Comment Text:
10-002
COMMENT
CL-08299
From:
Sent:
To:
Subject:
Attach:
Patrick Kelly
Monday, April 26, 2010 10:14 AM
secretary
Proposed Federal Speculative Position Limits for Referenced Energy Contracts
and Associated Regulations
Proposed Federal Speculative Position Limits API Comments.pdf
<>
David Stawick,
Re: Proposed Federal Speculative Position Limits for Referenced Energy
Contracts and Associated Regulations
API comments to the above referenced proposed rule were submitted today
via www.regulations.gov. For your convenience, I am also sending this
email with our comments attached.
Regards,
Patrick Kelly
APIPolicy Advisor
~22o L Street; NW
Washington, DC
USA
Telephone
292-682-8:t92
Emai~
April 26, 2010
David Stawick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21 s~ Street, NW.
Washington, DC 20581
Re: Proposed Federal Speculative Position Limits for Referenced Energy Contrac,s and Associated
Regu~ad~ns (Docket [D: CFTC-20104)0(~4)
Mr. Stawick:
AP] is a national trade association representing approximately 400 member companies involved in all aspects
of the oil and natural gas industry Our members actively trade tt"te financia! products covered by this
proposed rule and will be impacted by a final rule. While API supports transparency in the marketplace, we
remain concerned that the technical justification for this proposal may not be adequate. AP! appreciates the
opportuniW to commem on this proposal.
Our members are concerned that their bona fide hedging activities will be negatively impacted by this
regulation. It appears this is not intended, and we hope this issue can be addressed. APt is also concerned
about the unintended consequences that may impact the overall marketplace, specifically the migration to
overseas markets. This would serve to decrease transparency in the marketplace.
~t is important to note that speculators are not manipulators. API supports the pursuit and prosecution of
market manipulators. Pardes that impam the market however, are not inherently manipulating the market.
Speculators provide liquidity and market information that help to establish prices. Speculators are often
better suited to absorb price risks than their counterparties. These functions or risk management and prme
discovery are core purposes of the exchanges, and rely on the participation of speculators.
Hedge Exemption
Provision
API member companies often make use
o,
existing bona fide hedge exemptions in the proposed commodity
classes. Compliance challenges from the proposed "crowding out,' provisions are theretbre relevant and
warrant CFTC reconsideration, as well.
An equal opportunity
employer~'Crowding Out"
Under the Proposed Rule, the CFTC would authorize the granting of two types of exemptions from the
position limits for the retErenced energy commodities: bona fide hedging exemptions, which are also applied
to agricultural commodity limits fo_r traders with hedging needs, and the new limited risk-management
exemption for swap dealers, for positions held o-utside the spot month. The exchaages wil! continue to be
authorized to grant bona fide hedge exemptions to traders for commercial hedging, subject to the authority of
the CFTC. Swap dealers would be permitted to apply for hedge exemptions for their commercial hedging
needs, in addition to any risk-management exemptions granted by the CFTC.
Regardless. though, of whether a company is ultimately classified as a bona fide hedger or swap dealer, it
would be prohibited fi-om holding any position in excess of the applicable position limit if it has any
speculative positions. While the Proposed Rule provides for risk-management exemptions ap to two t~mes
the proposed position Iimit. as well as hedging exemptions that would allow a swap dealer to go beyond this
elevated position limit, the Proposed Rule effectively eliminates the benefits of higher limits for any hedger
or swap dealer that has any speculative positions, even at a minima[ level, As a result, once such a company
has exceeded the position limit, regardless of whether it has an exemption from the position limit, it must
liquidate all of its speculative holdings, if such holdings can even be segregated, or bring its hedging or risk~
management positions below the position limit,
As a result, the Proposed Rule could severely limit the hedging activity of energy companies who engage in
swap trading for purposes of risk management. Whether classified as a commercial hedger or swap dealer.
many API companies engage in swap activity as part of their overa!l risk management for refining and the
marketing ofphysica!ly produced commodities. By limiting speculative transactions when combined
positions (.speculative and hedging and 'or risk management) exceed the applicable position limit, the
Commission will in turn significantly and adversely impact the trading opportunities of market partic~pams
and end-users to execute hedging and/or risk-management transactions. In addition, speculative activity by
both commercial hedgers and swap dealers prm~ide vo!ume and liquidity to the markets, ensuring accurate
price discovery and stability. For example, speculation wilI likely decrease xn the outer months~ adversely
affecting commercial producers who use these contracts to lock in future prices. In turn, this wil! reduce the
liquidity in the market, as markel participants who hedge, manage risk for otlaers and speculate will be
subject to the hard position limit and limited in their use of exemptions. Any regulation that reduces liquidity
in U.S. markets could push trading activity to unregulated OTC markets and foreign exchanges. Furthermore,
it remains unclear how the CF'TC and market participants will distinguish between purely hedging and risk-
management transactions, compared to transactions that may have some speculati~ze nature, which often
could come down to a subjective judgment based on stated intent.
