
conditional-spot-month limit for cash-settled contracts and exemptions
for bona fide hedgers, swap dealers and delta-adjusted positions.
Accordingly, an exemption, such as the eligible entity exemption, that
would allow traders to establish a series of positions each near a
proposed outer bound position limit, without aggregation, may not be
appropriate. Instead, proposed regulation 151.4 would establish a clear
general account aggregation standard and a clear exception thereto for
passive pool participants and similar investors.
VII. The CME Group's Proposal
In a concept paper published in September of 2009, the CME Group
suggested an alternative position limit framework that would require
each reporting market to set position limits separately without inter-
exchange aggregation.\81\ The single-month and all-months-combined
limits, under the CME's proposal, would apply collectively to
physically-delivered contracts and cash-settled contracts on a
referenced energy commodity, including spread positions within the same
contract. The level of the limits would be based on the collective open
interest of the lead month (i.e., the month with the highest level of
open interest) in such contracts at that reporting market.
---------------------------------------------------------------------------
\81\ See, ``Excessive Speculation and Position Limits in Energy
Derivatives Markets,'' CME Group, at page 10, http://
www.cmegroup.com/company/files/PositionLimitsWhitePaper.pdf.
---------------------------------------------------------------------------
The CME Group also suggested that each reporting market set a
single-month limit at 10% of the first 25,000 contracts of that
reporting market's open interest with a 5% marginal increase for open
interest in excess of 25,000 contracts at that reporting market. The
CME Group suggested that the all-months-combined limit be set at 150%
of the single-month limit and suggested establishing a flexible
concentration limit in deferred-month contracts. Under the CME's
proposed approach, a suggested concentration limit of 25% of open
interest would be applicable in a single month that has developed
liquidity.\82\
---------------------------------------------------------------------------
\82\ The concept paper did not specify a method to determine
when a contract month had developed liquidity.
---------------------------------------------------------------------------
With respect to applying aggregate limits, the CME Group suggested
that the CFTC establish and enforce an aggregate limit across all
reporting markets, conditioned on the CFTC gaining authority to impose
limits on OTC trading and on the CFTC developing a means to minimize
the impact of potential transfers of trading to foreign jurisdictions
or the physical markets. With respect to the aggregation of positions,
the CME Group proposed that the aggregation standards of Commission
regulation 150.4 apply to the aggregate limits.
By way of comparison, the Commission's proposed limits would apply
aggregately across all exchanges that list a referenced energy contract
and separately to physically-delivered contracts and cash-settled
contracts that are listed by a particular reporting market. The
Commission's proposed class-based limits would prevent the
establishment of excessively large positions in a single class and,
thereby, would reduce the potential for price distortions.
Also, by way of contrast to the CME Group's approach, the level of
limits proposed by the Commission would be based on the sum of the open
interest in all months, rather than only the lead month's open interest
as proposed by the CME. By using the entire open interest, the
Commission's proposal would avoid creating an incentive for traders to
shift open interest into the lead month in an attempt to increase the
level of the limits. Furthermore, rather than considering only a
reporting market's open interest, the Commission's proposal would
establish limit levels that reflect both aggregated open interest on
all reporting markets and open interest on an individual reporting
market. This tiered approach would provide an opportunity for small
markets to grow, while establishing a prudential all-months limit for a
class of contracts of no more than 30% of a reporting market's open
interest in a class of contracts as defined in proposed regulation
151.1. The class limit, as proposed by the Commission, would be capped
at a formula-determined level based on the open interest in all
reporting markets in a referenced energy contract. The 30% level was
selected in light of the expected opportunity for arbitrage across
classes and the cap was set using the traditional all-months position
limit formula in regulation 150.5(c)(2).
As discussed previously, the Commission's proposal first
establishes an all-months-combined limit, then sets a single-month
limit at two-thirds of the level of that all-months-combined limit.
This is the same ratio between limits if first established in a single-
month limit, as proposed by the CME, and then multiplied by 150% to
arrive at an all-months-combined position limit. This two-thirds ratio,
as proposed by the Commission, is therefore the same ratio that is
proposed by the CME Group and consistent with the ratio between the
single-month limits and the all-month-combined limits in the existing
Federal agricultural positions limits which
[[Page 4162]]
range from a low of 61% to a high of 77%. The table below provides a
comparison of position limits as they would be set under the proposed
Commission and CME Group approaches to establishing speculative
position limits:
Proposed Federal Speculative Position Limits For Referenced Energy Contracts
----------------------------------------------------------------------------------------------------------------
All-months-
combined (AMC)
average open
Referenced energy contract Class of contract interest AMC limit Single-month
(January 2008- limit
December 2008)
----------------------------------------------------------------------------------------------------------------
NYMEX Light Sweet Crude Oil........ NYMEX Physical 2,881,901 98,100 65,400
Delivery.
NYMEX Cash-Settled... 963,871 98,100 65,400
Aggregate Limit...... 3,845,772 98,100 65,400
NYMEX New York Harbor Gasoline NYMEX Physical 252,564 9,000 6,000
Blendstock (RBOB). Delivery.
NYMEX Cash-Settled... 29,306 8,800 5,900
Aggregate Limit...... 281,870 9,000 6,000
NYMEX New York Harbor No. 2 Heating NYMEX Physical 254,442 10,100 6,800
Oil. Delivery.
NYMEX Cash-Settled... 73,996 10,100 6,800
Aggregate Limit...... 328,438 10,100 6,800
NYMEX Henry Hub Natural Gas........ NYMEX Physical 1,236,257 132,700 88,500
Delivery.
NYMEX Cash-Settled... 3,088,239 132,700 88,500
ICE Cash-Settled..... 904,754 132,700 88,500
Aggregate Limit...... 5,229,250 132,700 88,500
----------------------------------------------------------------------------------------------------------------
Proposed Energy Speculative Limits by CME Group
----------------------------------------------------------------------------------------------------------------
Average lead
month open
interest All-months- Single-month
Reference energy contract Exchange (January 2008- combined limit limit
December 2008)
----------------------------------------------------------------------------------------------------------------
NYMEX Light Sweet Crude Oil........ NYMEX................ 841,607 65,000 43,400
NYMEX New York Harbor Gasoline NYMEX................ 107,439 10,000 6,700
Blendstock (RBOB).
NYMEX New York Harbor No. 2 Heating NYMEX................ 98,977 9,300 6,200
Oil.
NYMEX Henry Hub Natural Gas........ NYMEX................ 505,220 39,800 26,600
ICE.................. 124,860 11,300 7,500
----------------------------------------------------------------------------------------------------------------
VIII. Request for Comment
The Commission requests comment on all aspects of this proposal,
and particularly requests comments on the following issues and
responses to the following questions:
1. Are Federal speculative position limits for energy contracts
traded on reporting markets necessary to ``diminish, eliminate, or
prevent'' the burdens on interstate commerce that may result from
position concentrations in such contracts?
2. Are there methods other than Federal speculative position limits
that should be utilized to diminish, eliminate, or prevent such
burdens?
3. How should the Commission evaluate the potential effect of
Federal speculative position limits on the liquidity, market efficiency
and price discovery capabilities of referenced energy contracts in
determining whether to establish position limits for such contracts?
4. Under the class approach to grouping contracts as discussed
herein, how should contracts that do not cash settle to the price of a
single contract, but settle to the average price of a sub-group of
contracts within a class be treated during the spot month for the
purposes of enforcing the proposed speculative position limits?
5. Under proposed regulation 151.2(b)(1)(i), the Commission would
establish an all-months-combined aggregate position limit equal to 10%
of the average combined futures and option contract open interest
aggregated across all reporting markets for the most recent calendar
year up to 25,000 contracts, with a marginal increase of 2.5% of open
interest thereafter. As an alternative to this approach to an all-
months-combined aggregate position limit, the Commission requests
comment on whether an additional increment with a marginal increase
larger than 2.5% would be adequate to prevent excessive speculation in
the referenced energy contracts. An additional increment would permit
traders to hold larger positions relative to total open positions in
the referenced energy contracts, in comparison to the proposed formula.
For example, the Commission could fix the all-months-combined aggregate
position limit at 10% of the prior year's average open interest up to
25,000 contracts, with a marginal increase of 5% up to 300,000
contracts and a marginal increase of 2.5% thereafter. Assuming the
prior year's average open interest equaled 300,000 contracts, an all-
months-combined aggregate position limit would be fixed at 9,400
contracts under the proposed rule and 16,300 contracts under the
alternative.
