Comment Text:
10-002
COMMENT
CL-08302
From:
Sent:
To:
Cc:
Subject:
Attach:
Parker, Christine T.
Monday, April 26, 2010 2:12 PM
secretary
Raisler, Kenneth ; Funderburk, Kelly L.
(kelly funderburk@ml, com)
Proposed Federal Speculative Position Limits for Referenced Energy Contracts
and Associated Regulations
MLCI - CFTC 4-26-2010.pdf
Please see attached comments on behalf of Merrill Lynch Commodities, Inc., with regard to the Proposed Rule
on Federal Speculative Position Limits for Referenced Energy Contracts and
Associated Regulations.
Thank you,
Christine
Christine Trent Parker
Sullivan & Cromwell LLP
125 Broad Street
New York, New York 10004
Tel: (212) 558-3631
Fax: (212) 558-3588
[email protected]
This e-mail is sent by a law firm and contains information that may be privileged and confidential. If
you are not the intended recipient, please delete the e-mail and notify us immediately.April 26, 2010
Mr. David Stawick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, DC 20581
Proposed Federal Speculative Position Limits for Referenced
Energsi Contracts and Associated Regulations
Dear Mr. Stawick:
This letter is submitted on behalf of Merrill Lynch Commodities, Inc.
("MLCI") in response to the proposed rule issued by the Commodity Futures Trading
Commission (the "CFTC" or the "Commission") regarding whether the CFTC should
directly impose speculative position limits on futures and option contracts in four energy
commodities
~
and whether to create a limited risk management exemption, administered
by the CFTC for swap dealers holding positions outside the spot month (the "Proposed
Rule"). MLCI, the principal entity through which Bank of America and Men'ill Lynch
conducts its commodity activities, is supportive of measures that diminish, eliminate or
prevent excessive speculation causing sudden or unreasonable fluctuations in the price of
a commodity. However, MLCI has serious concerns regarding specific mechanics set
forth in the Proposed Rule, including provisions that address the aggregation of positions
under common ownership for the purpose of applying the limits, as well as the "crowding
out" provisions.
Introduction
Following Bank of America's acquisition of Merrill Lynch, the integration
of the commodity activities of Bank of America and Merrill Lynch ("BAC/ML") was
consolidated into a single business unit, MLCI. MLCI is engaged in a wide range of
Henry Hub natural gas, light sweet crude oil (such as West Texas D~termediate or WFI), New
York Harbor No. 2 heating oi~ and New York Harbor gasoline blendstocko
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7X(544.79 1commodity activities with its clients, including physical and financial transactions
involving natural gas (including liquified natural gas), power, coal, natural gas liquids
and emissions allowances, and financial transactions involving commodity indices
(including agricultural indices).
MLCI maintains a global book for the BAC/ML commodities business in
relation to financial risks relating to physical and financial transactions in crude oil and
refined products. MLCI also provides energy management services and asset
management services to customers in the gas and power sectors, and structures certain
commodity-linked notes (including hedging the commodity price exposures related to
such notes) issued to customers by certain BAC/ML and third-party entities.
We are pleased to share our comments on and concerns with the CFTC on
the Proposed Rule.
Elimination of the Independent Account Controller Exemption
Under the Proposed Rule, the CFTC would aggregate the positions for
accounts in which any person has an ownership or equity interest of 10% or more at both
the account owner and control level for the referenced energy contracts. This provision
would eliminate the independent account controller exemption for position limits that
currently exists in CFTC Regulation 150.3(a)(4), which has been extensively relied on by
market participants, including BAC/ML. This provision would require MLC! to
aggregate its holdings in energy commodities with the holdings of the various
independent business units trading for all of BAC/ML's proprietary and customer
servicing accounts. In addition, MLCI would be required to aggregate its positions with
any equity investment above the 10% threshold made by any business unit within
BAC/ML in a third-party business that holds positions in any of the referenced energy
commodities. This provision will require various independent entities, including MLCI
and other affiliates that hold these positions, to disclose their energy commodity positions
to unrelated entities ~vithin and even outside of BAC/ML.
