CFTC completes rule on position limits with more tweaks for energy sector

Washington — The US Commodity Futures Trading Commission voted 3-2 to finalize a regulation setting federal speculative position limits on physical commodity derivatives, further adjusting the regulation to answer concerns of energy interests.

The final version expands upon the exemptions to the limits in order to better encompass hedging practices used by commercial end users including energy companies.

"Today we've reached the end of an arduous journey," said CFTC Chairman Heath Tarbert said, noting the regulation has been 10 years in the making. "We balance the interests of all the participants in this market, some of which are in diametric opposition."

Tweaking exemptions

In areas closely watched by energy interests, the final rule makes explicit that commercial market participants may qualify for hedging exemptions for unfixed price transactions. It seeks to allow for most common spread strategies covered by exchanges, along with added cross-commodity hedges, and calendar month average contracts, CFTC officials said. Addressing concerns about the role of storage, the final rule allows an anticipatory merchandizing hedge to be used in conjunction with storage hedges.

Going beyond those exemptions that are expressly listed, the rules creates a streamlined process for major exchanges to grant further hedge exemptions, with a 10-day period for the CFTC to review those decisions. A two-day review is set out for sudden hedging needs.

In one important revision, the process would allow market participants to enter into a hedge position while their application for an exemption is still pending CFTC review.

Concerns from Democrats

Democrats found fault with the rule on several grounds. They said the streamlined process would let market participants violate limits and create their own exemption without adequate guardrails.

"This provision may swallow the final rule," said CFTC Commissioner Dan Berkovitz in a dissenting statement.

The commission voted 3-2 to accept an amendment offered by Berkovitz that would encourage the exchanges to share exemption applications with the commission, affording CFTC more time for its role.

Commissioner Rostin Behnam worried the CFTC was relinquishing too much of its role to the exchanges.

The Democrats also faulted the CFTC for failing to address trading at settlement (TAS) transactions, particularly in light of their concerns about the collapse of West Texas Intermediate crude oil futures prices on April 20. They worried the CFTC should have finished its investigation of the price movements before acting on the major rule.

Given the CFTC's familiarity with the potential for manipulation and disruption of price discovery arising from an abuse of the TAS order type, the failure to address such known dangers is "inexcusable" Berkovitz said in his dissent.

Tarbert during the meeting offered that the TAS concern was a technical one that the CFTC could consider in weeks and months ahead, potentially through interpretation of what the CFTC allows for netting. The report on the WTI price event is undergoing peer review, he said. "When that comes out, if that sheds any light on how we can continue to work within the framework of position limits that that we're finalizing today, then obviously, we're certainly open to that."

Gas contract

The final rule makes a notable change limits in cash-settled natural gas contracts, compared with prior proposals, no longer aggregating positions across all markets. It applies a limit of 2000 contract spot-month level on cash-settled gas contracts on a per exchange and per over the counter swap market basis. That change sought to recognize the market liquidity across several exchanges and avoid picking winners and losers, according to CFTC staff.

In another significant change, the CFTC is extending the compliance timeframe to two years for position limits for economically equivalent swaps.

The Natural Gas Supply Association praised the CFTC for taking time to understand energy markets and develop a rule recognizing market differences and hedging practices. "We are especially pleased to see the commission's careful attention to end-user concerns, such as storage capacity hedging and the ability to retain exposure to index," said Jenny Fordham, NGSA senior vice president of government affairs.

After years of contention over the rule, and litigation that blocked the CFTC's first finalized version, Commissioner Brian Quintenz called interpretations in the new rule "bulletproof and the best reading of the statute that will ground what is a very good rule for many, many years to come."