CFTC Commissioner Bart Chilton says he is “optimistic” that the futures regulator will issue a proposal addressing position limits and hedge exemptions in energy futures trading by the middle of the month.

“I’m hopeful and optimistic that we will put something out in the very near future and would be disappointed if that didn’t take place by the middle of the month,” Chilton, an outspoken member of the Commodity Futures Trading Commission (CFTC), said in response to e-mail questions from NGI.

“I see no reason why we can’t put something out for comment soon,” he noted. “We’re nearing the end of the process” on the proposal. However, “I really can’t tell you anything about the [CFTC] proposal at this point.”

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 Daily GPI, July 29, 2009).

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 markets or other markets. Both Congress and the CFTC are working together on legislation to give the agency authority in OTC markets.

As for hedge exemptions, end-users called for them to be made available only to those who produce, process or consume a commodity.

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