Comment Text:
10-002
COMMENT
CL-02683
Atternative Investment Manasement Association
David Stawick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1t55 21st Street, NW.
Washington DC
20581
U.S.A.
By emai[ to: secretary@cftc..~ov
26 Apri[ 2010
Dear Mr Stawick,
The Atternative Investment Management Association (ALMA)
1
appreciates the opportunity to comment on the
Commodity Futures Tradin8 Commission's (the 'CFFC').'Proposed Federal Speculative Position Limits for
Referenced Ener~ly Contracts and Associated Regulations' (the 'Position Limits Proposat').
AIMA's comments
AlMA agrees with the Position Limits Proposat's aim to "diminish, eliminate or prevent excessive specutation causing
sudden or unreasonabte fluctuations in the price of a commodity, or unwarranted changes in the price of a
commodity". AlMA additionatty supports any measures by the CFTC which woutd prevent or address market abuse or
market maniputation in any form, and betieves that it is right that the CFTC should have ftexibte powers to address
these issues. However, we woutd note that it is vitat that the CFTC strives towards a market that is efficient, tiquid
and transparent, governed by supply and demand, and one which produces a fair setttement price.
We do not believe that position limits, whether alone or as part of a wider solution, necessarily achieve this
goal, and they may even counteract such goals if wronsly applied.
Where excessive specutation forms part of a market participant's attempts to maniputate market prices or where
such specutation forms part of practices amountin~ to market abuse, then of course it shoutd be suitably addressed.
However, the main cause of price votatitity has been driven by suppty and demand, so that votatitity would not be
sufficientty addressed by imposing position timits, except to the extent that such timits woutd restrict art functioning
of the market - excessive specutative trading and normat tegitimate tradins.
The CFTC woutd be abte to evaluate the effect of such position timits by considering the prices of the covered
energy contracts as they approach expiry. Low vo[atitity and a stabte approach to setttement price woutd indicate a
successfut outcome, white high votatitity with difficulty in estabtishing a fair setttement price woutd indicate that
the market was hindered in its abitity to estabtish a fair setttement price. Previous historic imptementations of
substantiat position timits have shown that position timits, where apptied, were rapidty changed or repeated and did
not achieve the intended goat when setttement prices became votatite and difficutt to predict.
AlMA is the trade body for the hedse fund industry 8tobatty; our membership represents art constituencies within the sector -
inctudin8 hedse fund managers, fund of hedge funds managers, prime brokers, fund administrators, accountants and tawyers.
Our membership comprises over 1,100 corporate bodies in over 40 countries, with over 10% based in the US and over 30% of
AlMA members' totat assets under management (AUM) managed by US investment advisers.
The Atternative Investment Management Association Limited
1
167 Freer Street, London, EC4A 2EA
Te[: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381
E-mai[: [email protected]~ Internet: http://www.aima.org
Registered in Enstand as a Company Limited by Guarantee, No. 4437037. VAT registration no: 577 5913 90. Registered Office as above10-002
COMMENT
CL-02683
Alternative Investment Management Association
A preferred atternative approach may be to impose position timits on physicat commodity futures contracts as they
approach expiry, and grant no exemptions to such timits. This woutd, at [east, address unfair settlement prices and
protect real economy producers seeking to buy crude oit, naturat gas, gasoline and heating oit in the market.
Alternatively, we suggest that the CFTC shoutd consider the methods used in the equities markets, where market
participants who own a targe percentage of a stock are restricted in their abitity to trade (rather than constrained
by a hard timit).
To the extent that the CFTC decides that the energy contract position timits as proposed are necessary to address
the stated goats and by reference to the questions posed in the Proposats, AlMA believes that:
contracts that do not cash settte to the price of a singte contract but settle to the average price of a sub-
group of contracts within a crass shoutd be catcutated using Detta-equivatent measures during the spot month
for the purposes of enforcing the proposed specutative position timits (question 4);
the timits proposed under regutation 151.2(b)(1)(i) as art-months-combined aggregate position limits woutd be
adequate to achieve the stated aims (subject to our comments above) (question 5);
customary position sizes herd by specutative traders should be considered as a factor in moderating the timit
revers proposed by the CFTC (question 6);
the CFIC shoutd pubtish acceptabte practices that adopt format guidetines and procedures for implementing
position accountabitity rutes (question 7);
there is even tess necessity to impose position timits in other contracts of physicat suppty, where simitar
effects may be felt in terms of efficiency, tiquidity, transparency and proper settlement price discovery.
