Comment Text:
10-002
COMMENT
CL-02693
19 April 2010
Mr. David Stawick
Secretary
Commodity Futures Trading Commission
1155 21
~L
Street, NW
Washington, DC 20581
Dear Mr Stawick
Position Limit Rule Consultation
On 26 January 2010 the Commission issued a Notice of proposed rule making outlining proposals
with respect to the revision of the existing position limit rules with respect to certain energy contracts
1
.
This letter sets out ICE Futures Europe's response to those proposals.
Background
ICE Futures Europe ("the Exchange") is Europe's largest energy futures exchange and the second
largest in the world. ICE Futures Europe is the home of the ICE Brent Crude Futures Contract which
is the primary benchmark for crude oil pricing outside the United States. ICE estimates that the North
Sea Brent Complex of which ICE Brent Futures is a part is used in the pricing of two-thirds of the
world's traded oil. The Exchange also operates the ICE Gas Oil Futures contract, which is the
international benchmark for refined oil products such as diesel, as well as European and Asian futures
contracts in coal, natural gas and power. With its partner, the European Climate Exchange, ICE
Futures Europe also operates the world's largest carbon market.
ICE Futures Europe is a UK Recognised Investment Exchange regulated by the UK Financial
Services Authority ("FSA") in accordance with the Financial Services and Markets Act 2000, The
Exchange is headquartered in London where it was founded in 1981 as the International Petroleum
Exchange of London Limited. ICE Futures Europe maintains extensive regulatory, compliance and
market supervision staff, all of which are based at its London headquarters. All ICE Futures Europe
Contracts are cleared by ICE Clear Europe, a Recognised Clearing House, regulated by the FSA.
ICE Futures Europe and ICE Clear Europe are subsidiaries of IntercontinentalExchange (NYSE: ICE)
a global operator of regulated futures exchanges, OTC marketplaces and clearing facilities,
1 Federal Speculative Position Limits for Referenced Enersy Contracts and Associated Regulations;
Proposed Rule
Federal Register, 26 January 202010-002
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CL-02693
headquartered in Atlanta, Georgia. The development and operation of ICE Futures Europe's
electronic trading platform is outsourced to IntercontinentalExchange.
Since 1999, tile Exchange has had permission to operate electronic trading terminals in the United
States under the terms of a series of 'No Action' letters issued by the Commission. The CFTC's
mutual recognition system is an important component of the cooperation among regulators in an
increasingly global marketplace. This cooperation is necessary to ensure a fair, well-regulated and
efficient global marketplace.
~CE WTI Futures
In February 2006, the Exchange introduced the ICE W]q Futures con[tact in response to customer
demand for an electronic, transparent WTI. At that time, no other electronic WTI futures contract was
offered due to the prevailing open-outcry model in the US, where direct access was limited to those
on the trading floor. ICE's electronic WTI Futures grew rapidly in popularity, with traded volumes
increasing from some 40,000 contracts per day in February 2008 to 173,000 contracts per day in
March 2010. The ICE WTI Futures contract is financially-, or cash, settled against the prevailing WTI
price, This is currently the settlement price of the NYMEX physically-delivered light sweet crude oil
contract on the day prior to contract expiry.
Since 1999, the Exchange has had permission to operate electronic trading terminals in the United
States under the terms of a CFTC 'No Action' letter. The terms of this letter have been updated on a
number of occasions, most recently on 20 August 20092. Under the terms of the revised No Action
letters, ICE Futures Europe operates under regulation of both its home country regulator, the FSA, as
well as under the regulatory requirements of the US Commodity Futures Trading Commission for all
"linked contracts". As a result, ICE Futures Europe applies an equivalent regulatory framework for
reporting, position limits and position accountability levels to the linked markets that are set by and
required in those operated by NYMEX. As such, the cash-settled ICE WTI Futures contract has a
position limit of 3,000 contracts in the last three days leading up to contract expiry (subject to
applicable bona ride hedge exemptions), and the Exchange also operates position accountability
levels. In addition, clearing members are required to report all client positions in excess of 100
contracts on a daily basis to the Exchange's compliance depadment and this information is shared
with the Commission. The Commission uses the aggregate data reported by the Exchange to
produce and publish a 'Commitment of Traders' report on a weekly basis for the ICE WTI Futures
similar to those produced with respect to Designated Contract Markets.
The No Action letters impose a number of additional regulatory and reporting obligations on ICE
Futures Europe including
interalia,
the provision of daily trade data, the notification of all rule
2 CFTC Letter 09-3710-002
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CL-02693
amendments and disciplinary actions with respect to linked contracts, and cooperation with the CFTC
in the event that Emergency Action is directed pursuant to the Commodity Exchange Act Section
8a(9).
