Comment Text:
10-002
COMMENT
CL-02685
Deutsche Bank
April 26, 2010
Mr. David Stawick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21
st
Street, NW
Washington, DC 20581
Deutsche Bank AG London
Winchester House
1 Great Winchester Street
London EC2N 2DB
Tel +44 20 7545 8000
Re:
Proposed Federal Speculative
Position Limits for Referenced Energy
Contracts and
Associated Regulations, 75 Fed. Reg. 4144 (,tan. 26,
2010)
Dear Mr. Stawick
By this letter, Deutsche Bmxk AG ("DBAG") responds to the Commodity Futures
Trading Commission's ("CFTC" or "Cotnmission") request for comments on its Proposed
Federal Speculative Position Limits for Referenced Energy Contracts ("the Proposal"), For
the reasons discussed herein, DBAG does not believe the CFTC should adopt federal
speculative position limits as described in the Proposal.t Firstly, the stated premise for the
proposal is without any demonstrated basis in historical thct. Secondly, even if the stated
premise was valid, the Proposal in its current form would not be sufficient to remedy it.
Finally, the Proposal contains features that would be unfair and extremely burdensome to
market participants but does not explain why these features are necessary to achieve any
purpose consistent with the Proposal's stated goals.
The Premise for the Proposal is unsupported by
evidence.
The Proposal is premised on the notion that excessive speculation in energy futures
markets was the cause of high and volatile prices in crude oil, crude oil products and in
natural gas
2
for a period of time in the summer of 2008, and that limits on speculation are
needed to prevent similar conditions from recurring, Much rhetoric has been offered by
various parties in the press and in Commission and Congressional hearings asserting that
DBAG is a member of a number of industry groups that either have submitted or will be submitting
comment letters on the Proposal, including the Futures Industry Association, the International Swaps and
Derivatives Association, and the Financial institutions Energy Group, We agree generally with the comments
offered by those groups, but we would like to take this opportunity to re-emphasize certain of the arguments
raised in their comments.
The same arguments were raised by various parties " ' O~}?<:~,,~}Ji~[aa[; ,s ~,,~,~s~'~,i~, ~,]~,~,i,,g~a,~,L~'~,
~egardmg o i U u co~ nlo lt~ s urm t eame
time period and are equally without merit, bul as these markets are not ~theffect~s~e,#tfl-'#~Propesal ,,we,~.i~lt,nev ;,uu,o.~¢
include
them in this discussion.
Auth~tdV; ,~ member
~A lhe
Lo~lon SV~ck g×cha ,~1~ [3~ut~d,o t3m.& AG10-002
COMMENT
CL-02685
David Slawiek, Secretary, CFTC
April 26, 2010
Page 2 of 5
speculation in energy futures markets had been excessive and was to blame for price
conditions that many considered objectionable. However, no party has offered any empirical
evidence to support these assertions. Further, a number of formal studies were undertaken by
domestic and international regulators adhering to sound and commonly accepted economic
principles in response to these assertions, yet none have produced any empirical evidence that
supports the conclusion that speculation during the relevmat time periods was "excessive" or
that speculation (excessive or othenvise) was responsible fbr the price conditions that
prevailed. Rather, time and again, the conclusion reached by the experts based on the
evidence they obtained while conducting these legitimate studies was that market
fundamentals most likely drove the price movements.
If the Proposal's premise were valid, the Proposal would not be sufficient to address it.
Even if the premise for the Proposal were supported by empirical evidence, DBAG
does not believe the imposition of limits in the manner proposed would be sufficient to
reduce the potential for recurrence. The imposition of position limits that only affect conduct
on domestic futures markets will likely cause market participants simply to shill positions
either to foreign boards of trade that offer futures contracts on the same underlying
commodities, or to OTC markets. In either case, the depth and liquidity of US futures
markets would be diminished, interfering with their price discovery mechanism, and reducing
the transparency of these commodity markets to both regulators and the public, al! without
necessarily changing the total amount of speculative investment in the market for these
commodities globally. The CFTC currently requires foreign boards of trade that offer access
to products to US market participants that are analogous to US contracts to impose analogous
limits. While the Proposal does not include a provision to aggregate thosepositions with
analogous US conlracts, the CFTC has asked commenters to opine on whether it should.
Also, Congress is currently considering legislative proposals that would expand the scope of
the CFTC's authority to regulate position-taking in OTC markets. Again, while DBAG does
not agree that such measures have been demonstrated to be necessary, if they were, the
Proposal would not logically hope to accomplish the presumed goal of reducing the effects of
speculation in energy markets unless it could be extended to all products that are the
economic equivalents of the referenced contracts. Accordingly, we believe the CFTC should
refrain from imposing a rigid limit structure on US futures markets until its authority to act in
a more comprehensive manner is clarified by Congress, after which it should work with
t~)reign regulators on a coordinated approach to maintaining orderly markets through
enhmaced transparency, and measured responses to specific market events.10-002
COMMENT
CL-02685
David Stawick, Secretary, CFTC
April 26, 2010
Page 3 of 5
The Proposal contains features that are overly burdensome and unnecessary to achieve
the stated purpose.