Additionatty, the US market in contacts such as metats is significantty smatter than those in energy contracts,
and have yet to indicate any rear issue with specutative price increases (question 11 );
internationat cooperation and coordination of any regutatory rutes is desirabte at[hough we acknowtedge that
agreement is not atways possibte; it is our understanding that many other major financial centres have
rejected the introduction of position timits in any form (question 12);
if the CFTC isgranted additionat authority by Congress to extend position timits beyond positions in reporting
market contracts, to reach positions in over-the-counter (OTC) derivative instruments and foreign board of
trade (FBOT) contracts, the current position [imit rules should be sufficiently ftexib[e that the CFTC can make
the amendment and update the rutes for its tares[ mandate. To the extent that the Position Limit Proposat is
effective, the inclusion of OTC markets may improve any effect over imptementation onty in the exchange-
traded market, which shoutd be exptored further (question 13);
market participants require ctarity and certainty in the apptication of any rutes that market regutators set, in
genera[ preferring strict and transparent methodotogies to which they can adhere. At[hough flexibitity and
frequent reviews sound hetpfu[ in principte, in practice position [imits shoutd not be amended so often that
significant comptiance burdens and costs are imposed on market participants. We wood, therefore, suggest
that amendments to position timits set shoutd not occur more frequentty than once per year, except where
the CFTC considers it urgent that it shoutd do so (i.e. in response to a specific issue or event). If the CFTC
does decide to conduct more frequent reviews of the position timits, its methodotogy shoutd be transparent
and require that the data is easity obtainabte by at[ users. AlMA has additionatty had sight of a response to this
CFTC consuttation by one of our members, Win[on Capitat Management Limited; we agree with and support
The Atternative Investment Management Association Limited
2
167 Free[ Street, London, EC4A 2EA
Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381
E-marl: info®aima.org Internet: http://www.aima.org
Registered in Engtand as a Company Limited by Guarantee, No. 4437037, VAT registration no: 577 5913 90. Registered Office as above10-002
COMMENT
CL-02683
Atternative Investment Management Association
that respondent's,analysis and comments on the issues raised by seasonat fluctuations causing position timits
to have weaker and stronger effect at various points during the cycle (question 14);
targe, passive, and unleveraged tong-onty positions shoutd not be given a separate market space and shoutd
not be subject to separate rules. It is best not to categorise investors and appty differing rutes or limits as this
can lead to bargaining and creation of avoidance measures by market participants. To accommodate passive
investors, one coutd restrict trading activity above a certain tevet (rather than enforcing hard [imits on
position size) (question 15); and
the proposed definition of contracts of the same class for spot and non-spot months is sufficiently inctusive. It
is atso appropriate to define contracts of the same ctass during spot months to inctude onty contracts that
expire on the same day (question 16).
Conclusion
If the Position Limit Proposats are imptemented, they wit[ not sufficiently accomptish the goats of addressing
excessive market specutation and coutd, as a resutt, have certain negative effects on the proper functioning of the
markets. The CFTC should instead focus its efforts on addressing market votatitity caused by market abuse and
maniputation. If the CFTC does imptement such rutes, in addition to tikety market disruption, some current market
participants may be expected to trade their investments to non-US exchanges instead.
We thank you for this opportunity to comment on the Position Limits Proposa[ and we woutd be happy to discuss in
greater detait any of comments above.
Yours
sincerety,
Mary Richardson
Director of Regulatory ~t Tax Department
The Atternative Investment Management Association Limited
167 Fleet Street, London, EC4A 2EA
Te[: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381E-malt: info®aima.org Internet: http://www.aima.org
Registered in Engtand as a Company Limited by Guarantee, No. 4437037, VAT registration no: 577 5913 90. Registered Office as above
