Comment Text:
10-002
COMMENT
CL-08332
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Attach:
Jon_Hixson@cargill. com
Monday, April 26, 2010 4:30 PM
secretary
[email protected]
Cargill Comments - Position Limits
Stawick Letter_001 .pdf
Dear Secretary Stawick-
Attached are Cargill Incorporated's comments on the Commodity Futures Trading Commission's Notice
of Proposed Rulemaking, Federal Speculative Position Limits for Reference Energy Contracts and
Associated Regulations.
Thanks,
-Jon
Jon Hixson
Cargill
1101 15th Street, NW - Ste 1000
Washington, DC 20005
202-530-8166 direct
202-641-6564 cell
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reply e-mail, and delete this message and any attachments. Thank you."April 26, 2010
David Stawick, Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
Re: Proposed Federal Speculative Position Limits for Referenced Energy Contracts and
Associated Regulations
Dear Secretary Stawick:
Cargill is an intemational provider of food, agricultural, and risk management products and
services. Cargill is also an active participant in the energy markets. As a merchandiser,
processor and exporter of commodities, Cargill relies heavily upon efficient and well-functioning
futures markets and over-the-counter derivatives markets. Cargill is pleased to submit these
comments in response to the Notice of Proposed Rulemaking ("Proposed Rules") of the
Commodity Futures Trading Commission ("Commission" or "CFTC") that was published in the
Federal Register on January 26, 2010.
The Proposed Rule contains a fundamental flaw in its construction. According to the CFTC's
September 2008 Report on Commodity Swap Dealers and Index Traders, there were 18 incidents
identified where noncommercial traders held aggregated positions across exchange-traded and
over-the-counter derivatives markets that would have been above a speculative limit or
accountability limit. Unfortunately, the Proposed Rule seeks to focus on commercial firms and
swaps dealers, rather than to simply aggregate positions at the level of the noncommercial trader.
As such, the Proposed Rule will have little impact on the noncommercial traders exceeding
speculative or accountability limits like those cited in the report.
The September 2008 CFTC Report included a relatively straightforward suggestion, noted as
recommendation #5. This recommendation outlined risk management exemptions for swaps
dealers conditioned upon:
1.
An obligation to report to the CFTC when noncommercial swap clients reach
certain position levels in related exchange traded contracts, and/or
Law
Linda L. Cutler
Vice President, Assistant Secretary and
15407 McGinty Road West
Wayzata, MN 55391-2399
P.O. Box 5624
Minneapolis, MN 55440-5624
Tel: (952) 742-6377
Fax: (952) 404-6334
[email protected])
A certification that none of the swap dealer's noncommercial clients exceed
specified position limits relative to related exchange traded contracts.
As noted in this initial recommendation, this proposal would be a "practicable way of ensuring
that noncommercial counterparties are not purposefully evading the oversight and limits of the
CFTC and exchanges.
The principle action that swap dealers can take is to report to the CFTC. That is the most
important recommendation from the 2008 Staff Report. The value of the certification by a swaps
dealer is limited by the fact that a dealer would not know if a customer is utilizing multiple
dealers and a dealer is not likely to know the limit for a specific customer.
Enforcement of overall position limits is the role of the regulator, who can aggregate the reported
information. However, even with these limitations, the September 2008 recommendation stands
in stark contrast to the complexity of the CFTC's current proposal, and the fact that at its core,
the current Proposed Rule would not address the incidents where position limits were exceeded.
The Proposed Rule would unduly restrict legitimate hedging. The Proposed Rule could also
damage necessary speculation that is needed to provide liquidity. The Proposed Rule may
inhibit price discovery and create the unintended risk of markets failing to solve the physical
imbalances that often exist in the petroleum supply chain. These new risks will be created
through the new rule, without achieving the Commission's regulatory objective of preventing
excessive speculation.
In the attached Appendix A and B, we offer further comments in detail on the Proposed Rule and
provide answers to the questions proposed by the agency. However, we would reiterate that the
more straightforward alternative recommended September 2008 is far better public policy.
As such, we do not recommend that the Commission move forward with the Proposed Rule.
As an active commercial participant in the markets, Cargili appreciates the Commission's
attention to the issues raised in its Proposed Rule, and looks forward to working with the
Commission in analyzing and resolving these issues.
Yours truly,
L. Cutler
LLC:jp
2869085Appendix A
The
following
provisions in the Proposed Rule, are inconsistent with current regulatory practices
and, if adopted, would unduly restrict the activities of legitimate market users.