6. Should customary position sizes held by speculative traders be a
factor in moderating the limit levels proposed by the Commission? In
this connection, the Commission notes that current regulation 150.5(c)
states contract markets may adjust their speculative
[[Page 4163]]
limit levels ``based on position sizes customarily held by speculative
traders on the contract market, which shall not be extraordinarily
large relative to total open positions in the contract * * *''
7. Reporting markets that list referenced energy contracts, as
defined by the proposed regulations, would continue to be responsible
for maintaining their own position limits (so long as they are not
higher than the limits fixed by the Commission) or position
accountability rules. The Commission seeks comment on whether it should
issue acceptable practices that adopt formal guidelines and procedures
for implementing position accountability rules.
8. Proposed regulation 151.3(a)(2) would establish a swap dealer
risk management exemption whereby swap dealers would be granted a
position limit exemption for positions that are held to offset risks
associated with customer initiated swap agreements that are linked to a
referenced energy contract but that do not qualify as bona fide hedge
positions. The swap dealer risk management exemption would be capped at
twice the size of any otherwise applicable all-months-combined or
single non-spot-month position limit. The Commission seeks comment on
any alternatives to this proposed approach. The Commission seeks
particular comment on the feasibility of a ``look-through'' exemption
for swap dealers such that dealers would receive exemptions for
positions offsetting risks resulting from swap agreements opposite
counterparties who would have been entitled to a hedge exemption if
they had hedged their exposure directly in the futures markets. How
viable is such an approach given the Commission's lack of regulatory
authority over the OTC swap markets?
9. Proposed regulation 20.02 would require swap dealers to file
with the Commission certain information in connection with their risk
management exemptions to ensure that the Commission can adequately
assess their need for an exemption. The Commission invites comment on
whether these requirements are sufficient. In the alternative, should
the Commission limit these filing requirements, and instead rely upon
its regulation 18.05 special call authority to assess the merit of swap
dealer risk management exemption requests?
10. The Commission's proposed part 151 regulations for referenced
energy contracts would set forth a comprehensive regime of position
limit, exemption and aggregation requirements that would operate
separately from the current position limit, exemption and aggregation
requirements for agricultural contracts set forth in part 150 of the
Commission's regulations. While proposed part 151 borrows many features
of part 150, there are notable distinctions between the two, including
their methods of position limit calculation and treatment of positions
held by swap dealers. The Commission seeks comment on what, if any, of
the distinctive features of the position limit framework proposed
herein, such as aggregate position limits and the swap dealer limited
risk management exemption, should be applied to the agricultural
commodities listed in part 150 of the Commission's regulations.
11. The Commission is considering establishing speculative position
limits for contracts based on other physical commodities with finite
supply such as precious metal and soft agricultural commodity
contracts. The Commission invites comment on which aspects of the
current speculative position limit framework for the agricultural
commodity contracts and the framework proposed herein for the major
energy commodity contracts (such as proposed position limits based on a
percentage of open interest and the proposed exemptions from the
speculative position limits) are most relevant to contracts based on
other physical commodities with finite supply such as precious metal
and soft agricultural commodity contracts.
12. As discussed previously, the Commission has followed a policy
since 2008 of conditioning FBOT no-action relief on the requirement
that FBOTs with contracts that link to CFTC-regulated contracts have
position limits that are comparable to the position limits applicable
to CFTC-regulated contracts. If the Commission adopts the proposed
rulemaking, should it continue, or modify in any way, this policy to
address FBOT contracts that would be linked to any referenced energy
contract as defined by the proposed regulations?
13. The Commission notes that Congress is currently considering
legislation that would revise the Commission's section 4a(a) position
limit authority to extend beyond positions in reporting market
contracts to reach positions in OTC derivative instruments and FBOT
contracts. Under some of these revisions, the Commission would be
authorized to set limits for positions held in OTC derivative
instruments and FBOT contracts.\83\ The Commission seeks comment on how
it should take this pending legislation into account in proposing
Federal speculative position limits.
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\83\ See, e.g., the Over-the-Counter Derivatives Markets Act of
2009 (OCDMA), H.R. 3795, 111th Congress, 1st Session (2009). OCDMA
would also abolish the DTEF, ECM and ECM-SPDC market categories.
---------------------------------------------------------------------------
14. Under proposed regulation 151.2, the Commission would set spot-
month and all-months-combined position limits annually.
a. Should spot-month position limits be set on a more frequent
basis given the potential for disruptions in deliverable supplies for
referenced energy contracts?
b. Should the Commission establish, by using a rolling-average of
open interest instead of a simple average for example, all-months-
combined position limits on a more frequent basis? If so, what reasons
would support such action?
15. Concerns have been raised about the impact of large, passive,
and unleveraged long-only positions on the futures markets. Instead of
using the futures markets for risk transference, traders that own such
positions treat commodity futures contracts as distinct assets that can
be held for an appreciable duration. This notice of rulemaking does not
propose regulations that would categorize such positions for the
purpose of applying different regulatory standards. Rather, the owners
of such positions are treated as other investors that would be subject
to the proposed speculative position limits.
a. Should the Commission propose regulations to limit the positions
of passive long traders?
b. If so, what criteria should the Commission employ to identify
and define such traders and positions?
c. Assuming that passive long traders can properly be identified
and defined, how and to what extent should the Commission limit their
participation in the futures markets?
d. If passive long positions should be limited in the aggregate,
would it be feasible for the Commission to apportion market space
amongst various traders that wish to establish passive long positions?
e. What unintended consequences are likely to result from the
Commission's implementation of passive long position limits?
16. The proposed definition of referenced energy contract,
diversified commodity index, and contracts of the same class are
intended to be simple definitions that readily identify the affected
contracts through an objective and administerial process without
[[Page 4164]]
relying on the Commission's exercise of discretion.
a. Is the proposed definition of contracts of the same class for
spot and non-spot months sufficiently inclusive?
b. Is it appropriate to define contracts of the same class during
spot months to only include contracts that expire on the same day?
c. Should diversified commodity indexes be defined with greater
particularity?
17. Under the proposed regulations, a swap dealer seeking a risk
management exemption would apply directly to the Commission for the
exemption. Should such exemptions be processed by the reporting markets
as would be the case with bona fide hedge exemptions under the proposed
regulations?
18. In implementing initial spot-month speculative position limits,
if the notice of proposed rulemaking is finalized, should the
Commission:
a. Issue special calls for information to the reporting markets to
assess the size of a contract's deliverable supply;
b. Use the levels that are currently used by the exchanges; or
c. Undertake an independent calculation of deliverable supply
without substantial reliance on exchange estimates?
IX. Related Matters
A. Cost Benefit Analysis
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its actions before issuing new regulations under
the Act. Section 15(a) does not require the Commission to quantify the
costs and benefits of new regulations or to determine whether the
benefits of adopted regulations outweigh their costs. Rather, section
15(a) requires the Commission to consider the cost and benefits of the
subject regulations. Section 15(a) further specifies that the costs and
benefits of new regulations shall be evaluated in light of five broad
areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of the market for listed derivatives; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission may, in its discretion, give
greater weight to any one of the five enumerated areas of concern and
may, in its discretion, determine that, notwithstanding its costs, a
particular regulation is necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
The proposed regulatory framework for positions in the referenced
energy contracts, as defined by the proposed regulations, would impose
certain compliance costs on Commission-regulated exchanges and traders
that hold large positions in the referenced energy contracts. In
addition to the compliance costs that are directly related to the
proposed regulations, the proposed position limits and their
concomitant limitation on trading activity could impose certain general
but significant costs. The proposed position limits could cause
unintended consequences by decreasing liquidity in the markets for the
referenced energy contracts, impairing the price discovery process in
these markets, and pushing large positions to trading venues over which
the Commission has no direct regulatory authority.
Based on data received by the Commission's large trader reporting
system, the Commission believes the proposed position limits would
accommodate the normal course of speculative positions in markets for
the referenced energy contracts. Commission data indicates that
possibly ten traders, including traders that hold positions pursuant to
exchange-approved bona fide hedge exemptions, could be affected by the
proposed limits. For the reasons discussed below, the Commission
anticipates that the compliance costs associated with the proposed
limits and their impact on the efficiency of the markets for the
referenced energy contracts would be minimal.