We are deeply concerned with this provision. In particular, we are
concerned that it conflicts with MLCI and BAC/ML's compliance structure under federal
banking regulations. We note that Bank of America Corporation is a bank holding
company registered under the Bamk Holding Company Act of 1956 and a financial
holding company under the Gralnm-Leach-Bliley Act of 1999. Although MLCI is the
primary commodities trading unit within BAC/ML, other business units within BAC/ML
may also make direct investments into third-pa~y entities that actively trade in the
commodities market. In compliance with various federal banking regulations, MLCI
may have no knowledge of and no relationship with the commodity trading activities of
entities in which other units within BAC/ML have invested. In fhct, for those
investments that MLCI is aware, BAC/ML has represented to federal banking regulators
that the making, monitoring, management, exit and realization of such investments by
designated
BACIML
units will be made outside the on-going activities of MLCL
Because of these limitations, we believe that it will be operationally unworkable {k~r
position limits to be aggregated across all BAC/ML positior~s in the futures markets.This provision of the Proposed Rule would pose significant additional
challenges, as BAC/ML would be required to allocate limited position volume across
separate and unrelated entities that previously have had separate position limits. As a
result, the trading activity of an investment business unit could affect the ability of MLCI
to trade in a particular energy commodity. More troubling, to comply with the
aggregated position limit, these separate entities will now have to share proprietary
trading information, which tnay raise concerns over the fiduciary duty of these entities to
protect client trading information. The Proposed Rule does not address the conflicts of
interest created by the elimination of the independent account controller exemption, and
we respectfully urge the C~C to reconsider this provision.
We also note that this provision would create significant administrative
burdens for MLCI back office operations, as we would be required to aggregate our
positions in four energy positions, but not for other positions including agricultural
positions. This will create significant confusion and administrative burdens to comply
with two different aggregation regimes and will require real-time coordination between
independent entities, which will be difficult, if not impossible. We are also deeply
concerned that as a result of the "crowding out" provision of the Proposed Rule,
addressed below, MLCI may be prohibited from hedging or speculating in the referenced
energy commodities, even if it conducts its trading operations as a separate business unit
that is completely independent. Given compliance constraints related to federal banking
regulations, we urge the CFTC to reconsider the elimination of the independent account
controller exemption.
"Crowding Out"
The Proposed Rule will severely limit the speculative activity of market
participants, including MLCI, by preventing market participants from using hedge
exemptions or risk management exemptions, if their combined positions (hedging and/or
risk management, and speculative) exceed the applicable position limit. As a result,
MLCI will be required to stay below the applicable position limit if we do any
speculative transactions, even if we have obtained a hedge exemption and/or a risk
management exemption from the CFTC. As a result, once MLCI, or any other
commodity trading investment entity with which MLC! aggregates its positions, has
exceeded the position lilnit, regardless of whether MLCI has an exemption from the
position limit, MLCI must liquidate al! of its speculative holdings or bring its hedging or
risk management positions below the position limit.
As discussed above, we believe this provision will be unworkable for
MLCI's corr~modity trading business. The Proposed Rule did not provide any clear
guidance as to how the Ct?~FC would determine if a position in one of the referenced
energy commodities would be deemed speculative or not. For example, a trade we enter
into may be hedging at inception of the trade, but given a rapid change in our underlying
energy assets, may later be deemed to be speculative in nature, before the futures contract
can be or is liquidated. In addition, holding a bona fide hedging exemption that is greater
than twice the speculative position limit will preclude MLCI t}orn also holding a risk
management exemption. As a result, MLCI will be permitted to hedge its physicalenergy assets, but depending on the size of our hedge exemption, we may not be able to
provide our clients with the risk management services we have provided in the past.
Requiring MLCI (or any other similarly situated market participant) to choose between
hedging our physical risk and providing risk management services to our clients will
severely limit trading in the energy futures market, reducing market liquidity for all
market participants, including commercial producers.
The Proposed Rule effectively eliminates the benefits of higher position
limits from risk management and/or hedge exemptions for any market participant,
including MLCI, which may have any speculative positions, however minimal. As a
result, the crowding out of speculative trading will reduce the volume and liquidity in the
futures markets, impairing their stability and price formation function, especially in the
outer contract months.
Conclusion
MLCI supports the goal of eliminating um'easonable and unwarranted
fluctuation in the commodities markets and appreciates the opportunity to comment on
the Proposed Rule. We would be pleased to offer our assistance to the Commission in
elaborating on any of the issues addressed in this letter.
Kel
Assistant General Counsel
Merrill Lynch Commodities, Inc.
