Comment Text:
10-002
COMMENT
CL-00016
From:
Sent:
To:
Subject:
Attach:
Rob Underwood
Friday, April 9, 2010 4:07 PM
secretary
Proposed Federal Speculative Position Limits for Referenced Energy Contracts
and Associated Regulations
PMAA Comments on Position Limits (RIN 3038-AC85).pdf
Mr. Stawick:
Please see attached PMAA's comments regarding the CFTC's proposed federal speculative position limits for
referenced energy contracts.
Best Regards,
Rob Underwood
Petroleum Marketers Association of America
Manager of Congressional Relations
1901 N. Fort Myer Drive, Suite #500
Arlington, Virginia 22209
Email: [email protected]
Phone: 703-351-8000
Fax: 703-351-9160PETROLEUM
MARKETERS
A:SSOCINI'ION
AMERICA
April 9, 2010
David Stawick
Secretary
United States Commodity Futures Trading Commission
Three Lafayette Centre
1155 21
st
Street, NW
Washington, D.C. 20581
Federal Speculative Position Limits for
Referenced Energy Contracts and Associated Regulations
Dear Mr. Stawick:
The Petroleum Marketers Association of America ("PMAA") is pleased to submit this
letter to the Commodity Futures Trading Commission ("CFTC" or "Commission") on its
proposal to implement speculative position limits for futures and option contracts in certain
energy commodities.1 PMAA is a national federation of 47 state and regional trade associations
representing over 8,000 independent petroleum marketing companies. These companies own
60,000 convenience store/gas stations and supply gasoline and diesel fuel to an additional 40,000
stores. Also, PMAA member companies sell, at retail, 90% of the heating oil consumed in the
US. PMAA representatives have frequently testified before the Commission and before
Congress on matters relating to the regulation of energy commodities and derivatives on energy
commodities. We are grateful to have this chance to express our support for the Commission's
effort to establish speculative position limits for the energy markets and to provide our comments
as to how they may be implemented in a sound, workable fashion.
Also joining PMAA in these comments is the New England Fuel Institute. NEFI is a
member of the Petroleum Marketers Association of America, and an independent trade
association representing the home heating industry since 1950. NEFI represents over 1,000
home heating oil and propane retailers and related service companies in New England and
throughout the northeastern United states, most of which are small, multi-generational family
owned- and operated-businesses. Many of these companies have been utilizing the futures
markets for their hedging needs for decades in an attempt to protect customers from ever
increasing uncertainty and volatility in energy commodity prices.
1 Federal Speculative Position Limits.fbr Re.~orenced Energy Contracts and Associated Regulations,
75 F.R. 4144
(Jan. 26, 2010) ("Release").David Stawick
April 9, 2010
Page 2
PMAA has previously expressed the need for effective regulation of excessive amounts
of speculative activity in the energy markets. In testimony before the CFTC in 2009, we outlined
how the price of crude oil and energy products have become increasingly determined not by the
forces of supply and demand, but by distortions in the market attributable to speculative trading
by large-scale, institutional investors.2 For example, in 2008, the price of crude oil rose from
less than $50 a barrel in January to over $147 in July, and then dropped to just $33 in
December.
3
That summer's record-setting prices for gasoline distressed the budgets of average
Americans, curtailed travel and caused an overall drag on the economy as the costs of business
overhead soared. In 2009, similar run-ups in prices occurred notwithstanding the sluggish state
of the economy, high inventory levels, and steady supplies. This volatility was not due to supply
and demand fundamentals. Rather, it appears to have been caused by excessively-leveraged
speculators, index investors and hedge funds.
A.
The Commission's Proposed Energy Position Limits'.
In response to this unprecedented volatility in the energy markets, the Commission began
a careful inquiry into the matter, including hearings held in the summer of 2009. Now, after a
thoughtful, deliberative and open process, the Commission has advanced proposals to establish
limits on positions that speculative traders may hold. The limits are proposed to apply across all
accounts where a person has a 10% or greater equity ownership interest or controls trading, or
where controlling parties are acting in concert. However, positions in a pool where a person is a
limited partner, shareholder or similar would not have to be counted with that person's other
positions so long as their ownership or equity interest in the pool does not equal or exceed 25%,
and they do not control the pool's trading.