The Commission's Proposals
The Commission's proposed rulemaking relates to four energy contracts, all of which have underlying
delivery points based withir~ the United States, and the rules will apply principally to US exchanges
and 0ver-the-counter (OTC) markets. The determination of the appropriate regulatory regime for such
contracts is a matter I'or American regulators and Congress to determine, Just as the appropriate
regulatory regime for the determination of the treatment of North Sea Brent Crude otl should be
determined by UK regulators and Parliament. This totter ~vill not, therefore, comment on all aspects of
the Commission's proposals but will address two areas:
comment on ICE Futures Europe's approach to the management of large positions; and
specific responses to questions 12 and 13 which concern the impact of the proposed rules on
Foreign Boards of Trade,
Position
management
As outlined above, ICE Futures Europe has cooperated fully with the Commission in implementing the
terms of a series of revised No Action letters and intends to continue to do so in combination with
working with the FSA to ensure continued compliance in an evolving global market place.
For contracts other than "linked contracts", the Exchange operates a position management regime.
Each of these other contracts trades with reference to European, Asian or Middle Eastern delivery
points. ICE Futures Europe requires that clearing members report all client positions to the Exchange
on a daily basis, subject to a minimum reporting threshold of 100 contracts with respect to oil
contracts. The Exchange monitors all such client positions and where positions are substantial will
contact the member and client concerned to determine the purpose for which such positions are held,
This is most important with respect to physicafly-delivered contracts where [here are limits on deltvery
capacity, such as ICE Gas Oil Futures In the case of Gas Oil Futures, during the final month of
trading in a contract, the Exchange will contact holders of significant Gas Oil positions to confirm their
intent and capability of making or taking delivery and the Exchange may require that positions be
reduced to limit position concentration and ensure price convergence, At any point during the month
where clients hold positions which it regards as excessive, the Exchange will advise members to
reduce such positions.10-002
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CL-02693
The FSA addresses the same issues with respect to market concentration as US regulators. Below is
an excerpt from their te~stimany to Parliament in July 2008:
"We require exchanges to monitor their markets to check what positions
are
being established across
the furl lifo of a contract, on a reel-time and ongoing basis. They share these position reports with us
and we review them as part of our market monitoring activity. The exchanges' roles give them
authority to manage positions at any time throughout a contract life cycle
and
to instruct a member to
close or reduce a position with the exchange, if that is necessary to secure fair and orderly markets. If
the member does not comply, the exchange can close the position unilaterally, There is considerable
precedent for this actiot~. We believe that in these ways UK arrangements already provide equivalent
standards of protection to those in the US."
The principal purpose of this position management regime is to ensure that market manipulation is
prevented, q~he CFTC has obligations with respeot to 'excessive speculation' and the Exchange has
its own responsibility with respect to the operation of a 'fair and orderly market'. However the
Exchange has not seen any evidence as to the existence of excessive speculation, nor has the
position limits regime been effective in managing price levels or volatility. Indeed there is a risk that
restrictive position limits might reduce the liquidity available in US markets, which could increase price
volatility of US contracts, particularly in the run-up to contract expiry, This could be to the detriment
of
commercial market participants who participate in expiry. The UK Financial Services Authority and
UK Treasury in their joint publication 'Reforming OTC Derivative Markets: a UK Perspective
'3
set out
their perspective:
"In relation to controlling or limiting price movement, we have seen no evidence to suggest that one
particular type of market participant has been solely responsible for systematically driving derivative
market prices. As a result, we do not believe that limiting one class of tnarket participant by imposing
specific limits is a desirable or warranted response to the changing nature of derivative markets.
Furthermore, there is no evidence to date which demonstrates that prices of commodities, or other
financial derivatives, can be effectively cunlrulled through the mandatory operation of regulatory tools
such as position limits. We therefore do not believe these measures wot~ld achieve the goal of
solving the perceived problems,"
Foreign Boards of Trade
The Commission in its Request for Comment has requested responses to two specific questions
which concern Foreign Boards of Trade.
Financial Services Authority & HM Treasury
Reforming O TC Derivative Markets: A UK perspective10-002
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t2.
As discussed previously, the Commission has foflowed e policy since 2008 of conditioning FBOT
no-action retief on the requirement that FBO Ts with contracts that link to CFTC-regulated contracts
have position limits that are comparable to the position limits applicable to CFTC-regulated contracts.
If the Commission adopts the proposed rulemaking, should it continue, or modify in any way, this
policy to address FBO T contracts that would be linked to any referenced energy contract as defined
by the proposed regulations?
