Comment Text:
10-002
COMMENT
CL-08337
From:
Sent:
To:
Cc:
Subject:
Attach:
Jennifer Cespedes
Monday, April 26, 2010 4:59 PM
secretary
Dean Wilde
Proposed Federal Speculative Position Limits for Referenced Energy Contracts
and Associated Regulations
2010-04-26_DCE_CFTC_Referenced Energy Contracts.pdf; ATT00002.htm
Jennifer Cespedes, Executive Assistant
DC Energy
Tel: (703) 760-4409 I Fax: (703) 506-3905
[email protected] ENERGY
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VIRGINIA 22182-2733
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\VILI)E@I)C-I~NEI/GY.COM
DEAN L.
WILDE,
II
MANAGING DIRECTOR &
CHI~F EXECUTlV~ OFFiCEr~
April 26, 2010
Mr. David Stawick
Secretary
Colnmodity Futures Trading Commission
1155 21 st Street, NW
Washington, DC 20581
RE: Comments on Proposed Federal Speculative Position Limits on Referenced Energy
Contracts
Dear Mr. Stawick:
This letter is submitted as our
"Proposed Federal Speculative Position Limits for
Referenced Energy Contracts and Associated Regulations"
with regard to the Commodity
Futures Trading Commission ("Commission") January 26, 2010 Notice of Proposed
Rulemaking ("NOPR"). DC Energy LLC, ("DC Energy"), hereby provide comments on the
NOPR. I am the Managing Director and CEO of DC Energy Holdings, LLC. DC Energy
invests in the electricity and gas markets, and provides hedge products and liquidity to
physical and financial participants.
The Commission is "proposing to establish reporting market specific Federal speculative
position limits for futures and option contracts in certain energy commodities and aggregate
position limits that would apply across economically similar contracts, regardless of whether
such contracts are listed on a single or on multiple reporting markets, to curb the impact of
disruptive excessive speculation.
''l
The Commission further specified that "...the speculative position limits would apply only to
referenced energy contracts. Proposed regulation 151.1 defines referenced energy contracts to
mean one of four enumerated contracts--the NYMEX Hmmy Hub natural gas contract, the
NYMEX Light Sweet crude oil contract, the NYMEX New York Harbor No. 2 heating oil
contract, and the NYMEX New York Harbor gasoline blendstock (RBOB) contract--and in
addition, any other contract that is exclusively or partially based on the referenced contracts'
commodities and deliverable at locations specified in the proposed regulations. Basis
contracts and diversified commodity index futures that are based on such contracts'
commodities, however, would not be considered to be referenced energy contracts and,
1 NOPR at 4 149.therefore, would not be subject to the proposed speculative position limits.
''2
In addition, the Commission has stated "Basis contracts, as defined in proposed regulation
151.1, are futures or option contracts that are cash settled based on the difference in price of
the same commodity (or substantially the same commodity) 70 at different delivery points.
These basis contracts have been excluded by the Commission from the speculative position
limits because they price the difference between the same commodity in two different
locations and not the underlying commodity itself.
"3
DC Energy agrees that basis contracts represent a very different exposure and should be
handled separately from speculative limits imposed on the commercial hub that acts as a
reference point to the basis contract. This will be particularly relevant to power contracts
where basis contracts are a critical element of managing locational price risk in the US power
markets.
However, we are concern that the action by relevant exchanges, such as The Intercontinental
Exchange, the Chicago Merchantile Exchange and the Nodal Exchange to disaggregate power
basis trades into its constituent parts may create a confusion in applying the Commission
stated exemptions tbr basis contracts. The exchanges make this segmentation merely because
it simplifies the clearing process
4
without consideration as to what this may imply to future
speculative limits on one of the constituents of the basis trade. DC Energy is concerned that
the action to segment the basis trade into one position on the hub reference and one position
on the local power may create unwanted limitations on the liquidity of basis trading in power
contracts. The intent of the Commission regarding basis contracts needs to be upheld
regardless of the implementation mechanics of the exchanges.
The NOPR states: "Proposed regulation 151.2(b)(1) would establish aggregate all-months-
combined and single-month speculative limits for positions held outside the spot month. The
proposed framework premises its limits on open interest levels, and would establish
speculative position limits aggregately, that is, across contracts of different classes on a single
exchange and across all reporting markets listing the same referenced energy contracts.