The arbitrary cap on hedging by swap dealers, which would limit them to two
times the otherwise applicable speculative limit.
The "crowding out" provisions whereby a company like Cargill, which is both a
commercial hedger and a swap dealer, would be precluded from hedging its swap
obligations if its commercial hedging exceeded the proposed arbitrary cap on
hedging of swap obligations, and would also be precluded from taking a
speculative position if its hedge position exceeded the speculative Iimit.
The elimination of the independent account controller exemption from
aggregation.
The arbitrary cap on hedging by a swap dealer should not be adopted. Such an arbitrary limit on
hedging would be unprecedented, and would prevent legitimate hedging. Rather than prudently
identify excessive speculation, the adoption of this provision would merely result in swap
counterparties spreading their swap transactions across numerous swap dealers, and the amount
of the offsetting trades made on the exchanges by these swap dealers collectively would remain
the same.
An accountability level of two times the speculative limit, might help provide oversight
information for the Commission, but there is no rational basis for arbitrarily capping hedges of
swap obligations at two times the speculative limit.
The Commission should not adopt the crowding out provisions, because they would prevent
legitimate hedging and speculation, without achieving any valid regulatory purpose. These
provisions would prevent a commercial hedger from hedging swap obligations if the trader's
commercial hedging exceeded the arbitrary cap on hedging of swap obligations, and would also
prevent a commercial hedger from engaging in separate speculative trading. Diversified
companies may be engaged in many activities including commercial hedging, speculation, and
hedging of swap obligations.
The current procedure is fully consistent with the Commission's objective of preventing
excessive speculation, because a hedger who also speculates is limited to speculative trading
within the same limit as other speculative traders.
The crowding out provisions would also make the administration of a hedging program for both
swap obligations and commercial hedges impossible in certain cases. For example, a swap
dealer with a combination of commercial hedges and hedges of swap obligations could be at or
close to the arbitrary cap when it incurred a need for greater commercial hedging. The only way
it could conduct that commercial hedging would be to liquidate all its hedges on its swap
obligations, leaving those obligations uncovered and greatly increasing its risk. In order to avoid
this result, the swap dealer would have to forego hedging of swap obligations entirely, as anyhedge of a swap obligation would act to limit all hedging to the amount of the arbitrary cap. This
would be an unreasonable and unworkable policy which could increase risk and volatility in the
energy sector, and it should therefore not be approved.
The independent account controller exemption should not be eliminated for the energy contracts
that are the subject of the Proposed Rule. Elimination of this provision would unduly restrict
trading by independently controlled traders in accounts with common beneficial ownership
where the trading is conducted independently. Where trading is truly independently controlled,
the beneficial owner may not have the legal or contractual right to manage the overall position
limits that would be imposed under the Proposed Rule.
If this exemption were eliminated for energy contracts, the amount of speculation in these
contracts would not necessarily decrease, as energy traders could simply disperse to numerous
smaller entities that would each be entitled to a speculative limit. In the meantime, trading
strategies and programs would be disrupted, because independently controlled accounts which
are now trading futures on energy and other commodities, within the terms of the exemption,
would no longer be able to trade energy contracts on the same scale as the other contracts, which
would continue to be entitled to the exemption.
The Commission established this exemption in 1988, and favorable experience with the
exemption has led the Commission to expand its coverage over the years. The Commission
acknowledged the effectiveness of this provision when it expanded the definition in 1999:
Commission rule 150.3 generally has worked well. It has provided flexibility to the markets,
accommodating the continuing trend toward professional management of speculative trading
accounts, while at the same time protecting the markets from the undue accumulation of large
speculative positions owned by a single person or entity in the spot month.
See Revision of Federal Speculative Position Limits and Associated Rules, 64 Fed. Reg. 24038
(May 5, 1999).
In cases where the requirements of the independent account controller exemption have been
satisfied, there is no valid regulatory reason to require aggregation. The reason for aggregating
accounts on the basis of ownership alone is that ownership carries with it the ability to exert
control. Under the terms of the independent account controller exemption, requirements must be
met that prevent the passive owner from exercising control. When these requirements have been
satisfied, there is no need for aggregation, and therefore no valid reason to require it.
