CFTC fights itself on energy limits

The Commodity Futures Trading Commission (CFTC)’s recent calls for position limits in energy could be on shaky ground, with three of the agencies’ commissioners and many in the industry expressing serious concerns about the proposals.

On Jan. 14, CFTC issued proposed rulemaking to establish a new position limit regime for energy futures and options markets. The proposal covers natural gas traded at the New York Mercantile Exchange (Nymex) and the Intercontinental Exchange and crude oil, heating oil and gasoline traded at Nymex. CFTC allowed for a 90-day public comment period for the rules.

CFTC Commissioner Michael Dunn said the proposed regulation “without the corresponding OTC regulatory authority and similar undertakings by other nations’ regulators, may result in less transparency in the futures markets if those presently trading on exchange move to OTC and other opaque markets to circumvent these proposed position limits.”

Commissioner Jill Sommers, who voted against putting the rule out for comment, also expressed concern that hard positions limits may be imposed on exchange trading without similar limits in place for OTC markets. “Forging ahead with federal limits in a piecemeal fashion is unwise. I am concerned that, without global standards, trading will move to other financial centers around the world,” she said.

In his statement, Commissioner Scott O’Malia said the proposal “fails to make a compelling argument that the proposed position limits, which only target large concentrated positions, would dampen price distortions or curb excessive speculation.”

Gary deWaal, general counsel at Newedge, says “It would be an ironic consequence at a time when [CFTC Chairman Gary Gensler] is arguing that trading should be on exchange and transparent that other policies [of the CFTC] would make this stuff non-transparent.” He adds that there are some thoughts about waiting until current legislation in Congress is done so that they can include OTC products. “It’s hard to imagine that the proposals will be enacted in the current form considering you have three commissioners that have some serious reservations.”

Andy Nybo, head of derivatives at Tabb Group, says regulators should take a more holistic view of how the marketplace operates. “If you put a band-aid on one wound, potentially you’re not treating the underlying disease. You need to look at the big picture and develop a structure that incorporates the different segments of the marketplace. Putting position limits on energy absolutely will drive trading activity to other markets.” He expects some sort of position limits to be put in place over time, although exactly when is uncertain.

Exchanges and other industry leaders are expressing reservations about the current proposals as well. “We would view with great concern the adoption of any policy on position limits that would diminish the transparency of the energy markets or put U.S. exchanges at a competitive disadvantage,” said Futures Industry Association President John Damgard in a statement.

CME Group in its statement said, “We will continue to analyze the new proposal in greater detail to ensure that the recommendations do not create unintended consequences that will push market users to unregulated markets.”

Others complained that the limits where not strong enough. Based on comments from several commissioners, the purpose of the rule was not to prevent a market spike as was seen in crude oil in 2008, but to prevent a firm from acquiring a huge concentrated position similar to the one energy hedge fund Amaranth took on prior to losing $6 billion in one week in September 2006.

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