The proposed spot-month position limits, although applicable to a
class of contracts and across reporting markets, are consistent with
current exchange-set spot-month position limits that have been
implemented and enforced by NYMEX and ICE pursuant to DCM and ECM-SPDC
core principles and Commission guidance. In addition, both NYMEX and
ICE implement position accountability rules for positions outside the
spot month and routinely monitor and solicit reports from large
traders. The affected exchanges and large traders therefore are
accustomed to an existing compliance system for large positions and the
processing of hedge and spread exemptions from exchange-set spot-month
position limits. In addition, a significant portion of the affected
traders are currently subject to the Commission's large trader
reporting system and should have compliance systems in place to
accommodate any new potential regulatory requirements. For these
reasons, the compliance costs associated with the proposed limits
should be minimal.
Section 4a(a) has identified excessive speculation that causes
unwarranted fluctuations in the price of a commodity as an undue burden
on commerce. Accordingly section 4a(a) of the Act gives the Commission
the ability to establish a position limit framework as a prophylactic
measure against sudden or unreasonable price fluctuations or
unwarranted price changes in accordance with the purposes and findings
of the Act. The Congressional endorsement of the Commission's
prophylactic use of speculative position limits extends to any
commodity and does not require a specific finding of an extant undue
burden on interstate commerce.
A primary intent of the proposed position limit framework is to
prevent a single trader or several traders from acquiring large or
concentrated positions that may cause unwarranted, sudden or
unreasonable fluctuations in the price of energy commodities. The
Commission is concerned that concentrated positions at or near the
proposed limits may directly lead to market disruptions causing
unwarranted, sudden or unreasonable fluctuations in the price of energy
commodities.
Another concern regarding the existence of large speculative
positions is the possibility for disruption across markets or trading
platforms listing similar or linked products. Because individual
markets have knowledge of positions only on their own trading
platforms, it is difficult for them to assess the full impact of a
trader's activities. In recognition of this, the proposed framework
also would apply to trading done in linked and economically similar
contracts across markets. The Commission notes that it has the unique
capacity for monitoring trading and implementing remedial measures
across interconnected futures and option markets in the referenced
energy contracts. The position limits, as proposed, are purposefully
set at the outer bounds of the levels that speculators are likely to
acquire in order to avoid disrupting or interfering with beneficial
trading activity. Still, the proposed regulations are intended to fully
achieve the prophylactic purpose of section 4a(a) of the Act.
B. The Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies consider the impact of their regulations on
small businesses. The requirements related to the proposed amendments
fall mainly on registered entities, exchanges, futures commission
merchants, clearing members, foreign
[[Page 4165]]
brokers, and large traders. The Commission has previously determined
that exchanges, futures commission merchants and large traders are not
``small entities'' for the purposes of the RFA.\84\ Similarly, clearing
members, foreign brokers and traders would be subject to the proposed
regulations only if carrying or holding large positions. Accordingly,
the Chairman, on behalf of the Commission, hereby certifies, pursuant
to 5 U.S.C. 605(b), that the actions proposed to be taken herein would
not have a significant economic impact on a substantial number of small
entities.
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\84\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------
C. Paperwork Reduction Act
Certain provisions of the proposed regulations would result in new
collection of information requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA''). The Commission therefore is
submitting this proposal to the Office of Management and Budget
(``OMB''), along with proposed new CFTC Form 404, for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
The title for this proposed collection of information is
``Regulation 1.45 and Parts 20 and 151--Position Limit Framework For
Referenced Energy Contracts'' (OMB control number 3038-NEW).
If adopted, responses to this collection of information would be
mandatory. The Commission will protect proprietary information
according to the Freedom of Information Act and 17 CFR part 145, headed
``Commission Records and Information.'' In addition, the Commission
emphasizes that section 8(a)(1) of the Act strictly prohibits the
Commission, unless specifically authorized by the Act, from making
public ``data and information that would separately disclose the
business transactions or market positions of any person and trade
secrets or names of customers.'' \85\
---------------------------------------------------------------------------
\85\ 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------
Under the proposed regulations, reporting markets listing, and
market participants trading, the referenced energy contracts would be
subject to the position limit framework established by proposed part
151 and the application and reporting requirements of proposed
regulation 1.45 and part 20. Proposed regulation 1.45 sets forth the
application procedure for swap dealers that would seek an exemption
from the proposed Commission-set Federal speculative position limits
for referenced energy contracts. Proposed part 20 would require similar
reports from persons holding large positions under the proposed
conditional-spot-month position limit, as bona fide hedgers, as swap
dealers, and as traders with certain delta-adjusted positions. The
Commission estimates that affected traders, as a result of their
diversified business structure, would be subject to most or all of the
requirements and exemptions of proposed regulation 1.45 and parts 20
and 151.
Should the proposed regulations be adopted, the total number of
traders that would be subject to the regulations is estimated at 10,
with each providing an estimated 20 reports to the Commission at an
estimated compliance time of four hours per response. Accordingly, the
Commission estimates the aggregate annual burden that would be imposed
by the regulations, as proposed, to be 800 hours. The Commission
specifically notes that the estimated annual burden provided on the
affected exchanges and traders is in addition to, and does not include,
costs incurred from compliance with other regulatory and operational
requirements. The Commission invites the public and other Federal
agencies to comment on any aspect of the reporting and recordkeeping
burdens discussed above.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments in order to: (i) Evaluate whether the proposed collections of
information are necessary for the proper performance of the functions
of the Commission, including whether the information will have
practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collections of information;
(iii) determine whether there are ways to enhance the quality, utility,
and clarity of the information to be collected; and (iv) minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
You may submit your comments directly to the Office of Information
and Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at OIRA-
[email protected]. Please provide the Commission with a copy of
your comments so that we can summarize all written comments and address
them in any subsequent notice of rulemaking. Refer to the Addresses
section of this notice for comment submission instructions to the
Commission. You may obtain a copy of the supporting statements for the
collection of information discussed above by visiting RegInfo.gov. OMB
is required to make a decision concerning the collection of information
between 30 to 60 days after publication of this notice. Consequently, a
comment to OMB is most assured of being fully considered if received by
OMB (and the Commission) within 30 days after the publication of this
notice of proposed rulemaking.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 20
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 151
Position limits, Bona fide hedge positions, Spread exemptions,
Energy commodities.
In consideration of the foregoing, pursuant to the authority
contained in the Commodity Exchange Act, the Commission hereby proposes
to amend chapter I of title 17 of the Code of Federal Regulations as
follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c,
13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by Title XIII of
the Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246,
122 Stat. 1624 (June 18, 2008).
2. Add Sec. 1.45 in part 1 to read as follows:
Sec. 1.45. Application for a swap dealer exemption.
(a) Persons seeking an exemption from the speculative position
limits established by the Commission for referenced energy contracts
under Sec. 151.2 of this chapter, pursuant to an exemption for swap
dealers under Sec. 151.3(a)(2) of this chapter, shall:
(1) File an initial application for an exemption and, thereafter,
update such application annually, as the Commission shall require;
(2) Provide as part of the application, all information required by
the Commission, including but not limited to:
(i) A completed Form 40 along with the information required under
Sec. 18.04 of this chapter;
(ii) A certification that the person is a swap dealer as defined in
Sec. 151.1 of this chapter; and
[[Page 4166]]
(iii) Specific consent to having their name published on the
Commission's Web site (http://www.cftc.gov) as having received a swap
dealer exemption from the speculative position limits; provided
however, that such list shall be published no more than once annually,
that no publication of the name of a swap dealer shall be made earlier
than six calendar months following the date on which the exemption was
granted, and that such publication shall not disclose the related
commodities in which the person is swap dealer or any other information
provided by the swap dealer to the Commission that would be
inconsistent with section 8(a)(1) of the Act; and
(3) Comply with the reporting requirements of Sec. 20.02 of this
chapter.
(b) Form, manner and time of filing.
(1) An application under paragraph (a) of this section shall be
submitted in the format and in the manner and within the time specified
by the Commission.
(2) The Commission hereby delegates, until such time as the
Commission orders otherwise, to the Director of the Division of Market
Oversight and to such members of the Commission's staff acting under
the Director's direction as the Director may designate, the authority
to specify the format, manner and time period for applications to be
submitted under paragraph (a) of this section. The Director may submit
to the Commission for its consideration any matter that has been
delegated in this paragraph. Nothing in this paragraph prohibits the
Commission, at its election, from exercising the authority delegated in
this paragraph.
3. Add part 20 to read as follows:
PART 20--REPORTS IN CONNECTION WITH POSITIONS IN REFERENCED ENERGY
CONTRACTS
Sec.