5
The
NOPR continues: "The proposed regulations would establish an all-months-combined
aggregate position limit that is fixed by the Commission at 10% of the aggregated open
interest value discussed above, up to 25,000 contracts, with a marginal increase of 2.5%
thereafter. The proposed regulations would set the single-month aggregate position limit at
two-thirds of the position limit fixed for the all-months-combined aggregate position limit.
This means that the aggregate all-months-combined position limit level would be 150% of the
aggregate single-month position limit level.
''6
2 NOPR at 4152.
3 NOPR at 4153
4 For instance, the Nodal Exchange clears power contracts at over 1800 separate locations. If
each basis combination was cleared as a separately defined contract, it would require over
3,000,000 contracts, an unmanageable number for the exchange to clear.
5 NOPR at 4153.
6 NOPR at 4155.
DC ENERGYWe suggest the decision to apply position limits and the limits themselves need to be based on
facts and statistically valid analysis to ensure that they will have the desired effect. We are
concerned that political pressure is creating a rush to enact limits without the backing of sound
empirical analysis that shows when speculation in the financial markets causes price bias or
increases volatility. We have seen a number of studies that show speculation does not create
price biases or increase volatility, and have only found anecdotal stories in support of the
opposing view, but the anecdotes don't hold up to statistical scrutiny. Given the prevailing
empirical assessments, new policies which limit market volumes and financial activity must
be carefully vetted to ensure they do not result in more harm than good.
Position limits should be set and reviewed by the Commission for each market with a view to
the market size (current and desired), to promote liquidity, and encourage competition.
Pricing will be more efficient and hedge products will be cheaper, if there is more competitors
and if it possible to transact without undue influence on price (i.e. liquidity).
Larger financial
markets enable this outcome.
Consequently, the consumer benefits when the financial market
is large relative to the underlying physical market. Unfortunately, there is a lingering myth
that a commodity traded financially incurs higher cost because a "middleman" is taking a cut
every time a commodity is traded. This is clearly not the case, as a financial trade creates a
long and short contract by two parties that is indexed to the price of the commodity- it is not
part of the distribution system for the physical commodity. In fact, the opposite is true, and
the consumer and economy benefit as more investors compete given their viewpoints on the
commodity's future.
If position limitx result in smaller less liquid markets' they will have
.failed. Larger liquid markets provide robust price discovery, more competition, and are much
more resistant to price manipulation than small illiquid ones.
The NOPR further states: "As proposed, the intent of the aggregate position limits is to permit
for the netting of positions in a referenced energy contract's different classes on a single
exchange and across the exchanges for the purpose of determining compliance with the
aggregate all-months-combined and aggregate single-month speculative position limits.
Accordingly, no trader would be permitted to hold net long or net short referenced energy
contract positions that, when combined with net long or net short positions in the same
referenced energy contract on another exchange, would exceed the aggregate all-months-
combined and aggregate single-month speculative position limits.
''7
We agree position limits should be applied to
a~,2re~:ate net positions.
The aggregation
should net positions across exchanges and bilateral agreements, so that participants would be
accountable for their total net position. Without this provision, competition amongst
exchanges will be severely harmed as new exchanges will not be able to compete because
their independently measured open interests would result in prohibitively low limits for
participants. Products that trade in different geographic areas for different prices (e.g. power
hubs, natural gas basis) should be aggregated for purposes of netting as well. This is
important because consumers and producers of power and energy are local. They produce
power or energy at specific, granular locations and consumers buy it at specific locations.
7
Ibid.
DC ENERGYCorrespondingly, they would like to hedge their positions at these specific locations because
prices can vary froln location to location. Financial investors providing hedges need to offer
products at these locations and then often obtain some offsetting position at a more liquid hub.
These geographic differences should be netted to capture the full economic position, so that a
"short" hedge at one location is measured in light of its "long" offsetting position at another
location. Failure to perform this geographic netting will limit the availability of locational
hedges for both consumers and producers, which will raise the cost of capital tbr producers
and ultimately increase the price paid by the consumer.
With this same logic, we suggest that calendar spreads should also be viewed as net positions
within the class, rather than in the gross positions of their constituent parts. In the proposed
position limits, "a trader's positions in contracts of the same class in a single month on a
reporting market, measured on a gross basis, would be limited to no greater than two times the
all-months-combined class position limit fixed for that reporting market."
Thank you for considering our opinion when making your decisions.
DC ENERGY
