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Public Gas Utilities Ask CFTC to Limit Speculation

The American Public Gas Association (APGA) is seeking the closure of a potential loophole in proposed regulations in order to prevent traders in exempt commercial markets (ECM) from amassing positions "well in excess of the intended speculative position limit," it said.

In comments filed with the Commodity Futures Trading Commission (CFTC) on a proposal to expand oversight of ECMs, the trade association representing public gas utilities expressed concern that the proposed rule does not set a unified speculative position limit. "Specifically, the rule does not propose to include noncleared significant price discovery contracts within the speculative position limit," it said.

The CFTC Reauthorization Act of 2008 required the CFTC to issue rules that bolster the oversight of ECMs (see NGI, May 19, 2008), thus establishing a level playing field among regulated exchanges and ECMs. ECMs are lesser-regulated electronic trading platforms that permit institutional participants to trade exempt over-the-counter commodities such as energy swaps. Atlanta-based IntercontinentalExchange is essentially unregulated as an ECM, according to the CFTC. The agency requested comments on the proposed rule in December (see NGI, Dec. 15, 2008).

"...APGA believes that with several modifications the effectiveness of the proposed rules could be increased in order to more completely achieve the intended goals of the Reauthorization Act," it said. "APGA recommends that the commission reconsider three aspects of the rules as proposed." These are operation of spot month limits; introduction of a new category of "volume accountability rules;" and enhancement of the proposed large trader reporting systems.

Of particular interest to APGA are the provisions of the Reauthorization Act that expanded the CFTC's oversight of ECMs having "significant price discovery contracts" (SPDC), it said.

"In light of the interconnectedness of SPDC contracts traded on different registered entities, a dual system of commission and market speculative position limits would be a far more effective regulatory tool than reliance only upon market-imposed speculative position limits," APGA said. "Such a dual system is not new; it has existed as part of the regulatory landscape since enactment of the Commodity Exchange Act in 1936. The commission traditionally has established its own speculative position limits for agricultural commodities, which like natural gas have limited deliverable supplies. Moreover, the Reauthorization Act specifically provides the commission with authority to establish commission-set speculative limits for SPDCs."

Establishing speculative position limits would allow the CFTC to aggregate positions across markets and enforce unified position limits, thus preventing a trader from amassing unduly large positions, APGA said. "The Commission has the opportunity through these proposed rules, using the authorities provided to it by the Reauthorization Act, to plug this potential loophole and to establish a large trader reporting system, which truly enables it routinely and prospectively to assemble a complete picture of the overall size and potential impact of a trader's position," APGA said.

"APGA and its members have worked tirelessly over the last several years to help ensure that the price...consumers pay for natural gas comes about through the operation of fair and orderly markets that accurately reflect supply and demand fundamentals and is not the result of market manipulation, excessive speculation or other market abuses," said APGA CEO Bert Kalisch.

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