20.00 Conditional-spot-month position limit.
20.01 Bona fide hedging.
20.02 Reports from swap dealers.
20.03 Delta-adjusted positions.
20.04 Form, manner and time of filing.
Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,
6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food,
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.
1624 (June 18, 2008).
Sec. 20.00 Conditional-spot-month position limit.
(a) Information required. All persons that acquire positions in a
referenced energy contract pursuant to the conditional-spot-month
position limit of Sec. 151.2(a)(2) of this chapter shall submit to the
Commission a Form 40 and provide the information required under Sec.
18.04 of this chapter.
(b) Additional cash and derivatives position data. All persons
subject to paragraph (a) of this section shall also submit the
following position data, net long or short, on Part A of Form 404:
(1) The trader's cash positions in contracts priced at a fixed
price differential (including a zero differential) to the referenced
energy contract or the contract's underlying commodity;
(2) The trader's cash positions in contracts priced to a cash
market index that includes quotations or prices for spot or forward
contracts in the referenced energy contract's underlying commodity;
(3) The trader's positions in cleared or bilateral swap agreements
with a fixed price differential (including zero) to the referenced
energy contract or the contract's underlying commodity; and
(4) Positions in any other physically or financially settled
contracts that are economically related to the trader's positions that
are acquired pursuant to the conditional-spot-month position limit.
Sec. 20.01 Bona fide hedging.
(a) Information required. All persons that acquire positions in a
referenced energy contract pursuant to the bona fide hedge exemption of
Sec. 151.3(a)(1) of this chapter shall submit to the Commission a Form
40 and provide the information required under Sec. 18.04 of this
chapter.
(b) Additional information on cash market activities. All persons
subject to paragraph (a) of this section shall also submit the
following information on Part B of Form 404:
(1) The quantity of stocks owned of the commodity that underlies a
referenced energy contract and its products and by-products;
(2) The quantity of fixed price purchase commitments open in such
commodity and its products and by-products;
(3) The quantity of fixed price sale commitments open in such
commodity and its products and by-products;
(4) For unsold anticipated commercial services or output directly
connected to producing, transporting, refining, merchandising,
marketing, or processing a commodity underlying a referenced energy
contract:
(i) Annual sales of such services or output for the three complete
fiscal years preceding the current fiscal year; and
(ii) Anticipated sales of such services or output for the period
hedged; and
(5) For unfilled anticipated requirements:
(i) Annual requirements of such commodity for the three complete
fiscal years preceding the current fiscal year; and
(ii) Anticipated requirements of such commodity for the period
hedged.
(6) The shares of an investment vehicle, including, but not limited
to, exchange-traded funds, registered investment companies, commodity
pools and private investment companies, that holds or owns a referenced
energy contract or the commodity that underlies a referenced energy
contract and its products and by-products.
(c) Conversion methodology. Persons engaged in the hedging of
commercial activity that does not involve the same quantity or
commodity as the quantity or commodity associated with positions in
referenced energy contracts shall furnish this information both in
terms of the actual quantity and commodity used in the trader's normal
course of business and in terms of the referenced energy contracts that
are sold or purchased. In addition, such persons shall explain the
methodology used for determining the ratio of conversion between the
actual or anticipated cash positions and the trader's positions in
referenced energy contracts.
Sec. 20.02 Reports from swap dealers.
(a) Initial reports. Persons who have received a swap dealer
exemption pursuant to Sec. 151.3(a)(2) of this chapter from the
speculative position limits established by the Commission for
referenced energy contracts under Sec. 151.2 of this chapter shall
provide on Part C of Form 404 to the Commission, and to any registered
entity on which the swap dealer's referenced energy contract positions
are listed, a monthly report including:
(1) Swap positions based upon the commodity underlying the
referenced energy contracts separately for proprietary and customer
accounts on a daily basis; and
(2) A daily summary of dealing and trading activity in swaps based
upon the commodity underlying the referenced energy contracts.
(b) Supplemental reports. Whenever the risk management requirements
of a swap dealer require it to increase its positions in referenced
energy contracts from levels justified by information provided in its
initial application under Sec. 1.45 of this chapter or the swap
dealer's most recent report submitted under this section, the swap
dealer shall file, on the business day following the date on which such
positions were acquired, a supplemental report in compliance with the
requirements of
[[Page 4167]]
paragraph (a) of this section that supports the increase in position
levels.
(c) Recordkeeping. Traders that receive a swap dealer exemption
under Sec. 151.3(a)(2) of this chapter shall maintain complete books
and records relating to their swap dealing activities (including
transactional data) and make such books and records, along with a list
of counterparties to customer swap agreements that support and
substantiate the need to offset swap agreement risks on reporting
markets, available to the Commission upon request.
Sec. 20.03 Delta-adjusted positions.
(a) Information required. All persons with referenced energy
contract positions in excess of the position limits of Sec. 151.2 of
this chapter that acquire such positions in reliance on Sec.
151.3(a)(3) of this chapter shall submit to the Commission a Form 40
and provide the information required under Sec. 18.04 of this chapter.
(b) Additional information. In addition, such persons shall provide
the following on Part D of Form 404:
(1) A certification that their positions, in whole or in part, are
in excess of the applicable limits as a result of the application of a
futures-equivalent calculation that adjusts option positions by the
previous day's risk factor, or delta coefficient; and
(2) Complete position data that demonstrates that the application
of a contemporaneous risk factor, or delta coefficient, renders the
trader compliant with the position limits of Sec. 151.2 of this
chapter on an adjusted basis.
Sec. 20.04 Form, manner and time of filing.
Unless otherwise instructed in this part or by the Commission or
its designee, the Forms and information required to be filed under this
part shall be submitted at such time and in a form and manner specified
by the Commission. The Commission hereby delegates, until such time as
the Commission orders otherwise, to the Director of the Division of
Market Oversight and to such members of the Commission's staff acting
under the Director's direction as the Director may designate, the
authority to specify the format, manner and time period within which
the Forms and information required to be filed under this part shall be
submitted to the Commission. The Director may submit to the Commission
for its consideration any matter that has been delegated in this
paragraph. Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in this paragraph.
4. Add part 151 to read as follows:
PART 151--FEDERAL SPECULATIVE POSITION LIMITS FOR REFERENCED ENERGY
CONTRACTS
Sec.
151.1 Definitions.
151.2 Position limits for referenced energy contracts.
151.3 Exemptions for referenced energy contracts.
151.4 Aggregation of positions.
Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,
6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food,
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.
1624 (June 18, 2008).
Sec. 151.1 Definitions.
As used in this part--
Basis contract means a futures or option contract that is cash
settled based on the difference in price of the same commodity (or
substantially the same commodity) at different delivery points;
Calendar spread contract means a futures or option contract that
represents the difference between the settlement prices in one month of
a referenced energy contract and another month's settlement price for
the same referenced energy contract;
Contracts of the same class mean referenced energy contracts
(including option contracts on a futures-equivalent basis) on a single
reporting market that are based on the same commodity and delivered in
the same manner (cash-settled or physically-delivered), provided
however, that during their spot month, contracts shall be considered
contracts of the same class if, in addition, such contracts expire on
the same trading day;
Diversified commodity index means a commodity index with price
components that include energy as well as non-energy commodities,
provided however, that futures and option contracts based on a
diversified commodity index that incorporates the price of a commodity
underlying a referenced energy contract's commodity which are used to
circumvent the speculative position limits, shall be considered to be
referenced energy contracts for the purpose of applying the position
limits of Sec. 151.2 of this chapter;
Inter-commodity spread contract means a futures or option contract
that is based on the price difference between a referenced energy
contract and another commodity contract;
Referenced energy contract means a physically-delivered or cash-
settled futures or option contract, other than a basis contract or
contract on a diversified commodity index, that is a:
(1) New York Mercantile Exchange Henry Hub natural gas contract
(NG), or any other natural gas contract that is exclusively or
partially based on a trading unit of 10,000 million British thermal
units (mmBtu) of natural gas delivered at the Henry Hub pipeline
interchange in Erath, Louisiana;
(2) New York Mercantile Exchange Light Sweet crude oil contract
(CL), or any other crude oil contract that is exclusively or partially
based on a trading unit of 1,000 U.S. barrels of light sweet crude oil
delivered at the Cushing crude oil storage complex in Cushing,
Oklahoma;
(3) New York Mercantile Exchange New York Harbor No. 2 heating oil
contract (HO), or any other heating oil contract that is exclusively or
partially based on a trading unit of 1,000 U.S. barrels of No. 2 fuel
oil delivered at an ex-shore facility in New York Harbor;
(4) New York Mercantile Exchange New York Harbor gasoline
blendstock (RBOB) contract, or any other gasoline contract that is
exclusively or partially based on a trading unit of 1,000 U.S. barrels
of reformulated gasoline blendstock for oxygen blend delivered at an
ex-shore facility in New York Harbor; or
(5) Fraction or multiple of the contracts described in paragraphs
(1) through (4) of this section, so that when viewed on a fractional
basis or as a multiple, such contract is based on the same commodity in
equivalent trading units;
Reporting market means a reporting market as defined in Sec. 15.00
of this chapter;
Spot month means:
(1) For a contract that allows trading concurrently with the
issuance of delivery notices, the futures contract next to expire
during that period of time beginning at the close of trading on the
trading day preceding the first day on which delivery notices can be
issued to the clearing organization of a registered entity;
(2) For a contract that does not allow trading concurrently with
the issuance of delivery notices, the futures contract next to expire
during that period of time beginning at the close of trading on the
third trading day preceding the last trading day; or
(3) For a contract that cash-settles based on the price of one or
more physically-delivered contracts, the period of time that is the
spot-month for such physically-delivered contracts;
Spread contract means either a calendar spread contract or an
inter-commodity spread contract;
Swap agreement means a swap agreement as defined in Sec.