4
1.
Aggregate Limits' Outside the Spot-Month.
For positions outside the spot month, proposed Rules 151.2(b) and (c) would prohibit
holding net long or net short positions in "referenced energy contracts" in excess of defined
limits. Referenced energy contracts would be any of four specified NYMEX contracts covering
natural gas, crude oil, heating oil and gasoline and similar or linked contracts, including options,
but would exclude basis contracts and diversified commodity index contracts. Limits applied
across all reporting markets would be as follows:
An aggregate all-month limit would be set at 10% of the open interest of the
relevant contract aggregated across reporting markets up to 25,000 contracts, with
a marginal increase of 2.5% of the aggregate open interest above that amount.
2 See
Testimony of Sean Cota, President, Cota & Cota, Inc., on behalf of the PMAA and the New England Fuel
Institute (July 28, 2009).
3 See
Margot Habiby,
Goldman, Morgan Stanley Threatened by CFTC Review (Update3),
July 8 (Bloomberg)
(available at
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUHZOH2Pqtr4); Testimony of Sean
Cota,
supra n. 1.
4 Proposed Rule 151.4.David Stawick
April 9, 2010
Page 3
An aggregate single-month limit would be set at two-thirds of the all-month limit
described above.
As to positions on individual markets, limits would be established with respect to net
long or net short positions in referenced energy contracts of the same "class"
(i.e.,
those with the
same delivery method, whether cash or physical), as follows:
An aggregate all-month limit would be set at the lesser of (i) the all-market / all-
month position limit described above or (ii) 30% of the relevant exchange's open
interest value in such contracts, subject in either case to a minimum limit of 5,000
contracts or 1% of the aggregate open interest of such contracts across all
reporting markets, whichever is greater.
A
single-month limit would be set at two-thirds of the single-market / all-month
limit described above, provided that traders could not hold positions greater than
two times the single-market / all-month limit on a gross basis.
2.
Spot Month Limits'.
In proposed Rule 151.2(a)(1) and (2), the Commission would prohibit holding net long or
net short positions in contracts of the same class in excess of spot month position limits set at
25% of the estimated spot month deliverable supply.
5
This standard would apply to both
physically and cash-settled contracts. However, for contracts that settle in cash based on prices
of physically delivered contracts, if permitted by rules of the reporting market, a trader could
hold up to five times that amount if they do not hold positions in spot-month physically-
delivered referenced energy contracts and file certain reports concerning their cash, futures, swap
and other positions with the CFTC.
6
For the purposes of this spot-month limit, contracts would
only be deemed in the same "class" if they expire on the same trading day.
7
Thus, traders could
not net positions that expire on different trading days, resulting in a higher number of contracts
that would count toward position limits.
8
PMAA Supports' the Adoption of Position Limits for Energy Contracts' But
Believes that the Commission Should Establish More Restrictive Limits'.
PMAA strongly supports the Commission's proposal to establish position limits for the
referenced energy contracts. As we have previously noted, speculative position limits would
serve to smooth out the volatility that can result from large amounts of funds moving into and
out of market positions. Exchange-set position accountability rules have, in our view, been
5 The Commission would establish the estimated spot month deliverable supply based on estimates from the
reporting markets, although it would be free to supply its own approximation. (Proposed Rule 151.2(d)(4).).
6 Proposed Rules 20, 151.2(a)(2).
7 Proposed Rule 151.1.
8 Release at 4159.David Stawick
April 9, 2010
Page 4
insufficient to control the excessive speculation that has buffeted the energy markets in recent
years. For example, data released by Commission staff indicates that "in the 12 months between
July 2008 and June 2009, accountability levels for individual months were exceeded in the four
main energy contracts by 69 different traders, some exceeding the levels during every trading
day in the period.
