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CFTC Takes Aim at Commodity Speculators, Proposes New Position Limits Rule

Just days after withdrawing its appeal of a federal court decision that tossed a controversial final rule aimed at limiting speculative trading in the swaps markets, the Commodity Futures Trading Commission (CFTC) on Tuesday voted to propose new rules in place of the discarded position limits rule.

The commission voted 3-1 to approve a notice of proposed rulemaking for the new position limits rule, sending it for publication in the Federal Register and a public comment period. Chairman Gary Gensler and commissioners Bart Chilton and Mark Wetjen voted for the motion, and Scott O'Malia voted against it.

The proposed rule would implement section 737 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, clamping down on speculation in 28 selected physical commodity futures and swaps. Among the 28 are four energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and New York Harbor Heating Oil. Among other things, the proposed rule calls for limits on speculative positions in commodity contracts and their "economically equivalent" futures, options and swaps, and it would establish speculative limits on referenced contracts effective 60 days after publication of a final rule.

Congress has made it clear that exemptions for swap dealers were to be narrowed by CFTC, according to Chairman Gary Gensler. "This proposal today narrows such exemptions with regard to swap dealers while still allowing them to facilitate the bona fide hedging of their customers through what I have come to call the 'passthrough' provision," Gensler said.

Commissioners have sought to update position limits regulations to prevent a repeat of episodes of market manipulation that occurred in the silver market in 1979-1980 and the natural gas market in 2006 (see Daily GPI, Dec. 22, 2011).

The proposed rule changes would "help to diminish or prevent unreasonable fluctuations or unwarranted changes in the price of a commodity, such as the extreme price volatility in the 2006 natural gas market," said Lee Ann Duffy, of CFTC's Office of General Council.

The Industrial Energy Consumers of America (IECA) applauded the CFTC vote.

"For industrial market-users (hedgers), excessive speculation results in increased hedging costs and diminishes confidence that commodity prices fairly reflect actual supply and demand factors," IECA said. "Excessive speculation causes price volatility that damages the competitiveness of U.S. manufacturers."

CME Group, which as a self-regulated entity had managed position limits on its exchange, was critical of the proposal which returns the function to the CFTC.

"CME Group supports position limits in our markets and always has. However, we do not believe the proposed rules, which require that federal position limits be set and implemented by the CFTC, are warranted or necessary, particularly outside of the spot months. The proposed conditional limit rules, which would allow a trader to hold up to five times the limit in a cash-settled version of a contract, are inconsistent with the remainder of the proposal, and are a potentially dangerous idea...as just one example, based on our analysis of current data, under this proposed rule structure the limits for Nymex Physical Crude Oil would increase by 500%," CME Group said.

In late September 2012, U.S. District Judge Robert Wilkins vacated the CFTC's final rule on speculative position limits, ruling that the Dodd-Frank Wall Street Reform Act required the agency to "unambiguously" make a finding of necessity before imposing position limits (see Daily GPI, Oct. 1, 2012). Shortly thereafter, the Democratic majority on the Commission voted to appeal the court's decision (see Daily GPI, Nov. 19, 2012). Last week the CFTC voted to withdraw its appeal, clearing the way for a new draft (see Daily GPI, Oct. 30).

The Commission on Tuesday also unanimously voted for a proposal related to aggregating accounts under the position limits rule. That notice of proposed rulemaking will also be published in the Federal Register and go through a public comment period.

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