CFTC readies for Oct. 15 vote on long-awaited, final position limits regulation

Washington — The US Commodity Futures Trading Commission plans to vote on final federal position limits in physical commodity derivatives Oct. 15, advancing a key remaining Dodd-Frank Act regulation that has been about a decade in the making, and has long been the subject of contention.

The regulation has implications for the level of participation In energy derivatives markets as well as energy-sector hedging strategies. Earlier versions in past years drew concerns that common energy sector practices would be hampered.

"For nearly a decade, the CFTC has grappled with the issue of position limits, and next week we'll finally put the issue to rest," said CFTC Chairman Heath Tarbert in an email to S&P Global Platts. "Our team has worked tirelessly these last several months to incorporate the feedback we've received from the stakeholder community – specifically the energy and agricultural sectors," he said.

The planned vote comes as Republican Commissioner Brian Quintenz has announced plans to step down later in October, leaving the potential for a 2-2 split after that time.

Debate over exchanges

A proposed version, voted out 3-2 by the CFTC in January, would set federal position limits in 25 core futures contracts, including the NYMEX Henry Hub natural gas contract and three petroleum contracts, as well as futures and options related to those contracts and "economically equivalent" swaps. Aiming to preserve commercial entities' ability to hedge their risk, the proposal expanded the list of hedges expressly exempted from limits. Further, the proposal sought to create a streamlined process for major exchanges to grant more hedge exemptions, provided the full CFTC does not object within 10 days of a request. A two-day review was set out for sudden hedging needs.

That proposed version divided the CFTC along party lines, with Democrats raising questions about how high the levels were set, how much of the CFTC's role was ceded to exchanges, and the CFTC's position on the longstanding legal fight about whether it had to make a "necessity finding" before setting limits.

Energy interests

Energy interests largely welcomed the direction the CFTC set out in that proposal but continued to press for refinements. Some urged clarifications about what hedges would be exempted, or sought further exclusions.

Among key issues raised by natural gas suppliers has been the timing in which limits would apply to over the counter energy markets. The Natural Gas Supply Association in May comments argued for a phase-in to allow more time for implementation for those OTC markets.

It also raised concerns about a regulatory condition that a trader hold no spot month position in the physical delivery contract to access higher limits the rule would set in the cash settled natural gas futures market.

Some energy consumers and smaller market players, on the other hand, worried exemptions in the proposed rule went too far, that limits were set too high or that a wider net of transactions should be covered.

While the prior two CFTC chairmen had promised Congress to complete work on the contentious regulation during their terms, neither was able to move the complex regulation across the finish line. Former Commissioner Timothy Massad faced opposition from congressional Republicans against taking action during the final weeks of the Obama administration and instead put forward a re-proposal.

The January proposal marked the CFTC's fifth attempt at the regulation since it was called for in the Dodd Frank Act following the financial collapse. A first attempt, approved by a split vote in 2011, was struck down in court September 2012 in a case centering on whether the CFTC needed to first make a threshold finding that the limits were needed.

NGSA Senior Vice President Jenny Fordham, in an email, expressed optimism the final rule would add important certainty to the market.

"There's no doubt that it's been a long and difficult task with issues so tough that I'm sure no one got everything they wanted. That alone suggests that the commission found the workable middle ground — the fairway."

In reference to NGSA's support for a phase-in, she suggested that allowing implementation of the rule in the exchange markets first to inform implementation in the OTC markets "makes implementation more manageable and thoughtful, also contributing to its durability."