Finally, if companies are actually forced to even liquidate positions that
might
ultimately be deemed
speculative, just to be safe in temps of regulatory compliance, this would actually subject these covered
markets to greater instability, not less. Every time participants trigger their legitimate exemptions, fl~ey will
be required to scramble to unwind a!l uncertain trades, consequently nullifying the value of the exemption
tbr no corresponding policy benefit, since commercials by their very physica! nature pose almost no risk of
excessive speculation. The other compliance alternative would be to never even employ the offered hedgeexemptions, thereby subjecting the underlying physical markets to potentially greater risk and volatility, as
well.
The Commission's position limit hedge exemption regime has always permitted a single market participant
to establish speculative positions up to the applicable position limits and to obtain hedge exemptions, if
eligible, for hedging positions above these levels. This practice has been based on the fact that hedging
positions eligible for exemption, even if held by an entity that also maintains speculative positions, does not
present the market concern that position limits are designed to mitigate.
Issues with company aggregation
Under the Proposed Rule, the Commission would aggregate positions in accounts in which any person has an
ownership or equity interest of i0% or more, or in a case in which a person controls trading by power of
attorney or otherwise. The role provides a notation ~br positions held as pro7 of commodity pool or advisor
business. Under such approach, the Commission would aggregate accounts by both owner and controller,
eliminating the potential exemption lbr independently controlled positions. Independent trading control has
been a recognized exception to aggregation by both the Commission and the CME Group in assessing
aggregation of positions held in accounts of related empties.
The Commission's approach poses potential compliance issues on many levels. Aggregating positions
across accounts based on equity ir~terest will require intbrmation sharing across those entities on a real time
basis in order to ensure appropriate positions are maintained in compliance with the provisions of the
Proposed Rule. Such information sharing would be highly problematic within business structures in which
ir~dependem entities are precluded fi-om sharing infbrmation as dictated by the entities risk controls and
compliance policies. Positions would need to be managed across separate entities, with volumes allocated
across those entines. This aggreganon would prove to be highly disruptive to the trading and compliance
requirements of the related entities and would impose a substantial administrative burden on the entities.
The Commission's proposal fails to address any such conflicts which may arise by intbrmation sharing
across independently controlled, and operated, entities.
The Proposed Rule also fails to address the possible distinction between the classitication, or business
f~anction, of the related entities. As an example one entity may be considered a bona fide hedger, while the
other a swap dealer, each treated distinctly under the Proposed Rule with respect to exemptions, risk
management activity and speculative positions (the "crowding out" provisions of the Proposed Rule). The
Proposed Rule does nm resolve how the rule provisions would be applied to such positions on an aggregate
basis.
The Commission's Proposed Rule should provide an exemption from position aggregation related to equity
ownership ~%r independently controlled positions (urnelated to the referenced exception for advisor or
commodity pool business). In allowing for such an exemption, the Commission would recognize that
accounts operating under an a~ns-length relationship, independently functioning corporate entities with
separate authorized traders, separate position control, separate risk control and separate management, shouldnot be aggregated as the positions cannot be viewed jointly in assessing potentia! impact on the
marketplace.
Broad Market :Implications
Section 151.2 of the proposed regulations implements a methodology that is vastly more comprehensive than
the present set of position limits, Speculation is not akin to market manipulation, and we recognize that
speculators play an important role in commodity markets.
Subpart (f) is vague and does not ensure that the objective limits set forth in Subparts (a) through (c) are
indeed fixed each year. Indeed, subparts (a) through (c) use the word "'fixed" and subpart (f) uses the word
"fix
°',
enabling the fixing of limits that are very different from the objective limits set forth in subparts (a)
through (c). So, what starts out as objective limit setting could end up as very subjective limit setting. This
could be remedied by making clear in subpart (f) that the objective limits fixed in subparts (a) through (c)
must be used in the fi~al calculation of the limits each year.
Subpart (t) calls for the definitive calculation of an undetermined to date number, which may haven
significant impact on the markets. The methodology to calcuIate estimated spot month deliverable supply
should be delineated with specificity so the regulated community can readily understand and comment on it.
The "fixing" to be done pursuant to subpart (f) is delegated to one person, or that person's designated staff
without any stated guidelines and without publishing it in the Federal Register for public comment. This
process should include an opportunity for notice and comment by impacted stakeholders~ API is also
concerned that the proposed prior notice of 30 days is not adequate tbr the mm'ket to properly understand the
irnpact of the change and prepare for ~t.
The regulatory framework established in this proposal creates an expedient means to further ratcheting of
position limits. Statements by Commissioners Chilton and O'MaIia regarding this potential are especially
concerning to AP1 members.
API and our member companies appreciate the opportunity to comment on the proposal. For further
information, please contact Patrick Kelly at 202-682-8192.
Regmds,
Patrick Kelly
Policy Advisor