Traders performing the function of swap dealers are analogous to futures commission merchants
("FCMs"), who act as intermediaries between their customers and the futures markets, and
therefore should be treated similarly with respect to position limits. FCMs are not limited in the
amount of trading they can transact on the exchanges on behalf of customers, as long as the
customers themselves abide by their own position limits. Similarly, traders acting as swap
dealers should not be prevented from entering into swaps and offsetting the swap liabilities on
the futures markets as hedges, as long as their swap counterparties are within their limits.Position limits could be better enforced by imposing a reporting requirement on the swap dealers
who enter into futures contracts to hedge their swap obligations. These swap dealers could be
required to report on their transactions with counterparties that are being offset on the exchanges,
and these reports could trigger a call for additional information from the counterparties
themselves.
A similar procedure is currently followed with FCMs, which are required to identify large traders
on their books, and the Commission then follows up with requests for information to the traders
themselves. In addition, Part 19 of the Commission's Regulations requires hedgers to file series
'04 reports concerning physical positions that are held in certain commodities, and this reporting
requirement could be expanded to include swaps that are being hedged. If a counterparty to an
off-exchange transaction failed to provide the requested information, the Commission could
prohibit the swap dealer from offsetting its obligations to that counterparty in the futures
markets.
Cargill urges the Commission not to approve the Proposed Rule and instead to extend the
coverage of the current position limits to the off-exchange counterparties whose transactions
with swap dealers are being hedged in the futures markets. Existing account control and
aggregation procedures also work well and should not be changed as considered in the Proposed
Rule.AppendLx
B
Cargill's Answers to Questions of CFTC in Notice of Proposed Rulemaking pertaining to
Federal Speculative Limits for Referenced Energy Contracts and Associated Regulations
1.
Are Federal speculative position limits for energy contracts traded on reporting
markets necessary to "'diminish, eliminate, or prevent" the burdens on interstate commerce that
may result from position concentrations insuch contracts?
Comment: No. The current regulation of position limits, with coverage extended to off-
exchange counterparties whose transactions are hedged on the futures markets, would better
achieve this goal.
2.
Are there methods other than Federal speculative position limits that should be
utilized to diminish, eliminate, or prevent such burdens?
Comment: Yes. The CFTC can require those who enter into off-exchange transactions that are
hedged on the regulated futures markets to abide by the limits set by the exchanges.
3.
How should the Commission evaluate the potential effect of Federal speculative
position limits on the liquidity, market efficiency and price discovery capabilities of referenced
energy contracts in determining whether to establish position limits for such contracts?
Comment: The Commission should first expand the applicability of exchange position limits to
off-exchange counterparties whose transactions are hedged on the futures markets, and should
then conduct a study to determine whether further changes are needed.
4.
Under the class approach to grouping contracts as discussed herein, how should
contracts that do not cash settle to the price of a single contract, but settle to the average price of
a sub-group of contracts within a class be treated during the spot month for the purposes of
enforcing the proposed speculative position limits?
Comment: No comment.
5.
Under proposed regulation 151.2(b)(i)(i), the Commission would establish an all-
months-combined aggregate position limit equal to 10% of the average combined futures and
option contract open interest aggregated across all reporting markets for the most recent calendar
year up to 25,000 contracts, with a marginal increase of 2.5% of open interest thereafter. As an
alternative to this approach to an all-months-combined aggregate position limit, the Commission
requests comment on whether an additional increment with a marginal increase larger than 2.5%
would be adequate to prevent excessive speculation in the referenced energy contracts. An
additional increment would permit traders to hold larger positions relative to total open positions
in the referenced energy contracts, in comparison to the proposed formula. For example, the
Commission could fix the all-months-combined aggregate position limit at 10% of the prior
year's average open interest up to 25,000 contracts, with a marginal increase of 5% up to 300,000
contracts and a marginal increase of 2.5% thereafter. Assuming the prior year's average open
interest equaled 300,000 contracts, an all-months-combined aggregate position limit would be
fixed at 9,400 contracts under the proposed rule and 16,300 contracts under the alternative.Comment: The Commission should require off-exchange counterparties whose transactions are
hedged on the futures markets to be subject to the exchange position limits and not set federal
limits on energy contracts.
6.
Should customary position sizes held by speculative traders be a factor in
moderating the limit levels proposed by the Commission? In this connection, the Commission
notes that current regulation 150.5(c) states contract markets may adjust their speculative limit
levels "'based on position sizes customarily held by speculative traders on the contract market,
which shall not be extraordinarily large relative to total open positions in the contract * * *"
Comment: Pursuant to the current regulation, this factor should continue to be considered by the
exchanges, but the Commission should not set position limits.