''9
While we support the Commission's effort to impose position limits on these markets, we
believe that the position limit levels being proposed by the Commission are overly generous. As
the Commission has noted, the proposed limits are "at the outer bounds of the largest positions
held by market participants," and standards for calculating positions are lenient. According to
Commission staff, the proposed limits would only have affected ten energy traders across the
four referenced energy contracts and some of those traders might have qualified for proposed
exemptions. Further, omitting positions in certain pooled vehicles where a trader has a less than
25% interest would allow some parties, including sovereign wealth funds and other large
investors, to skirt position limits by spreading energy-related investments among multiple pools
over which they can still wield substantial influence. It is therefore unlikely that the proposed
limits will meaningfully constrain the excessive speculation and undue market concentration that
has plagued these markets. Thus, we urge the Commission to strengthen the proposal in three
ways.
First, the Commission should revise the proposed limit levels downward to ensure fair
and orderly markets and prevent a small handful of speculators from holding a controlling
percentage of the open interest in any of these contracts. At the levels being proposed, PMAA is
concerned that the position limits will have little, if any impact, on market concentration and will
fail to achieve the important goals that the Commission has identified in promulgating the
proposed rules. As an alternative, in accordance with the language of current regulation
150.5(c), we would support the Commission considering the customary historical position sizes
held by speculative traders as a basis for establishing appropriate position limit levels.
Considering the customary historical levels held by speculators (in the period prior to the run-up
of energy prices) should result in limits that more effectively constrain a small number of traders
from holding extraordinarily large speculative positions relative to total open positions. More
restrictive position limits would help restore the balance that historically has existed between
speculative traders and commercial users of these markets and help prevent price distortions that
can result from unduly large speculative positions.
1°
Second, we believe the Commission should limit large, passive long positions, including
those associated with commodity indexes. The greater part of the recent price spikes and
9 Release at 4169-4170.
10 Illustrative of these excessively high position limit levels is the limit for cash settled contracts that permits a
trader to hold a position at five times the level of the cash-settled contract's physically-delivered counterpart. Given
the arbitrage relationship between the cash-settled contract and its physically-delivered counterpart, permitting a
single trader in the spot month to hold a position in excess of the total deliverable supply on the physically-delivered
contract creates the potential for significant price distortion.David Stawick
April 9, 2010
Page 5
volatility in energy markets came after 2004, when the SEC approved the first commodity-based
exchange-traded funds.ll In 2006, the SEC approved the first exchange-traded fund based
exclusively on energy derivatives.12 Such funds are exchange-traded, can be bought and sold
through stock brokerage accounts, and have been marketed by the investment banks that create
and manage them as a way to hedge against inflation. Their growth, and the growth of other
passive long investment funds, caused a massive flow of money into the markets for energy and
energy derivatives, which could not absorb such pressure.
Yet, the Commission's proposal would not directly address the distortive effects that such
funds have on the market. Indeed, it would not even address a substantial portion of the trading
that such funds engage in, because it would not count spread contracts or contracts on
"diversified" indexes toward position limits. Moreover, the proposed definition of a
"diversified" index (i.e., one with "price components that include energy as well as non-energy
commodities")
13
is so broad that a substantial number of the trades that have caused enormous
volatility will not be covered by the rules. Worse, the Commission has effectively provided a
safe harbor for three particular indexes, by specifically citing them as "diversified,
''14
notwithstanding the fact that, measured by dollar weight, 71% of one such index consists of oil
and gas products.
15
PMAA believes that the influx of large index traders and other passive longs has had a
deleterious effect on the orderly operation and price discovery function of the futures markets.
While the regulated markets for the referenced energy contracts are deep and liquid, their ability
to accommodate additional large volumes of trading without significant price distortion is not
without limit. PMAA believes that index participants and other passive longs should not be
permitted to grow to an unduly large percentage of the market. The Commission should either
apportion market space among passive long participants or set lower position limits for index
traders and other passive longs. Finally, all energy-related components of spread and index
contracts, whether diversified or not, should be counted toward position limits.
Third, we believe it would be more appropriate to aggregate an entity's positions with
those held in a pooled vehicle where that entity has an ownership level below the proposed 25%
interest that is currently proposed. While current position limits for certain agricultural products
apply a 25% standard,
16
ownership levels far lower than 25% allow an entity to exercise
substantial power over an investment vehicle. Given the energy markets' demonstrated
11 See
Letter re:
street TRACKS Gold Trust,
2004 SEC No-Act. LEXIS 860 (Nov. 17, 2004).
12
See
Letter re:
United States Oil Fund,
2006 SEC No-Act. LEXIS 422 (Apr. 10, 2006).
13 Proposed Rule 151.1
14 See
Release, at 4153 n. 72.
