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Industry Argues for Modification of CFTC's Proposed Position Limits Rule

Reaching the deadline for comments on proposed new rules aimed at limiting speculative trading in the swaps markets, the Commodity Futures Trading Commission (CFTC) had heard from dozens of energy companies, financial institutions and others, most recommending alterations to the agency's proposed rulemaking.

In comments filed at CFTC Monday, the Natural Gas Supply Association (NGSA) said its members "stand to incur substantial compliance costs" if the notice of proposed rulemaking (NOPR) is finalized as proposed. "In some circumstances, NGSA members would have to reduce the scope of their risk management programs in order to comply with the rules, thus increasing the price risk they bear and the costs borne by the ultimate end-users of the natural gas NGSA produces: the American consumer."

Last year, after withdrawing an appeal of a federal court decision that tossed a controversial final rule to limit speculative swaps trading, the CFTC voted to propose new rules in place of the discarded position limits rule (see Daily GPI, Nov. 5, 2013). 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.

But according to NGSA and others that filed with CFTC during a 90-day public comment period, the NOPR needs to be revamped before it is finalized. NGSA made a series of recommendations, including preserving the bona fide hedging exemption for "non-enumerated" bona fide hedge positions, and clarifying the "economically appropriate" criterion for the bona fide hedging position definition to accommodate a wide array of prudent commercial risk management practices. NGSA also asked CFTC to revisit "certain incorrect commission conclusions that certain risk reducing hedging activities used by natural gas commercial participants, particularly anticipated hedging activities, are not bona fide hedges," and called on CFTC to correct its analyses of bona fide hedges used in the natural gas and related industries.

The American Petroleum Institute (API) said in its filing that the NOPR "is too restrictive and could impair market liquidity in the energy commodity markets." CFTC's goal should be to curb excessive speculation while preserving liquidity in derivatives markets, said API, which called on regulators to "engage in a rigorous cost-benefit analysis that considers the impact to various market segments before implementing federal position limits."

Atmos Energy Holdings, a subsidiary of natural gas distributor Atmos Energy Corp., argued in its filing that CFTC should not subject trade options to position limits. "Forward contracts are not subject to the proposed position limits because the fundamental nature and scope of forward contracts effectively forecloses the possibility that a market participant could use forward contracts for speculation or market manipulation," Atmos said. "Trade options are far more similar in nature to forward contracts than other swaps.

"While Atmos understands and accepts that the CFTC's trade option rules impose recordkeeping and reporting requirements for trade options, Atmos contends that the burdens of subjecting trade options to position limits would far outweigh any possible benefits."

According to Plains All American Pipeline LP (PAAP), the NOPR is overly complex and would place an unnecessary burden on its pipeline business. "...PAAP is not aware of circumstances that require the imposition of the complex program embodied" in the proposed regulations, which "appear to limit PAAP's ability to hedge its risk and may deprive it of a vehicle through which it makes and takes physical delivery of crude oil," the company said in comments filed at CFTC.

Financial institutions have also called for sweeping revisions of the NOPR. In comments echoed by the Futures Industry Association, Morgan Stanley offered a list of changes it said should be made to the rule "so as not to diminish liquidity or impair price discovery in energy commodity futures contracts or harm the ability of commercial firms to manage their risks in the energy markets." Morgan Stanley's recommendations included defining bona fide hedging in a way that reflects and recognizes current risk management practices within energy commodity markets; permitting bona fide hedges for energy commodities in the spot month; permitting cross-commodity bona fide hedges involving energy commodities; and recognizing exchange determinations and providing greater flexibility in determination of deliverable supply.

The National Energy Marketers Association (NEMA) said in its filing that trade options should be excluded from characterization as referenced contracts, as physical contracts already are.

Monday was the final day that comments on the NOPR were accepted by CFTC.

CFTC has 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).

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, 2013).

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