35.1(b)(1) of this chapter;
[[Page 4168]]
Swap dealer means, solely for the purposes of this part and Sec.
1.45 and part 20 of this chapter, any person who, as a significant part
of its business, holds itself out as a dealer in swaps, makes a market
in swaps, regularly engages in the purchase of swaps and their resale
to customers in the ordinary course of a business, or engages in any
activity causing the person to be commonly known in the trade as a
dealer or market maker in swaps;
Unless specifically defined otherwise, the terms defined in Sec.
150.1 of this chapter shall have the same meaning as they do in that
section.
Sec. 151.2 Position limits for referenced energy contracts.
(a) Spot-month position limits. Except as otherwise authorized in
Sec. 151.3, no person may hold or control positions in contracts of
the same class when such positions, net long or net short, are in
excess of:
(1) For physically-delivered contracts, a spot-month position
limit, fixed by the Commission at one-quarter of the estimated spot-
month deliverable supply; or
(2) For contracts that cash settle based on prices of physically-
delivered contracts, a conditional-spot-month position limit, fixed by
the Commission at one-quarter of the estimated spot-month deliverable
supply, provided that, a trader may, if permitted by reporting market
rules adopted to implement this paragraph, acquire or hold spot-month
positions equal to the product of the above specified level and the
spot-month multiplier of five if the trader does not hold positions in
spot-month physically-delivered referenced energy contracts and the
trader complies with the reporting requirements of part 20 of this
chapter.
(b) All-months-combined and single-month limits. Except as
otherwise authorized in Sec. 151.3, no person may hold or control
positions in a referenced energy contract when such positions, net long
or net short, are in excess of:
(1) Aggregate position limits:
(i) An all-months-combined aggregate position limit, across
reporting markets, fixed by the Commission at 10% of the open interest
of that referenced energy contract aggregated across all reporting
markets up to an open interest level of 25,000 contracts with a
marginal increase of 2.5% of aggregated open interest thereafter; or
(ii) A single-month aggregate position limit that is two-thirds of
the position limit fixed pursuant to paragraph (b)(1)(i) of this
section.
(2) Reporting market position limits:
(i) For a reporting market, an all-months-combined position limit
for contracts of the same class that is the lower of the aggregate
position limit for a referenced energy contract under paragraph
(b)(1)(i) of this section or, for contracts of the same class, 30% of a
class's average combined futures and delta-adjusted option month-end
open interest for the most recent calendar year on that reporting
market; or
(ii) For a reporting market, a single-month position limit for
contracts of the same class that is two-thirds of the position limit
fixed pursuant to paragraph (b)(2)(i) of this section, provided
however, that such positions shall not be greater than two times the
level of the position limit fixed pursuant to paragraph (b)(2)(i) of
this section on a gross basis.
(c) Minimum position limit. The position limits of Sec.
151.2(b)(2)(i) shall be replaced by an all-months-combined position
limit, fixed by the Commission at the greater of 5,000 contracts or 1%
of the open interest aggregated across all reporting markets, if the
resulting position limit calculated under this paragraph is higher than
an otherwise applicable position limit.
(d) Deliverable supply.
(1) Reporting markets listing physically-delivered referenced
energy contracts are required to submit to the Commission an estimate
of deliverable supply by the 31st of December of each calendar year.
(2) The estimate submitted under paragraph (d)(1) of this section
shall be accompanied by a description of the methodology used to derive
the estimate along with any statistical data supporting the reporting
market's estimate of deliverable supply.
(3) The Commission shall base its fixing of spot-month position
limits on the estimate provided under paragraph (d)(1) of this section
unless the Commission determines to rely on its own estimate of
deliverable supply.
(4) The Commission may base its initial fixing of spot-month
position limits solely on its own estimates of deliverable supply.
(e) Calculation of limits for the purposes of this section.
(1) For the purpose of calculating positions under this section,
referenced energy option contracts that do not settle into futures
contracts shall be included in any calculation on a futures-equivalent
basis and treated as futures contracts under the provisions of this
section.
(2) Open interest shall be calculated by combining the month-end
futures open interest and the open interest in its related option
contract, on a delta-adjusted basis, for all months listed on a
reporting market during the most recent calendar year.
(3) In determining or calculating all levels and limits under this
section, a resulting number shall be rounded up to the nearest hundred.
(4) For the purpose of calculating position limits under this
section, referenced energy contracts that are spread contracts, as
defined by Sec. 151.1, shall be excluded from any calculation of open
interest.
(f) Administrative process for fixing and publishing position
limits.
(1) The Commission shall fix the spot-month position limits (and
estimates of deliverable supply) and the all-months-combined position
limits under Sec. 151.2, aggregately across all reporting markets and
separately for each reporting market, by January 31st of each calendar
year, provided that, the initial fixing of position limits may occur on
a different date.
(2) The Commission hereby delegates, until such time as the
Commission orders otherwise, to the Director of the Division of Market
Oversight and to such members of the Commission's staff acting under
the Director's direction as the Director may designate, the authority
to fix the position limits to be established pursuant to paragraph
(f)(1) of this section. The Director may submit to the Commission for
its consideration any matter that has been delegated in this paragraph.
Nothing in this paragraph prohibits the Commission, at its election,
from exercising the authority delegated in this paragraph.
(3) The fixed position limits shall be published on the
Commission's Web site (http://www.cftc.gov) and shall become effective
on the 1st day of March immediately following the fixing date (or 30
complete calendar days following an initial fixing of position limits
under this part if such fixing is on a date other than the 31st of
January) and shall remain effective until the last day of the
immediately following February.
Sec. 151.3 Exemptions for referenced energy contracts.
(a) Positions that may exceed limits. The position limits set forth
in Sec. 151.2 may be exceeded to the extent that such positions are:
(1) Upon application to a reporting market for an exemption,
positions (other than positions that are held to offset risks
associated with swap agreements under paragraph (a)(2) of this section)
held in a proprietary account (as defined in Sec. 1.3(y) of this
chapter) shown to be bona fide hedging transactions, as defined and
approved
[[Page 4169]]
by a reporting market in a manner consistent with, but that may differ
from (to the extent that such differences are consistent with
commercial activity in the physical energy markets), Sec. Sec.
1.3(z)(1) and (2) of this chapter, provided that:
(i) Traders holding positions outside the spot month, and traders
holding spot-month positions with respect to spot-month positions only,
that are greater than or equal to a position limit set under Sec.
151.2 pursuant to a bona fide hedge exemption shall not also hold or
control positions speculatively; and
(ii) Traders holding positions that are greater than or equal to
twice a position limit set under to Sec. 151.2 pursuant to a bona fide
hedge exemption shall not also hold or control positions pursuant to an
exemption under paragraph (a)(2) of this section;
(2) Upon application under Sec. 1.45 of this chapter, swap dealer
risk management transactions outside of the spot month that are held to
offset risks associated with swap agreements, which are entered into to
accommodate swap customers and are either directly linked to the
referenced energy contracts or the fluctuations in value of the swap
agreements are substantially related to the fluctuations in the value
of the referenced energy contracts, and which do not exceed twice the
applicable speculative position limits in all-months-combined or in any
single non-spot-month, provided that traders holding positions under
this paragraph shall not also hold or control positions speculatively
when such the trader's total positions are greater than or equal to a
position limit set under to Sec. 151.2; or
(3) Subsequently demonstrated, in a report to be filed on the
calendar day following the acquisition of such positions pursuant to
part 20 of this chapter, to be below an applicable position limit once
option contracts that are a part of a trader's overall position are
adjusted by a contemporaneous risk factor or delta coefficient for such
options.