15 S&P GSCI Commodity Index,
Components, Weights, Index Levels and Construction,
as of March 25, 2010
(available at
http://www2.g~~dmansachs.c~m/services/securities/pr~ducts/sp-gsci-c~mm~dity-index/tab~es.htm~).
16 17 C.F.R. § 150.4(b); (c).David Stawick
April 9, 2010
Page 6
sensitivity to high levels of speculation and their importance to the economy as a whole, PMAA
submits that it would be more appropriate to aggregate the positions of each non-commercial
trader that invests in a pooled vehicle. Alternatively, a lower ownership threshold, perhaps 10%,
would be an appropriate aggregation trigger.
On the other hand, we agree with the Commission that the proposed rules should not
allow for the disaggregation of positions held by certain entities but which are controlled by
"independent account controllers," as is permitted under other position limits.
See
CFTC Rules
150.3(a)(4), 150.4. PMAA agrees with the Commission that that this disaggregation framework
should not apply here. The proposed position limits are already set at high levels and as the
Commission noted, traders could seek to exceed them through "establish[ment of] a series of
positions, each near a proposed outer bound position limit, without aggregation." Release at
4161. Moreover, to encourage fair and orderly markets, the Commission has a legitimate interest
in limiting an entity's speculative position whether its accounts are traded by one, or more than
one, "independent account controllers" or whether it seeks to spread its position among different
accounts or investment vehicles.
Once position limits are implemented, the Commission will have to periodically
determine spot-month deliverable supplies pursuant to new Rule 151.2(d)(4), and to assess the
efficacy of the new rules on an ongoing basis. Here, PMAA suggests that the Commission
establish estimated spot month deliverable supplies not only after assessing estimates from
reporting markets, but after independent consultation with governmental authorities and bodies
with expertise in this area. In particular, we suggest that the Commission formalize its
cooperative efforts with the Energy Information Administration ("EIA") of the Department of
Energy ("DOE). The EIA is a statistical and analytical agency within DOE that independently
collects and publishes energy-related information, including production figures, supply estimates
and price data. Its reports are widely relied upon by commercial users, suppliers, marketers and
traders. Therefore, we urge the Commission to independently assess and determine deliverable
supplies and to base position limit determinations on the EIA's data, as supplemented by
information from reporting markets.iV We also suggest that the Commission enhance the role of
the Energy Markets Advisory Committee by formalizing its membership and by charging it with
the responsibility of presenting the views of its members as to the accuracy of estimates of
deliverable supplies and the necessity of future revisions to position limits.
17 While we understand that reporting markets currently look to EIA reports when estimating deliverable supply,
they are not required to do so, and a requirement to use this independent and transparent source would bolster
market confidence.David Stawick
April 9, 2010
Page 7
Co
PMAA Supports Aggregate Position Limits Across All Markets, Including OTC
Derivatives and Foreign Boards of Trade.
PMAA believes that position limits in energy contracts should be applied on an aggregate
basis across all markets offering similar contracts on the same commodity. Thus, aggregate
position limits should be established covering contract markets, exempt commercial markets,
OTC derivative markets and foreign boards of trade offering contracts in the United States linked
to contracts offered on regulated markets in the United States. Aggregate speculative limits
across markets would impose real limitations on large speculative positions that could not be
easily evaded by trading similar or identical products in another market not subject to position
limits.
PMAA supports proposed legislation being considered in Congress that would grant the
Commission stand alone authority to regulate OTC derivatives. However, PMAA believes that
the Commission already has ample authority to implement aggregate position limits across all
markets -- and should do so in its current rulemaking. All market participants trading oil, natural
gas, gasoline and heating oil on exchanges regulated by the Commission can, and should, be
made subject to position limits that take into account their full trading position in the OTC
derivatives market, on exempt commercial markets and on foreign boards of trade offering direct
access to their contracts in the United States. A trader's participation in the regulated markets
should be conditioned on compliance with aggregate position limits that take into account
positions held in all markets.18 The Commission's statutory mandate to protect the price
discovery function of its markets provides it with the power to establish position limits for
contract markets and exempt commercial markets offering significant price discovery contracts
as it deems necessary to reduce and prevent the burdens that come with excessive speculation - a
broad mandate that allows the Commission to take a trader's total positions in related contracts
into account when establishing such limits.