The Proposal contains a number of features that would compound the restrictive
effects of the speculative position limits on the independently operated business units of
complex financial institutions, yet these features do not appear to serve any purpose
consistent with the Proposal's intent. The Proposal would afford a swap dealer a limited risk
management exemption from speculative limits, provided its entire futures position, including
the portion that would otherwise be below the speculative limit, is taken strictly for the
purpose of offsetting its OTC positions with its cliems. As currently worded, it would appear
that if a swap dealer held a position over the speculative limit subject to this exemption, but
were to add a single futures contract in excess of the notional value of its OTC obligations, its
entire position would be considered speculative and would thus violate the terms of the
exemption and be in breach of the speculative position limit. In order to avoid this
circumstance, the swap dealer would be required to manage the timing and precision of its
hedging to a degree that is probably impossible on a sustained basis. It is not explained in the
Proposal why a swap dealer that primarily provides a hedging service to clients, including
many end-users of energy commodities and is given an exemption fi'om speculative position
limits for that purpose, should be ineligible to separately take a speculative position that is
itself below the limit that applies to any other market participant.
While any swap dealer would certainly find hedging so precisely to be problematic,
for a swap dealer that is part of a multi-faceted financial institution, this issue is moot. This is
because the Proposal would require aggregation of positions across accounts that share 10%
or more ofcom~non ownership interest, but it would not afford the ability to disaggregate
accounts under common ownership based on independent control, as currently exists under
Part 150 of the Commissions Regulations. Accordingly, the Proposal would require the swap
dealer's positions to be aggregated with those of any separate business units within their
organization that hold positions in the same markets, notwithstanding that they may be
independently managed and share no trading or position data.
3
The aggregation of the other
business units' positions with the swap dealer unit's positions would work to automatically
invalidate the swap dealer exemption. As with the provision that would void a swap dealer's
risk management exemption based on speculation below the speculative limit, the absence of
disaggregation relief for independently controlled accounts is not explained in the Proposal.
In fact, this provision would require business units that previously did not shm'e any position data to
begin to do so, and to carefully coordinate their trading activities with one another. This has potentially serious
fiduciary implications for firms that operate commodity investment vehicles that contain public investor funds
and have implemented information bah'lets to prevent the firm's proprietary traders from obtaining advance
knowledge of their planned trading aclivit3,.10-002
COMMENT
CL-02685
David Stawick, Secretary, CFTC
April 26, 20!0
Page 4 of 5
Alternatives to the Proposal
DBAG supports the CFTC's mission to ensure fair and orderly markets, but does not
believe the Proposal would advance that cause. However, if the Commission must take a
more direct role in the oversight of energy markets, DBAG respectfully proposes that it
instead consider adopting a position accountability programsimilar to that currently operated
by the regulated exchanges.
4
In conjunction with this, we propose that the Commission adopt
rules to formalize and expand the routine data collection in which it currently engages under
the Special Calls to Swap Dealers and Index Traders to include all other types of market
participants, requiring them to indicate which portions of their positions are hedging and
which are speculative. Further, we urge the Commission to adopt rules that would permit a
complex financial institution to disaggregate positions taken by its separately operated
business units upon demonstrating that it employs policies, procedures and physical barriers
that are designed to effectively segregate the management and flow of information among
them.
5
By employing these measures in combination, we believe the Commission would be
able to achieve greater transparency into the purpose behind positions taken by all market
participants. Further, we believe this alternative approach would afford the Commission and
its staffthe flexibility to react in a practical manner to potentially disruptive events as they
arise based on the specific circumstances, rather than constraining them to a rigid, hard-limits
approach that may diminish the liquidity and price discovery function of the US futures
markets, without providing any benefit in terms of market stability.
Conclusion
For the reasons stated herein, DBAG does not believe the imposition of speculative
limits on energy futures contracts, as contained in the Proposal, is warranted. No evidence
has been produced to support a conclusion that speculation in energy markets was responsible
for recent periods of high and volatile prices in those markets. Further, even if that had been
the case, DBAG believes the imposition of speculative limits in the manner proposed would
not reduce the amount of speculative investmenl in the relevant commodities, but that it
would instead drive activity away from the regulated US markets to overseas exchanges and
the OTC market. DBAG respectfully requests that the CFTC consider alternative means of
increasing transparency and ensuring order in energy commodity markets, as we suggest
above,
4
As administered by CME Group, the position accountability program establishes position levels in
certain contracts above which a market participant must, upon request, provide the exchange with information
regarding the participant's purpose and intent for taking that position, Based on this information, the exchange
may impose restrictions on the participant's trading activity as necessary, in the exchange's discretion, to
prevent abuse and maintain an orderly market,
Such measures should be independently auditable and reaffirmed on an annual basis, similar to the
processes by which hedge exemptions are cm~'ently administered.10-002
COMMENT
CL-02685
David Stawick, Secretary, CFTC
April 26, 2010
Page
5
of 5
DBAG thanks the Commission for the opportunity to comment on the Proposal, If
the Commission or its staff would like to discuss any of our comments, please contact the
undersigned at 44 207.547.9041, or Adam Wernow in DBAG's Compliance Deparmaent at
212,250.6973.
Respect~hlly,
Troy Martin
Chief Operating Officer
Deutsche Bank Global Commodities
CC:
Adam Wernow