The Exchange has worked closely with the CFTC over the past decade on continuing to evolve the
No Action Letter framework and expects to continue to do so. Whatever the Exchange's views on the
merit of the Commission's proposals, it is clearly appropriate for Exchanges that offer linked-contracts
to operate under the rules that apply to US Exchanges, though this is currently only applied to ICE
Futures Europe, despite the existence of 30 Foreign Boards of Trade in the US. Accordingly we
propose:
that for the purpose of the calculation of Aggregate position limits, positions which are held on
Foreign Boards of Trade should be included in the calculation of aggregate open interest;
Foreign Boards of Trade which operate linked contracts wou~d have the terms of their No Action
Letters amended to ensure that they agree to cooperate with the implementation of aggregate
position limits and (should the Commission choose to proceed with reporting market position
~imits) to implement reporting market position limits.
In order to implement such limits, ICE Futures Europe may need to make rule changes which would
need to be approved by the FSA in accordance with the Investment Exchanges and Clearing Houses
Act 20064. We respectfully request that any changes to the ICE Futures Europe No Action Letter
resulting from these proposals be made with sufficient notice to allow ful~ consultation with the FSA
with respect to the method of implementation. We further note that Futures Commission Merchants
will need to make a number of system changes and enhancements in order to allow them properly to
monitor aggregate positions across separate exchanges. These changes will require development
work by third party vendors; again we respectfully request that the Commission take account of such
technology development timetines in determining the notice period for the introduction of any
aggregate position limits.
13. The Commission notes that Congress is currently considering legislation that would revise the
Commission's section 4a(a) position limit authority to extend beyond positions in fepotlin
9
rnarket
contracts to reach positions in
OTC
derivative instruments and FBO T contracts. Under some of these
revisions, the Commission would be authorized to set limits for positions held in O TC derivative
~ The Investment Exchanges and Clearing Houses Act 2006 confers on the Financial Services
Authority the Power to disallow excessive regulatory provisions. It was designed to prevent exchange
owners based outside the UK from imposing excessive regulation on UK-based exchanges and
clearing houses,10-002
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ice
instruments and FBOT contracts, The Commission seeks comment on how it should teke this
pending legislation into account in proposing Federal speculative position limits.
With respect to the setting of limits for positions held in FBOT contracts, the Commission's focus Is
properly on Linked Contracts as set out in response to Question 12 above, We believe that the
establishment of position limits on FBOT linked contracts addresses concerns about the need for
equivalent regulatory treatment of linked contracts,
The question arises as to whether it is appropriate for the Commission to oblige a regulated Foreign
Board of Trade to apply position limits with respect to non-US contracts, or contracts other than linked
contracts, We believe that it would be inappropriate to do so for two primary reasons:
(t) US customers have access to many contract markets in globalty traded commodities markets
for price discovery where reference pricing is based on delivery points outside the US, For
example, the ICE Gas Oil Futures contract is physically delivered in the Amsterdam-
Rotterdam-Antwerp region of north-west Europe and is primarily used by European and Asian
market participants, We believe that the determination of the appropriate position limit regime
for this contract is a matter that ICE F[it[~res Europe should determine within the wet!
established FSA position management framework, subject to UK and EU law, For the
Commission to seek to impose position limits on non-US contracts would be extra-territorial,
Inappropriate and unjustified,
(2) A number of US exchanges listed contracts with delivery and/or pricing points outside the US
but not directly regulated by local regulators at the delivery point. For example, the ICE
Futures U.& sugar futures contract has many delivery points around the world. Other US
futures exchanges list interest rate contracts based on interest rates determined in the UK.
Were the Commission to seek to extend the imposition of position limits to contracts other
than linked contracts, for example to contracts with certain delivery points in the US, they
might invite retaliatory action against such US exchanges from overseas regulators, This
could unintentionally lead to circumstances where global commodity derivatives markets were
subject to multiple and, on occasions, conflicting regulation.
The Commission has taken a ~eading role in promoting cooperation between regulators around
the world and we continue to take the view that the development of an appropriate framework for
international commodity market issues is best served by further cooperation between regulators
through the IOSCO framework,
Conclusion
The No Action framework within which US market participants are allowed direct access to
Foreign Boards of Trade has worked welt, bringing more choice and price transparency to US
customers, as welt as competition to US derivatives markets and spurring innovation and
enhanced risk management practices in the US ICE Futures Europe recognises the legitimate
interest of the Commission in ensuring that contracts linked to US contracts traded on US10-002
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ice
exchanges are appropriately regulated and subject to a consistent regulatory approach, The
Exchange looks forward to continuing to work closely with the Commission and the FSA to ensure
that international energy futures markets remain effectively and appropriately regulated.
Yours sincerely
Dee Blake
Director of
Regulation, ICE Futures Europe
