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CFTC Meets Thursday to Consider Position Limits Rule

The Commodity Futures Trading Commission (CFTC) said it will hold a public meeting Thursday (Jan. 14) to consider issuing a much-anticipated proposed rule on energy position limits and hedge exemptions on regulated futures exchanges, derivatives transaction execution facilities and electronic trading facilities.

The meeting will be held at CFTC headquarters in Washington, DC, at 1 p.m. EST, and will be webcast at www.cftc.gov.

While declining to discuss the content of the proposal, CFTC Commissioner Bart Chilton said he personally has called for mandatory hard caps on position limits on energy and metals, and the redefining of how any exemptions to those limits are obtained and implemented. Specifically, he believes that exemptions must be approved by the CFTC; targeted for business purposes, not speculation; verifiable; and transparent.

"They're [CFTC] indicating that they want something fairly strong" with respect to position limits on regulated exchanges, said Susan Ginsberg, vice president of crude oil and natural gas regulatory affairs for the Independent Petroleum Association of America. "We're...very anxious to see what they come out with as a proposal."

The anticipated proposal follows three hearings that the CFTC held this summer on the issue. There was near unanimity at the CFTC hearings on one point -- that position limits were needed to to curb excessive speculation in energy commodity markets. But the consensus unraveled when it came to the details -- who should set position limits, who should be exempted from the limits and at what level the position limits ought to be set (see NGI, Aug. 3, 3009).

CFTC Chairman Gary Gensler at the time appeared certain that speculative limits were in order in the energy markets. "No longer must we debate the issue of whether or not to set position limits," he declared, but he acknowledged that the details still had to be ironed out. Energy users called on the CFTC to move quickly. "Rome is burning," they said, urging fast action on across-the-board hard position limits before the energy markets, particularly crude oil, take off again.

The major exchanges -- Atlanta-based IntercontinentalExchange (ICE), which owns the New York Board of Trade, and CME Group, which owns the New York Mercantile Exchange, Chicago Board of Trade and the Chicago Mercantile Exchange -- agreed that position limits were necessary in the energy commodity markets, but they were split over the issue of who should set the position limits -- the CFTC or the exchanges.

ICE CEO Jeff Sprecher called for aggregate position limits, accountability levels and hedge exemptions to be set and administered by the CFTC and not by the exchanges. But CME Group CEO Craig Donohue said he believed exchanges were best suited to impose position limits.

From a legal standpoint, the Commission's authority to establish position limits only goes to designated contracts, designated derivative transaction and execution facilities or where there's a significant price discovery contract in exempt commercial markets. The agency does not have statutory authority to post position limits in the over-the-counter (OTC) markets. Both Congress and the CFTC are working together on legislation to give the agency authority in OTC derivative markets.

In December, the House passed financial regulatory reform legislation that would require the CFTC to establish position limits on derivative swaps that perform a significant price discovery function and require aggregate limits across markets. The House bill also authorizes the CFTC to provide exemptions to position limits. (see NGI, Dec. 14, 2009). The Senate Banking and Agriculture Committees are expected to take up regulatory reform proposals when they return later this month (see related story).

Speaking in New York City last week, Gensler said that it was time for OTC derivatives to move away from a dealer-dominated market to a central marketplace to lower risk and increase transparency.

While the financial crisis of late 2008 "highlighted the need for regulatory reform of the derivatives marketplace," he said broad reform of these markets would have been warranted even if the crisis had not occurred.

"Some opponents of reform argue that derivatives were not at the center of the crisis and should thus not be regulated. I believe, however, that over-the-counter derivatives were at the heart of the crisis," he said in prepared remarks to the Council on Foreign Relations.

In the past three decades, the notional value of the OTC derivatives marketplace has gone from less than $1 trillion to more than $300 trillion in the United States, which is "more than 20 times the size of the American economy," Gensler said. While much of the market has changed, he lamented that it continues to be dealer-dominated and unregulated by the CFTC.

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