19
The Commission should exercise that authority in
the current rulemaking.
Do
Exemptions from Position Limits Must Be Narrowly Defined and Strictly
Enforced.
PMAA recognizes that there is a need for narrowly crafted exemptions from position
limit requirements for bona fide commercial hedgers. However, as history has indicated, when
exemptions become too freely granted, the policies of deterring manipulation and preventing
undue market concentration and excessive speculation that underlie the position limit proposal
can be undermined. Thus, to promote confidence in the markets, we urge the Commission to
18 While it is probably difficult in the energy markets for traders to seek to evade limits by not trading on U.S.-
regulated contract markets or exempt commercial markets at all, this situation could be dealt with by requiring as a
condition to the risk management exemption for swaps dealers that dealers not enter into swaps with customers who
have positions in excess of the aggregate limits. This rule could be policed through a robust reporting system
directed to those dealers seeking a risk management exemption.
19 Commodity Exchange Act Sections 3, 4a(a), 7 U.S.C. 5, 6a(a).David Stawick
April 9, 2010
Page 8
narrowly tailor any exemptions to the position limit rules and to take sole responsibility for
granting any exemptions for hedging purposes.
1.
Exemptions for Bona Fide Hedging.
The proposed new rules would permit a trader to apply to the relevant exchange for an
exemption from the position limits for bona fide hedging purposes.
2°
A trader that received such
an exemption and that holds a position outside the spot month, or that holds spot month positions
would also be prohibited from holding or controlling speculative positions. If such a trader's
positions equaled or exceeded twice the otherwise applicable limit, they could not also receive a
swap-dealer risk management exemption (described below). In addition to applying to the
relevant market for an exemption, such traders would also have to report certain data to the
Commission, including information as to (i) their positions in the underlying commodity and its
products and by-products; (ii) their interests in pooled investment vehicles that hold positions in
referenced energy contracts, or the underlying commodity and its products and by-products; and
(iii) their current and anticipated purchases and sales of the relevant commodity in the physical
market.
PMAA supports the bona fide hedging exemption and believes that the Commission's
proposal is a well-reasoned approach to allowing commercial users and suppliers of energy
products to meet their hedging needs. The exemption would permit limits to be exceeded where
there is a non-speculative purpose, and at the same time, limit the concentration of positions that
would result if a large hedging entity also were to maintain speculative positions. However, the
reporting markets are not well-suited to handle applications for exemptions. While exchanges
have been allowed to grant exemptions from Commission rules, this practice appears to be a
remnant of times when exchanges were less subject to competitive pressures and did not face the
conflicts that may arise when their ownership and financial interests overlap with those of the
financial institutions that trade on their platforms. In today's environment, especially as to a
commodity where prices are such a public concern, and where the exchanges have publicly
opposed position limits and questioned the value of the limits themselves, we believe that only
the Commission has the requisite independence and singular focus on the public interest to grant
exemptions from position limits.
2.
Exemption for Swap Dealer Risk Management.
In the proposed rules, the Commission has created a special exemption for swap dealers
that are hedging risks associated with their over-the-counter swaps business. The proposal
would allow the Commission to grant exemptions for positions outside of the spot month that are
held to offset risks associated with swaps that are entered into to accommodate swap customers.
The exemption would allow dealers to hold up to twice the otherwise applicable position limits
in all months-combined or in any single nonspot-month. In order to receive such an exemption,
swap dealers must provide the Commission with information as to their overall trading positions
20 Proposed Rule 151.3(a)(1).David Stawick
April 9, 2010
Page 9
and to keep books and records to substantiate the need for an exemption. Swap dealers holding
risk management positions in excess of existing position limits would be barred from also
holding speculative positions.