(b) Other exemptions. The position limits set forth in Sec. 151.2
of this chapter may be exceeded to the extent that such positions
remain open and were entered into in good faith prior to the effective
date of any rule, regulation, or order that specifies a limit.
(c) Call for information. Upon call by the Commission, the Director
of the Division of Market Oversight or the Director's designee, any
reporting market issuing, or any person claiming, an exemption from
speculative position limits under this section must provide to the
Commission such information as specified in the call relating to the
positions owned or controlled by that person, trading done pursuant to
the claimed exemption, the futures, options, over-the-counter, or cash
market positions that support the claim of exemption, and the relevant
business relationships supporting a claim of exemption.
Sec. 151.4 Aggregation of positions.
(a) Positions to be aggregated. The position limits set forth in
Sec. 151.2 of this chapter shall apply to:
(1) All positions in accounts in which any person, directly or
indirectly, has an ownership or equity interest of 10% or greater or,
by power of attorney or otherwise, controls trading; or
(2) Positions held by two or more persons acting pursuant to an
expressed or implied agreement or understanding the same as if the
positions were held by, or the trading of the positions were done by, a
single person.
(b) Positions in pools. Positions in pools in which a trader that
is a limited partner, shareholder or similar person has an ownership or
equity interest of less than 25% need not be aggregated with other
positions of the trader unless such person, by power of attorney or
otherwise, controls trading that is done by the pool.
Issued by the Commission this 14th day of January 2010, in
Washington, DC.
David Stawick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix Statements
Statement of Gary Gensler Chairman, Commodity Futures Trading
Commission Meeting of the Commodity Futures Trading Commission
The CFTC is charged with a significant responsibility to ensure
the fair, open and efficient functioning of futures markets. Our
duty is to protect both market participants and the American public
from fraud, manipulation and other abuses. Central to these
responsibilities is our duty to protect the public from the undue
burdens of excessive speculation that may arise, including those
from concentration in the marketplace.
The CFTC does not set or regulate prices. Rather, the Commission
is directed to ensure that commodity markets are fair and orderly.
It is for that reason that I support the staff's recommended
rulemaking regarding position limits in the energy markets and
exemptions for swap dealer risk management transactions.
The CFTC is directed in its original 1936 statute to set
position limits to protect against the burdens of excessive
speculation, including those caused by large concentrated positions.
In that law--the Commodity Exchange Act (CEA)--Congress said that
the CFTC ``shall'' impose limits on trading and positions as
necessary to eliminate, diminish or prevent the undue burdens that
may come as a result of excessive speculation. We are directed by
statute to act in this regard to protect the American public.
A transparent and consistent playing field for all physical
commodity futures should be the foundation of our regulations. Thus,
position limits should be applied consistently to all markets and
trading platforms and exemptions to them also should be consistent
and well-defined.
While we currently set and enforce position limits on certain
agriculture products, we do not for energy markets. Though there are
some differences between energy markets and agricultural markets,
those distinctions do not suggest to me that the federal government
should set position limits on one and not the other.
When the CFTC set position limits in the past, the agency sought
to ensure that the markets were made up of a broad group of market
participants with a diversity of views. At the core of our
obligations is promoting market integrity, which the agency has
historically interpreted to include ensuring markets do not become
too concentrated.
Position limits help to protect the markets both in times of
clear skies and when there is a storm on the horizon. In 1981, the
Commission said that ``the capacity of any contract market to absorb
the establishment and liquidation of large speculative positions in
an orderly manner is related to the relative size of such positions,
i.e., the capacity of the market is not unlimited.'' I believe this
is still true today.
The futures exchanges also have obligations with regard to the
setting of position limits. As was explored in our summer hearings,
though, the Commodity Futures Modernization Act (CFMA) changed the
exchanges' obligations. They have to comply with a core principal
that speaks to protecting against manipulation or congestion,
``especially during trading in the delivery month.'' These core
principles do not explicitly require the exchanges to set position
limits to guard against the burdens of excessive speculation. The
CEA, in section 4a, though, left the obligations of the CFTC
unchanged with regard to setting position limits to protect against
the possible burdens of excessive speculation. Our governing statute
importantly distinguishes between these two distinct, but sometimes
related, public policy goals--protecting against manipulation and
protecting against possible burdens of excessive speculation. The
CFMA clearly established that the exchanges had to address the first
while the CFTC had a broader mandate to address both. Though the
CFTC had in 1992 first allowed exchanges to establish accountability
regimes, it was only in 2001 that they did so in lieu of position
limits in the energy markets.
The past eight years have provided further evidence as to the
difference. Accountability levels are regularly and repeatedly
exceeded. In fact, they are neither stop signs nor even yield signs
for market participants. As reviewed at our summer hearings, in the
12 months between July 2008 and June 2009,
[[Page 4170]]
accountability levels for individual months were exceeded in the
four main energy contracts by 69 different traders, some exceeding
the levels during every trading day in the period.
The staff recommendation builds upon the Commission's experience
and previous guidance in setting position limits, particularly for
agricultural commodities.
Limits are set across the same contract month
groupings: All-months-combined (AMC); single-month; and spot-month.
Limits apply to aggregate positions in futures and
options combined.
There are exemptions for bona fide hedging transactions
involving commodity inventory hedges and anticipatory purchases or
sales of the commodity.
In addition, the proposed energy limits incorporate CFTC
guidance to exchanges in setting speculative position limits:
The basic formula for the level of the all-months-
combined limit is the same--10% of the first 25,000 contracts of
open interest plus 2.5% of open interest over 25,000 contracts.
The approach to setting the level of the spot-month
limit in the physical delivery contracts is the same--25% of the
estimated deliverable supply.
The proposed energy Federal limits builds upon the Commission's
experience in several ways:
The proposed energy limits would be responsive to the
size of the market and administratively reset on an annual basis,
rather than remaining unchanged until a new rule is issued.
The proposal extends contract aggregation by applying
all-months-combined and single-month energy speculative position
limits both to classes of contracts (all physical delivery or cash
settled contracts in a commodity at a reporting market) and to
positions held across all reporting markets.
The proposed energy limits aggregate positions at the
owner level rather than permitting disaggregation for independent
account controllers.
I believe that the staff recommendation is a measured and
balanced approach to setting position limits in the energy markets.
In addition to resetting position limits in the energy futures
and options markets, the proposed rulemaking both addresses
exemptions for bona fide hedgers and establishes a consistent
framework for certain swap dealer risk management exemptions. The
Commission and the exchanges currently grant relief from agriculture
and energy position limits to swap dealers on a case-by-case basis
via staff no-action letters or similar methods at the exchanges. The
proposed rule would, for the first time, bring uniformity to swap
dealer exemptions. Swap dealers would be required to file an
exemption application and update the application annually. Exempted
swap dealers also would be required to provide monthly reports of
their actual risk management needs and maintain records that
demonstrate their net risk management needs. The CFTC would publicly
disclose the names of swap dealers that have filed for an exemption
after a six-month delay.
This rule proposal is one step in a very important process. Our
vote on the proposed rulemaking begins a 90-day public comment
period. Many important questions are listed in the proposal, and we
are all very interested to hear from the public on these significant
issues.
I look forward to hearing from hedgers and speculators, dealers
and exchanges and other market participants and economists regarding
the proposal and how and if it would improve the functioning of the
markets. I am also interested in hearing any changes that they may
suggest.
As we vote to on a proposed rulemaking to set position limits in
the energy futures and options markets, we also are working with
Congress to bring comprehensive regulatory reform to the over-the-
counter derivatives markets. I was pleased that the House included
in the recently passed financial reform legislation enhanced
authority for the CFTC to set aggregate position limits for over-
the-counter derivatives contracts when they perform or affect a
significant price discovery function with respect to regulated
entities. While Congress continues to work on regulatory reform, it
is important that the Commission continue its work under current
authority to consider setting energy position limits. The CFTC is
working in parallel with the legislative process.