7.
Reporting markets that list referenced energy contracts, as defined by the
proposed regulations, would continue to be responsible for maintaining their own position limits
(so long as they are not higher than the limits fixed by the Commission) or position
accountability rules. The Commission seeks comment on whether it should issue acceptable
practices that adopt formal guidelines and procedures for implementing position accountability
rules.
Comment: The position limits and position accountability rules should be left to the exchanges as
they are currently.
8.
Proposed regulation 151.3(a)(2) would establish a swap dealer risk management
exemption whereby swap dealers would be granted a position limit exemption for positions that
are held to offset risks associated with customer initiated swap agreements that are linked to a
referenced energy contract but that do not qualify as bona fide hedge positions. The swap dealer
risk management exemption would be capped at twice the size of any otherwise applicable all-
months-combined or single non-spot-month position limit. The Commission seeks comment on
any alternatives to this proposed approach. The Commission seeks particular comment on the
feasibility of a "'look-through" exemption for swap dealers such that dealers would receive
exemptions for positions offsetting risks resulting from swap agreements opposite counterparties
who would have been entitled to a hedge exemption if they had hedged their exposure directly in
the futures markets. How viable is such an approach given the Commission's lack of regulatory
authority over the OTC swap markets?
Comment: Following the CFTC's, "Recommendation #5," in the 2008 Staff Report, the
Commission should use its authority to place conditions on a limited risk management
exemption for swaps dealers that would require appropriate reporting. With proper
implementation of this recommendation, there is no need for an arbitrary cap on a swap dealer's
hedge exemption. A swap dealer's own hedge exemption for swap obligations should not be
limited, as long as the dealer's counterparties are within their own speculative and hedging
limits, which can be accurately enforced by the CFTC.9.
Proposed regulation 20.02 would require swap dealers to file with the
Commission certain information in connection with their risk management exemptions to ensure
that the Commission can adequately assess their need for an exemption. The Commission invites
comment on whether these requirements are sufficient. In the alternative, should the Commission
limit these filing requirements, and instead rely upon its regulation 18.05 special call authority to
assess the merit of swap dealer risk management exemption requests?
Comment: The reporting requirements of proposed Regulation 20.02 could be expanded to
require swap dealers to report the information necessary for the Commission and exchanges to
determine whether the swap dealer' s counterparties are within their own limits. Special calls
may be used when a special need arises, but should not be a regular practice.
10. The Commission's proposed part 151 regulations for referenced energy contracts
would set forth a comprehensive regime of position limit, exemption and aggregation
requirements that would operate separately from the current position limit, exemption and
aggregation requirements for agricultural contracts set forth in part 150 of the Commission's
regulations. While proposed part 151 borrows many features of part 150, there are notable
distinctions between the two, including their methods of position limit calculation and treatment
of positions held by swap dealers. The Commission seeks comment on what, if any, of the
distinctive features of the position limit framework proposed herein, such as aggregate position
limits and the swap dealer limited risk management exemption, should be applied to the
agricultural commodities listed in part 150 of the Commission's regulations.
Comment: The Commission should retain current policies applicable to agricultural
commodities, namely, those providing for the independent account controller exemption,
exemptions for persons acting as swap dealers, and for hedgers to be able to separately trade
speculatively up to the speculative limit. In addition, the Commission should adopt a took-
through provision whereby a swap dealer's cotmterparties would be required to comply with
their own hedging exemptions and speculative limits. The expansion of Part 19 of the
Commission's regulations to require additional traders to file '04 reports concerning physical
positions that are held in certain commodities would help in oversight and enforcement.
11. The Commission is considering establishing speculative position limits for
contracts based on other physical commodities with finite supply such as precious metal and soft
agricultural commodity contracts. The Commission invites comment on which aspects of the
current speculative position limit framework for the agricultural commodity contracts and the
framework proposed herein for the major energy commodity contracts (such as proposed
position limits based on a percentage of open interest and the proposed exemptions from the
speculative position limits) are most relevant to contracts based on other physical commodities
with finite supply such as precious metal and soft agricultural commodity contracts.