PMAA recognizes that swap dealers play an important role in energy derivative markets
because they allow commercial entities to manage particularized risks through non-standardized
OTC products. To facilitate this business, dealers should be permitted a limited exemption to
manage the risks associated with these swap transactions with commercial hedgers. However the
exemption should be narrowly tailored. Therefore, PMAA urges the Commission to take the
"look through" approach described in the Release and by Commissioner O'Malia, whereby
dealers would only receive exemptions from position limits for positions that offset risks that
result from swaps with counterparties who would have themselves been entitled to a hedge
exemption if they had hedged their risks directly in the futures markets. This "look through"
exemption should be subject to an absolute cap of up to twice the otherwise applicable position
limit. Such a rule would provide more than enough leeway for a dealer to manage its risks, while
ensuring that position limits are exceeded only for the valid needs of commercial firms.
In any case, the Commission should retain the proposal to bar swap dealers holding such
exemptions from also holding speculative positions. Allowing dealers to hold risk management
positions in excess of the proposed limits as well as large speculative portfolios could result in
unduly large and potentially disruptive positions and confer dangerous market power to a small
number of market participants. In PMAA' s view, the energy markets do not suffer from a lack
of speculative interest. Preventing swaps dealers (or commercial hedgers) from holding large
speculative positions in the futures markets while also taking advantage of exemptions from
position limits will not negatively impact the price-discovery and hedging functions of the
marketplace.
E.
PMAA Supports' Greater Market Transparency.
PMAA commends the Commission for the additional reporting requirements reflected in
the proposed rules. We believe, however, that the Commission should go further. The energy
markets continue to suffer from a lack of adequate transparency, particularly as it relates to OTC
derivatives trading. The Commission should extend its large trader reporting system to provide
that large traders who are trading on regulated or exempt commercial markets whose combined
exchange, OTC and FBOT positions exceed a specified level, file with the Commission large
trader reports detailing their cash and derivatives positions. In addition, swaps dealers claiming a
risk management exemption should be required to file reports containing detailed transactional
data regarding their swaps trading and the energy positions of their major counterparties. These
reports should extend beyond the summaries apparently contemplated by the proposed rule.
F.
PMAA Supports' Prompt Implementation of Position Limits'.
PMAA strongly supports legislative efforts in Congress to reform our financial system
and more effectively regulate our country's derivatives markets. We support additional
centralized clearing and exchange trading of standardized derivatives products andDavid Stawick
April 9, 2010
Page 10
comprehensive regulation of derivatives dealers and major market participants. As previously
noted, we also strongly support additional transparency for the derivatives markets.
Nonetheless, we urge the Commission not to wait for the conclusion of an uncertain
legislative process in order to move to improve the current regulatory regime applicable to
energy trading. The Commission has a clear statutory mandate to ensure fair and orderly futures
markets. The Commodity Exchange Act also clearly directs the Commission to set position
limits to protect against the burdens of excessive speculation.
21
In light of the tremendous harm
that disruptions in energy markets caused to businesses and the U.S. economy in recent years,
PMAA believes that the Commission should not delay implementation of the proposed new
rules. The proposal to impose position limits reflects a sound conclusion after an open and
transparent 6-month process in which the Commission received input from a wide range of
market participants and interested members of the public. Given traders' familiarity with
exchange-set position accountability rules and the Commission's extensive experience with
position limits in other markets, there is little reason for a lengthy implementation period.
Moreover, the proposal includes a grandfather clause for positions entered into in good faith
before implementation of the rules. Therefore, we urge the Commission to move promptly to
finalize and make effective meaningful position limits across all markets and improve reporting
and market transparency generally.
PMAA supports the Commission's goal of protecting consumers and markets with sound
policies that will foster open markets, fair competition, and transparent standards. The
imposition of meaningful position limits will serve these goals by helping control excessive
speculation while preventing undue market concentration. We appreciate the opportunity to
comment on the proposed rules.
Sincerely,
Dan Gilligan
PMAA President
Shane Sweet
President & CEO of the NEFI
The Honorable Gary Gensler, Chairman
The Honorable Michael V. Dunn, Commissioner
The Honorable Jill Sommers, Commissioner
The Honorable Bart Chilton, Commissioner
The Honorable Scott D. O'Malia, Commissioner
21 Commodity Exchange Act Section 4a(a), 7 U.S.C. 6a(a).
