Responding to rival exchange CME Group’s most recent letter to the Commodity Futures Trading Commission (CFTC), IntercontinentalExchange (ICE) contends that CME has “undermine[d] their argument” that the agency’s proposed expansion of conditional spot month limits for all major physical commodities would heighten the threat of price manipulation.
“ICE does not feel it is necessary to address the substance of the CME’s new submission of data given that the CME’s resubmitted analysis, much like its previous submission, shows lower volatility, tighter price ranges and increased volume in the CME’s natural gas markets after the imposition of condition limits — all indicators of a healthy market,” Atlanta-based ICE, an advocate of conditional spot month limits, wrote in a letter Wednesday to the CFTC.
“Furthermore, CME’s voluntary adoption of the conditional limit for its own financially settled natural gas contract, though in direct conflict with its comments, provides additional empirical support for the conditional limit,” the exchange said.
The two exchanges have been at odds over the conditional limit, which the 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 could hold a position in financially settled natural gas contracts (ICE H or Nymex NN) that is up to five times the size of the physically settled natural gas contract’s (Nymex NG) position limit.
The CFTC is proposing to expand conditional spot month limits to include all major physical commodities.
CME submitted a letter to the CFTC on Aug. 5 expressing its opposition to conditional spot month limits, but because “aspects of that letter were based on an incorrect data set,” it submitted a follow-up letter on Monday (see Daily GPI, Aug. 16).
“CME Group believes that adoption of the Commission’s conditional limit proposal will increase the threat of price manipulation, especially in the final days of trading in the crucial spot month of all major agricultural, metals and energy futures contracts that call for physical delivery. The Commission should share this concern,” wrote the CME in a letter to the Commission on Monday. CME owns and operates the New York Mercantile Exchange, the Chicago Board of Trade and the Chicago Mercantile Exchange.
“Yet the Commission’s proposal would allow a speculator to maintain or establish a cash-settled futures or swap position equal to 125% of the commodity’s deliverable supply in the final trading days of a physically delivered contract,” the regulated exchange said.
“Moreover the Commission’s proposal both encourages a speculator to never participate in trading or to exit in the final trading days of the spot month the physically settled futures contract by allowing that speculator to hold five times the physical delivery contract limit and up to 25% of the physical commodity’s total deliverable supply, that is, hold 25% of the physical commodity itself. Given that it is a long-standing regulatory principle that 25% is the threshold at which a trader may be able [to] manipulate the market, the Commission’s conditional limits proposal defies sound regulatory policy,” CME said.
ICE called on the CFTC not to change its proposal. However, if it should decide to narrow it, ICE urged the agency to reopen the comment period to allow further public comment.
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