Comment: If Commission-set limits are extended to other commodities, the agricultural
framework should be used as it relates to the availability of the independent account controller
exemption, unlimited hedging exemptions for persons acting as swap dealers, and allowing
hedgers to separately trade speculatively up to the speculative limit. In addition, the Commissionshould add a took-through provision which would require a swap dealer's counterparties to
comply with their own hedging exemptions and speculative limits.
12. As discussed previously, the Commission has followed a policy since 2008 of
conditioning FBOT no-action relief on the requirement that FBOTs 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 FBOT contracts that would be
linked to any referenced energy contract as defined by the proposed regulations?
Comment: The Commission should continue to consider each such situation separately and in
each case work with the foreign regulator to determine whether, and if so what, limits should be
imposed.
13.
The Commission notes that Congress is currently considering legislation that
would revise the Commission's section 4a(a) position Iimit authority to extend beyond positions
in reporting market contracts to reach positions in OTC derivative instruments and FBOT
contracts. Under some of these revisions, the Commission would be authorized to set limits for
positions held in OTC derivative instruments and FBOT contracts. The Commission seeks
comment on how it should take this pending legislation into account in proposing Federal
speculative position limits.
Comment: The Commission should not take action based on the Congressional proposals, as it is
impossible to foresee what, if any, legislation will be enacted. The Commission should wait to
see what happens with the Congressional proposals before making any significant changes.
14. Under proposed regulation .151.2, the Commission would set spot-month and all-
months-combined position limits annually.
Should spot-month position limits be set on a more frequent basis given the
potential for disruptions in deliverable supplies for referenced energy contracts?
Should the Commission establish, by using a rolling-average of open interest
instead of a simple average for example, all-months-combined position limits on a
more frequent basis? If so, what reasons would support such action?
Comment: Position limits, both spot and non-spot, should remain stable and not be changed
frequently, because frequent changes will create uncertainty for market users, disrupt their
trading, and cause price movements unrelated to market fundamentals.
I5. Concerns have been raised about the impact of large, passive, and unleveraged
long-only positions on the futures markets. Instead of using the futures markets for risk
transference, traders that own such positions treat commodity futures contracts as distinct assets
that can be held for an appreciable duration. This notice of rulemaking does not propose
regulations that would categorize such positions for the purpose of applying different regulatory
standards. Rather, the owners of such positions are treated as other investors that would be
subject to the proposed speculative position limits.Should the Commission propose regulations to limit the positions of passive long
traders?
if so, what criteria should the Commission employ to identify and define such
traders and positions?
Assuming that passive long traders can properly be identified and defined, how
and to what extent should the Commission limit their participation in the futures
markets?
If passive long positions should be limited in the aggregate, would it be feasible
for the Commission to apportion market space amongst various traders that wish
to establish passive long positions?
What unintended consequences are likely to result from the Commission's
implementation of passive long position limits?
Comment: Passive longs should be considered, and their activities should be subjected to
reporting by swap dealers. The Commission should study the impact of these traders to
determine whether, and on what terms, to permit them to hold positions above speculative limits.
The guiding principle in determining these limits should be to ensure that the underlying contract
continues to effectively perform its price discovery and its risk transfer function.
16. The proposed definition of referenced energy contract, diversified commodity
index, and contracts of the same class are intended to be simple definitions that readily identify
the affected contracts through an objective and administerial process without relying on the
Commission's exercise of discretion.
Is the proposed definition of contracts of the same class for spot and non-spot
months sufficiently inclusive?
Is it appropriate to define contracts of the same class during spot months to only
include contracts that expire on the same day?
Should diversified commodity indexes be defined with greater particularity?
Comment: No comment.
17. Under the proposed regulations, a swap deater seeking a risk management
exemption would apply directly to the Commission for the exemption. Should such exemptions
be processed by the reporting markets as would be the case with bona fide hedge exemptions
under the proposed regulations?
Comment: Bona fide hedge exemptions for futures traders and risk management exemptions for
swap dealers should be processed by the reporting markets.
18. In implementing initial spot-month speculative position limits, if the notice of
proposed rulemaking is finalized, should the Commission:
ao
Issue special calls for information to the reporting markets to assess the size of a
contract's deliverable supply;Use the levels that are currently used by the exchanges; or
Undertake an independent calculation of deliverable supply without substantial
reliance on exchange estimates?
Comment: Per prior colnments, the Commission should not adopt the Proposed Rule and seek a
more straightforward reporting alternative that will allow proper oversight of existing position
limits and accountability limits.
