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CFTC member wants hedge exemptions to reflect energy markets


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Washington — As the Commodity Futures Trading Commission moves toward proposing a revised position limits rule this summer, Commissioner Dan Berkovitz said he wants to ensure that exemptions for hedging reflect the characteristics of energy commodity markets.

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At issue is a proposal that would set federal position limits in 25 physical commodity futures and swaps markets, and which could affect the level of participation in oil, gas and electric derivatives markets. The agency is crafting another take on a proposal put out toward the end of former Chairman Timothy Massad's term.

Berkovitz in a speech Tuesday before the Energy Risk 2019 conference in Houston, said he believes position limits are needed to prevent price distortions from excessive speculation, according to written remarks provided by the commission. Among "clear" examples, Berkovitz, a Democrat, listed the Amaranth Advisors hedge fund's "excessively large positions in the natural gas futures and swaps markets."

"These price distortions ultimately harm the end-users and consumers of these vital commodities," he said.


But he acknowledged that the agency has taken in many comments on how hedge exemptions in the rule should better align with how energy contracts are delivered, settled and used to manage risk.

"As the next position limits proposal moves forward, I will consider these comments and work to ensure that hedge exemptions are appropriately tailored to the characteristics of the energy markets," he said.

The CFTC's re-proposed rule in December 2016 would allow the major exchanges to grant exemptions to position limits for bona fide hedging activities that are not expressly listed by the commission. The CFTC's definition of bona fide hedging and whether exemptions can be granted in a timely manner have been of key concern of energy sector interests, although the long-delayed rule became a back burner issue over the last two years at the CFTC. After the presidential election, a variety of industry groups argued the proposed rule was not necessarily required by the Dodd-Frank Act that followed the 2008 financial collapse.

CFTC Chairman Christopher Giancarlo, a Republican, has stressed a need to answer concerns that the measure would constrain common hedging practices. Giancarlo has indicated he would like the CFTC to consider a proposal by the end of the second quarter, Berkovitz noted.


With details still to emerge, Jenny Fordham of the Natural Gas Supply Association expressed concern that a so-called 'conditional limit' in the national gas market could dampen liquidity, should it remain in the proposal.

"We've heard some concerning rumors that the proposal retained the 'conditional limit' that would require a market participant to divest of the physically settled prompt month futures contract (CME) to access the higher speculative limit in cash-settled futures contracts (ICE)," she said in an email.

The commission's December 2016 limit on the cash-settled spot month NYMEX natural gas contract was effectively five times higher than the limit on the physically settled spot month contract, the group had noted in comments in February 2017. NGSA warned at the time that a requirement forcing divestiture would harm liquidity in the physically settled spot-month contract.

"We hope the commission will take the time to revisit this before moving forward with a regulatory approach that risks harming market liquidity," Fordham said in the email.

That conditional limit was the subject of considerable comment, including debate between the two exchanges, ICE and CME, whose volumes could be affected by the decision.

-- Maya Weber,

-- Edited by Richard Rubin,