The CME Group’s argument for eliminating the “conditional limit” in the natural gas futures market is “significantly flawed,” said IntercontinentalExchange (ICE).
The two exchanges are at odds over the conditional limit, which the Commodity Futures Trading Commission (CFTC) has provided since February 2010 for financially settled natural gas contracts during the last three days of contract trading. Under the conditional limit, a trader may carry a position in financially settled natural gas contracts (ICE H or Nymex NN) that is up to five times that of the physically settled natural gas contract’s (Nymex NG) position limit if the trader agrees not to hold a position in the natural gas contract in the last three days.
The conditional limit, which the agency seeks to codify in its proposed rule on position limits, in effect establishes a higher limit for cash-settled contracts as long as such positions are decoupled from large physical commodity holdings and the positions in physical delivery contracts that set or affect the value of cash settled positions.
“Removing or reducing the conditional limit would disrupt present market practice for the sole purpose of enhancing CME’s competitive position. CME already accounts for 97% of all U.S. futures market volumes and 70% of all natural gas derivative volumes,” ICE told the CFTC in a document filed on Friday.
“Eliminating or decreasing the conditional limit for cash-settled contracts would be a significant departure from current rules, which have the support of the broader market. In the 17 months since the conditional limit provision went into effect, natural gas prices have been lower and less volatile than historical levels,” ICE argued.
“ICE has received no complaints regarding natural gas markets during that time frame nor are we aware of any complaints received by Nymex [New York Mercantile Exchange] or the CFTC. The only party advocating for change in the well functioning status quo is CME, who is clearly biased regarding the issue and whose own analysis supports the [contention that the] change is significantly flawed,” it said.
But CME begs to differ. “There is no logical basis for a Commission regulation that rewards traders for exiting the primary futures market by granting them permission to hold five times the spot limit if they only trade in a different market for the underlying commodity where delivery does not occur,” said CME, which owns and operates Nymex, the Chicago Board of Trade and the Chicago Mercantile Exchange.
“It is CME Group’s position that equivalent spot month limits for physically settled and economically equivalent and cash-settled contracts, without any conditional component, is the most appropriate and effective means for preserving market integrity and achieving the Commission’s stated objectives,” the exchange said.
“The Commission provides no justification for giving traders in the cash-settled contract five times the limit of traders who hold physically delivered futures.”
CME reportedly withdrew its analysis of the “conditional limit” from Commission consideration last week, an ICE spokesman said.
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