Last week, the Commodity Futures Trading Commission (CFTC)  released a proposal to apply speculative position limits to the energy futures markets. A public meeting was held on January 14, 2010 to discuss the new rules (which have some in the industry up in arms),  but they are not yet a done deal.

A summary of the proposed rules in a special FIA report issued on January 15 follows below.  Copies of the proposed rule, a fact sheet describing the proposed rule, statements by CFTC commissioners, and the presentation documents are available on the CFTC website. In addition, the FIA has posted links to all of these documents on a dedicated page on its website at http://www.futuresindustry.org/position-limits-.asp.

Position Limits: CFTC Releases Proposed Rule
Jan. 15, 2010
The Commodity Futures Trading Commission on Jan. 14 approved the release of a proposed rulemaking to establish a new position limit regime for four major energy commodities and a limited risk management exemption for swap dealers. The proposal will be published and interested parties will have 90 days to submit their comments to the CFTC. After that, the CFTC staff will review the comments and the proposal may be revised before a final vote.

The four energy commodities that would be subject to the new position limit regime are light sweet crude oil, Henry Hub natural gas, New York Harbor No. 2 heating oil, and New York Harbor gasoline blendstock. The proposed rule would only affect two exchanges: the New York Mercantile Exchange and IntercontinentalExchange. In the case of ICE, the only market that would be directly affected would be its Henry Hub natural gas contracts. In addition, the WTI crude oil contracts traded on ICE Futures Europe would be indirectly affected because the exchange is required to apply position limits to those contracts that are “comparable” to what Nymex applies to its WTI contracts.

During the Jan. 14 meeting, CFTC staff estimated what the position levels would have been if they had been in effect in 2009. The all months combined limits would have been: 98,200 contracts for light sweet crude oil; 8,900 contracts for gasoline; 13,100 contracts for heating oil; and 117,300 for natural gas.

The new position limits, if finalized in their present form, would affect only the largest traders, according to CFTC staff. During their presentation to the CFTC commissioners, they estimated that if the proposed rule had been in effect for 2008 and 2009, 23 traders would have been forced to reduce their positions at some point during those two years. Of those 23, only seven would not have been eligible for hedge exemptions. If the proposed rule were put into effect at this moment in time, 10 traders would be affected, and of those 10, approximately half would be eligible for hedge exemptions, the staff said.

Precious Metals Next in Line

In his closing statement, Chairman Gensler stated that the proposed rule was designed to target “excessive concentration” rather than “excessive speculation” in the energy markets. He noted that the proposal’s requirements would be prospective, and emphasized the importance of consistency in setting position limits and exemptions across markets.

“A transparent and consistent playing field for all physical commodity futures should be the foundation of our regulations,” said Gensler. “Position limits should be applied consistently to all markets and trading platforms and exemptions to them also should be consistent and well-defined. While we currently set and enforce position limits on certain agriculture products, we do not for energy markets. Though there are some differences between energy markets and agricultural markets, those distinctions do not suggest to me that the federal government should set position limits on one and not the other.

Gensler also announced that the CFTC plans to hold another meeting in March to consider whether the CFTC should establish a new position limit regime for precious metals and possibly the “softs”, i.e., cotton, sugar, coffee and cocoa.

Commissioner Chilton strongly supported an extension of the proposed rule to the metals markets. Chilton said he was “disappointed” that a separate rule-making would be required to establish a new position limit regime for precious metals, and said he hoped that a proposed rule would discussed at the March meeting. Chilton said he was comfortable that the CFTC had “erred on the high side” with the proposed energy position limits and they would not drive business off the exchanges.

Visit the CFTC’s “Speculative Position Limits” resource page for more information on this topic.

The FIA reponds in a Reuters article, “FIA Warns CFTC Plan Could Hurt U.S. Markets.”

Read CME Group’s reactionary statement.

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