I thank the staff and my fellow Commissioners for all of the
preparation that went into the recommended rulemaking. I will now
entertain a motion that the Commission issue a proposed rule to set
position limits for futures and option contracts in the major energy
markets and establish consistent, uniform exemptions for certain
swap dealer risk management transactions.
Statement of Commissioner Michael V. Dunn Regarding the Notice of
Proposed Rulemaking for Speculative Position Limits for Referenced
Energy Contracts
Today I am voting to release the proposed notice of rulemaking
entitled Federal Speculative Position Limits for Referenced Energy
Contracts and Associated Regulations. My vote to release this
proposed rule should in no way be construed as an agreement with the
opinions expressed in the proposal or to the approach advocated in
setting these proposed position limits. Despite my serious
reservations, I have agreed to the release of this proposal so that
the public at-large has ample opportunity to voice their opinions
and concerns on this topic.
At the close of the Commission's position limits hearings on
August 5, 2009, I stated that:
[T]he CFTC does not have the authority to set speculative
position limits in all of the venues that may be affected by
excessive speculation, specifically over-the-counter markets (OTC)
and on foreign boards of trade (FBOT). Unilateral Commission action
in only the markets we currently regulate may not have the desired
effect of reigning in excessive speculation in the futures market.
Without similar steps in the OTC markets and on FBOTs, those seeking
to evade the limits we set could simply move to venues outside our
authority.
I believe this is still true today, and that forging ahead on a
position limits regime for political expediency is not the course of
action that this agency needs or one that promotes the health and
integrity of the futures industry in the United States. The simple
announcement of our hearings several months ago caused business to
migrate to OTC markets and FBOTs currently outside our purview. This
is an unacceptable consequence of regulation and is, I fear, a sign
of things to come if this agency does not take a coordinated
approach to bringing sensible regulation to the futures markets.
I think it needs to be made clear that the Proposed Position
Limits do not set trading limitations on any particular class of
investor, including passively managed long-only index funds. The
Proposed Position Limits' sole objective is to prevent excessive
speculation by a single entity. I would be very interested to hear
from the public on whether this incremental approach best addresses
the market wide concerns raised by those who participated in our
hearings last summer.
I would like to reiterate that my vote to release this document
should in no way be construed as an agreement of any kind to final
rules setting federal speculative position limits on energy
contracts. My commitment remains to accept comments and information
during the next few months with an open mind, and to work with my
fellow Commissioners to ensure that we have a functioning futures
industry.
Statement of Commissioner Jill Sommers Regarding the Notice of Proposed
Rulemaking for Speculative Position Limits for Referenced Energy
Contracts
Dissenting
The Commission and its predecessors have grappled with the
complex issues surrounding federal speculative position limits for
many years in connection with transactions based on agricultural
commodities. As prices rose across the board in virtually all
commodities throughout 2007 and 2008, the Commission focused its
attention on possible causes, including the influx of new traders
into the markets, in particular swap dealers hedging the risk
resulting from over-the-counter (OTC) business and traders seeking
exposure to commodities as an asset class through passive, long-term
investment in exchange traded funds (ETFs) and commodity index
funds. Concerns were raised in numerous Congressional hearings that
excessive speculation in both exchange-traded and OTC markets was to
blame for rising prices, particularly in the energy sector. The
Commission held three days of hearings in July and August of 2009 to
discuss a number of different approaches and has received continuous
feedback from the industry for the past several months. We now have
before us a proposal from staff which would implement federal
speculative position limits for futures and options contracts in
certain energy commodities.
I dissent from issuing the proposal for the following reasons. I
am concerned that hard positions limits may be imposed on exchange
trading without similar limits in place for
[[Page 4171]]
OTC markets. Legislation giving us the authority to impose OTC
limits may be enacted this year, but the timing and final form of
such legislation is unknown. While I wholeheartedly support efforts
to enhance our authority in this area, I am concerned that forging
ahead with federal limits in a piecemeal fashion is unwise. I am
especially concerned that doing so will have the perverse effect of
driving portions of the market away from centralized trading and
clearing at the very time we are urging all standardized OTC
activity to be traded on-exchange or cleared. Likewise, I am
concerned that, without global standards, trading will move to other
financial centers around the world. A report issued by the United
Kingdom's Financial Services Authority and HM Treasury last month
urges caution in introducing a position limits regime. See Financial
Services Authority & HM Treasury, Reforming OTC Derivative Markets,
A UK Perspective at 31-35 (Dec. 2009). Clearly, more work is needed
to achieve a uniform approach.
A delay in promulgating position limits will not leave the
markets unprotected. The proposal before us ``sets high position
levels that are at the outer bounds of the largest positions held by
market participants.'' Proposal at 59. Exchange position limits and
accountability rules remain in place and will continue to trigger
the first line of defense against potential market manipulations or
other disruptions. Even if the proposed federal limits were enacted,
exchanges would be obligated to begin monitoring positions on their
markets well before traders reach the federal limits. Aggressive use
of the Commission's surveillance authority in partnership with the
exchanges should be sufficient to closely monitor and protect the
integrity of the markets.
Finally, the proposal makes no distinction between passive ETF
and index traders and speculators. While the proposal does seek
comment on the feasibility of categorizing such traders differently,
I am discouraged that we are no closer to an answer than we were
prior to our 2009 hearings, the numerous Congressional hearings that
focused on index trading, and the Commission's extensive collection
of index investment data since June 2008, which it now publishes on
a quarterly basis. There is no doubt that passive long-only
investors do not behave as typical speculative traders. They have a
unique footprint in the markets. If the data demonstrates that
passive long traders are disrupting the markets, through the rolling
of their positions or otherwise, the Commission should make an
affirmative finding and tailor a solution that addresses the
problem.
It is also my hope that if the Commission adopts the limits
included in the proposal, that it also promulgate federal limits for
all other commodities with a finite supply, such as metals and the
agricultural commodities not currently subject to federal limits.
The rationale given for the current proposal applies equally to
contracts in those commodities. Another inconsistency that would
result if the Commission adopts the proposed rulemaking is that swap
dealers would continue to receive bona fide hedge exemptions for
positions related to agricultural commodities subject to federal
limits, but the new proposed risk management exemption regime would
apply to positions related to the four energy commodities included
in the proposal. A uniform policy would benefit not only the
Commission and market participants from an operational efficiency
standpoint, but would also enhance transparency by eliminating
needless complexities in the process.
Statement of Commissioner Bart Chilton Regarding the Notice of Proposed
Rulemaking for Speculative Position Limits for Referenced Energy
Contracts
``Moving Forward''
During the last decade, while traditional hedgers and
speculators increased their use of the futures markets, many new
non-traditional participants entered the arena, bringing with them
capital and a wealth of innovative approaches to trading. The trend
helped fuel the economic engine of our democracy--a good and
positive outcome. As markets and market participants evolve, the
Commission has an inherent responsibility to examine the impact, as
well as to proactively anticipate the potential impact, of changing
dynamics on those markets we are entrusted to oversee.
There is certainly no consensus about the potential and net
impact of new non-traditional speculators on commodity markets. Did
the massive passives--very large traders who have no interest in the
underlying physical commodity and have, in general, a fairly
inactive long trading strategy--contribute to $147 barrel oil in
2008? Some say there is no impact on markets, others (like
researchers at MIT, Rice and Princeton--and a new study out this
week from Lincoln University of Missouri) absolutely disagree.
Regardless, what is important to remember is that having an
impact is not equivalent to manipulation (or other abuse) under
current law, rule or regulation; it is not per se negative. However,
any conduct that potentially can distress markets, that has the
propensity to create artificiality in the markets, needs to be
understood and curbed as necessary.
The Commodity Exchange Act (CEA) has as its fundamental purpose
the deterrence and prevention of fraud, market abuse and
manipulation. To accomplish our mission requires vigilance and
thoughtful consideration of the potential for market aberrations. It
requires agile, balanced and prudent action in a timely manner--not
usually the mark of government. Our role in striking the right
balance with regard to the massive passives and other new dynamics
in the futures industry requires that we not merely review and
respond, but that we anticipate, deter and prevent.
That is why I support moving forward on the energy proposal
before the Commission. This proposal strikes a reasonable balance.
Simply put, it seeks to impose mandatory hard cap position limits.
Doing so is not the mark of wild-eyed overzealous regulators. In
fact, the position limits called for in the proposal are similar to
limits already in effect for agricultural commodities. This proposal
simply seeks to expand such mandatory hard cap position limits to
four heavily traded energy contracts.
Specifically, the energy proposal would establish four different
hard cap mandatory speculative position limits. They are: An
exchange-specific spot-month limit; a single month limit; an all-
months-combined limit; and an all-encompassing, cumulative U.S.
exchange position limit for substantially similar-traded contracts.
These limits would be dynamic in that they would be responsive to
the size of the market and subject to annual recalculation by the
Commission.
While I have been a staunch advocate for strong position limits,
the levels set for the limits, in my opinion, actually err on the
high side. The proposed limits will certainly be seen by some as
higher than appropriate. However, should the limits prove
inadequate, the agency can, and I hope will, recalibrate to ratchet
them down or even increase them as deemed appropriate. The most
important thing is to establish a thoughtful position limit system.
Furthermore, while the proposed limits err on the high side,
such levels would still ensure that the very largest traders'
positions, those with the greatest potential for causing market-
contortions, would be limited. Moreover, if limits were set too low,
there would be a possibility that trading migration could take
place, transferring traders to over-the-counter markets or overseas
exchanges. This is particularly noteworthy because Congress has yet
to pass regulatory reform legislation that would grant the CFTC
authority to properly regulate the over-the-counter markets--markets
that are currently dark in that there is not government regulation
or oversight. Hundreds of trillions of dollars are traded in these
dark markets and they can influence the price that consumers pay for
everything from gasoline, to a loaf of bread, to a home mortgage.
Passage of such legislation to provide regulators with authority in
this area is critically needed, and soon.
In addition to position limits, the proposal contains a
mechanism to consider certain exemptions to those limits. I have
suggested that any exemptions should be approved by the CFTC,
targeted for legitimate business purposes, verifiable and
transparent. This proposal meets all four of those criteria.
Traders hedging commercial risks, i.e. those who have inventory
or have an interest in the underlying physical commodity, would
qualify for a bona fide hedging exemption from the proposed
speculative position limits upon application to the exchange. The
CFTC would audit the use of this exemption to ensure its consistency
with our rules and regulations. Importantly, no longer included in
this class of traders would be swap dealers who establish positions
to offset the financial risk of customer initiated swap positions.
Instead, those traders could apply directly to the CFTC for a
limited risk management exemption for positions held outside of the
spot month. Swap dealers who receive this exemption from the CFTC
would be subject to rigorous and regular reporting requirements to
verify and qualify their need for the exemption. Currently, neither
the names nor the numbers of such exemptions
[[Page 4172]]
are available to the public. Under the proposal, in order to
increase transparency, the CFTC would make public the identities of
those who receive exemptions.
Finally, the proposal seeks comment from the public on the
question of expanding position limits to the metals complex and to
soft agricultural commodities. While I am pleased that this question
is at least posited through the proposed rule, I am extremely
disappointed that metals are not a part of this proposal as I have
sought. In essence, failure to include a proposed rule relative to
metals such as gold and silver prevents the inclusion of metals in
the final rule covering position limits in energy. As a result of
the omission, CFTC attorneys have opined that should the Commission
wish to establish position limits in metals as a result of public
comment, the agency would have to undertake an entirely separate
rulemaking. I strongly support thoughtful position limits in the
metals complex. I have advocated for their inclusion in this
proposal with each of my colleagues and staff, and regret the lack
of consensus that remains. It is my sincere hope and expectation
that the upcoming hearing on position limits with regard to metals
will enable us to move more expeditiously on a parallel regulatory
process for metals.
I thank everyone involved in conceiving and designing this
thoughtful proposal with regard to energy. We seek comment, for an
ample period of 90 days, on not only the overall proposal, but also
specifically on the question of expanding the concept to the metals
and soft agricultural commodities and on the question of imposing
separate position limits for the massive passives as a class of
investors. I look forward to the comments and ultimately to putting
a sensible position limit system in place.
Concurring Statement of Commissioner Scott D. O'Malia
Regarding the Proposed Federal Speculative Position Limits for
Referenced Energy Contracts and Associated Regulations
I concur on the release of the Federal Register notice of
proposed Federal speculative position limits for certain energy
commodities because I think it is important that the Commission
receive comments on the proposal. I encourage our market
participants, the public, and anyone with an interest in the markets
to inform the Commission about the impact of the proposed limits or
other limits, meaning limits as currently proposed, or potentially
lower limits as a result of this rulemaking or future rulemaking.
Notwithstanding my concurrence on the release for comments, I
have many concerns regarding the proposal's effectiveness and
justification. Keeping in mind the importance of maintaining the
market's fundamental purpose of allowing customers to hedge
commercial risk, I question the utility of rules that either present
any potential for circumventing CFTC authority or make energy
markets less transparent or liquid.
The Proposed Limits Could Result in Less U.S. Regulatory Oversight
I question the effectiveness of these regulatory changes,
especially as Congress is considering a much broader and
comprehensive financial reform package. I remain particularly
concerned with the impact of enacting the proposed position limits
on the regulated exchanges, while the Commission lacks the
regulatory authority to impose limits equitably upon all similar
energy transactions, including over-the-counter transactions. As we
work to increase transparency in these markets, the proposed
position limits may undermine our efforts by allowing participants
to turn to the less regulated and less transparent over-the-counter
markets, which would be detrimental to the markets and to the
public.
Status Quo for Index and Speculative Investors
Earlier this year, the Commission held hearings and heard
testimony from witnesses who were frustrated with recent prices and
volatility in commodity markets. Some advocated that the Commission
immediately impose position limits as a solution. This created high
expectations that any Commission proposal would impose limitations
on passive index and speculative investors. The release states that
no more than ten trading entities would be affected and most of
those would likely be entitled to a bona fide hedge exemption. This
means that few, if any, passive index and speculative investors will
be significantly impacted by the proposed position limits. The
proposed position limits will not change the investing behavior of
passive index investors, so long as they remain under the limits or
utilize the over-the-counter markets over which the Commission has
limited authority. The Commission would benefit from receiving
information on the impact, if any, the proposed position limits
might have on the trading strategies of passive index investors
going forward. In addition, the Commission should endeavor to
improve its understanding of the impacts of passive index investors
rolling over their position on a monthly basis to determine what, if
any, action is required.
Concerns About Effectiveness and Necessity
This proposal makes a case for the statutory justification for
the CFTC to impose position limits under Section 4a(a) of the Act.
However, the proposal fails to make a compelling argument that the
proposed position limits, which only target large concentrated
positions, would dampen price distortions or curb excessive
speculation. In large part, the lack of a compelling justification
may be due to the CFTC's own research and the Interagency Task Force
on Commodity Market's conclusion that the rise in oil prices was
largely attributable to fundamental supply and demand factors, which
is also supported by independent analysis. In addition, the fact
that the proposed position limits are modeled on the agricultural
commodities position limits forces us to examine whether those
agriculture limits were effective in preventing the price spikes in
2007 and 2008. Despite federal position limits, contracts such as
wheat, corn, soybeans, and cotton contracts were not spared record
setting price increases.
Missed Opportunity for Transparency
The proposed position limits provide swap dealers with twice the
single and all-months combined levels. This is a divergence from the
current practice of providing swap dealers with a hedge exemption
for commercial risk taken on over-the-counter transactions. I
question whether the Commission has missed an opportunity to
consider an alternative approach to provide swap dealers with a
``look through'' exemption, meaning swap dealers would receive a
bona fide hedge exemption for business related to counterparties who
would have been entitled to a hedge exemption if the counterparties
had used the futures markets. In exchange for this ``look through''
exemption, swap dealers would provide the Commission with their
customer's over-the-counter position data. That data would allow the
Commission to determine whether customers are attempting to
circumvent the position limits. I would be interested to receive
comments on whether the Commission should impose this ``look
through'' exemption, rather than the swap dealer exemption in the
proposed rule. In addition, I am interested to know what types of
data could be made available under a ``look through'' exemption.
While I am aware that the proposed rule contains a provision for
``look through'' recordkeeping, meaning data would be provided only
upon Commission request, this would not provide the same
transparency as the above.
Position Limits Must Not Hinder Commercial Risk Management
If position limits are implemented, the Commission must ensure
that such limits do not affect market liquidity and thus hinder the
market's fundamental purpose of allowing commercial hedgers to
manage risk. This is true for position limits on energy products or
for any other commodity.
In light of the many questions and concerns I have, I look
forward to receiving comments from market participants, the public,
and anyone with an interest in the markets that would be impacted by
the proposed position limits.
[FR Doc. 2010-1209 Filed 1-25-10; 8:45 am]
BILLING CODE 6351-01-P