Comment Text:
10-002
COMMENT
CL-08363
From:
Sent:
To:
Subject:
Attach:
Dominique Depras
Monday, April 26, 2010 11 : 11 AM
secretary
Industry Filings: Comments on Industry Submissions
10-21 CFTC Consultation position limits-Comments by AMAFI_final release.doc
Re Proposed Federal Speculative Position Limits for Referenced Energy Contracts and Associated Regulations (p 4144 - Fed
Register Vol. 75 n
°
16
Dear Sirs,
You will find attached the comments from AMAFI, French Association in Financial Markets.
Please feel free to contact me should you need further information.
With my kindest regards
Dominique Depras
Directeur - Infrastructure des March~s / Director - Markets Infrastructure
AMAFI - Association.fran~aise des march~s.financiers
T~l~phone : +33.(0)1.$3.83.00.73 Mobile : +33.(0)6.07.22.82.9S
Fax : +33.(0)1.$3.83.00.83
E.Mail :
[email protected]
Site : www.amafi.fr
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21 April 2010
Consultation Document
Federal Speculative Position Limits for
Refe re nced E nergy Cont ractsa nd Ass oc iated
Regulations; Proposed Rule
1.
Association
fran~aise des march~s financiers
(AMAFI) has more than 120 members
representing over 10,000 professionals who operate in the cash and derivatives markets for equities,
fixed-income products and commodities, or who perform market infrastructure functions (trading, clearing,
and settlement). Slightly more than a third of our members are subsidiaries or branches of non-French
institutions.
AMAFI welcomes the opportunity to comment on the CFTC proposed Federal Speculative Position Limits
for Referenced Energy Contracts and Associated Regulations (Federal Register vol. 75 -4144)
While AMAFI totally support CFTC's role to protect market participants by organizing and promoting
efficient regulated markets, exempt from any abuses, it considers that the current proposed new rules
could be counterproductive and have negative impacts on the whole energy market.
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Telephone ¯ 01 53 83 00 70 ¯ T616copie ¯ 01 53 83 00 83 ¯ http://www.amafi.fr ¯ E-mail ¯ [email protected] / 10-21
21 April 2010
As a general comment, AMAFI would like to raise three points that are of some concerns for us.
2. The first concern relates to the current political developments where the US Congress is debating
on a major revision of its financial markets organisation and supervision of which derivatives is a key
component. At the same time, on the international scene, a G20 meeting is working also on concerted
contributions for closer coordination and improvements of the financial markets.
In that context, AMAFI would greatly urge CFTC to postpone the current proposal to be able to include
developments arising from those national and international political decisions soon to be adopted.
3. The second remark is relative to the role of speculation in the 2008 oil crisis. Several studies
monitored by the CFTC on the causes of the dramatic price increase found no evidences of such decisive
impact from speculators. Even though the role of speculators in the oil market (as in other products) is
discussed and their presence is questioned, it may be necessary to reassess the importance for an
efficient trading centre to maintain the three key components that are hedgers, arbitragers but also
speculator. It is "a necessary" to develop the liquidity that investors are looking for in a market.
4. Finally, the third observation will focus on the over-the-counter markets. This segment of the
trading including energy products has grown up considerably.
As Chairman Gary Gensler mentioned in his testimony before the Senate Committee on Energy and
Natural Resources on March 9, 2010
"The
2008 financial crisis left us with many lessons and many chaflenges to tackle. Though there
were certainly many causes of the crisis, I think most would agree that the unregulated O TC derivatives
marketplace played a central role."
And later on this same speech
"It is now time to bring comprehensive
regulation to this large and economically significant (O TC) market."
AMAFI fully support Chairman Gensler in his assessments and the consequent analysis he developed.
5. OTC markets, being non regulated right now and for a major part of the trades not reported
and/or centrally cleared, could constitute a much severe source of damages for the market stability.
For standardized OTC derivatives contracts, the use, where appropriate, of electronic trading platforms
and central counterparties, to the contrary present fair and transparent conditions that contribute to
market participants protection and investors confidence. CFTC in its role of overseeing the clearing
houses under its jurisdiction has a privilege access to all necessary information to monitor situation that
would be subject to suspicion or manipulation.
Furthermore, CFTC has the ability to investigate and issue sanction if necessary.
Those are efficient mechanisms that CFTC can use if market conditions or price evolutions necessitate
such an action;
6. By adopting its proposed speculative position limits and associated regulations, CFTC could
generate an adverse effect movement with some participants moving their trades on OTC markets or
switching to foreign exchanges if equivalent products are available or being developed.
7.
Aggregating positions in accounts which any person, directly or indirectly, has an
ownership or equity interest of 10% or greater or, by power of attorney or otherwise, controls
tradinq raise considerable leqal, confidential and administrative constraints.
Firstly, for accounts which are governed through totally independent managements, the follow-up in real
time of the various accounts in regards of the global position limit is irrelevant in terms of confidentiality.
Given the European (Market in Financial Instruments Directive) law on conflict of interests, it could be
-2-AMAFI / 10-21
21 April 2010
highly difficult to know/request positions taken by companies in which a company holds an equity interest
since they are independently operated and regulated.
Secondly, the administrative organization that such requirement would imply would appear costly and
very sensitive to determine who should do what if the global limit is reached. Furthermore, as there would
not be a distinction between US registered companies and foreign companies, the latter could be under
their legal obligation be accused of illegal combination.
Thirdly, the new rule that takes into account both the control and the ownership levels is unnecessary and
unwarranted and will be highly disruptive to a wide variety of market participants that have relied upon the
previous rule to operate efficiently in the commodity markets.
Fourthly, the extraterritorial application of the proposed rule would be inappropriate where a global market
participant has an equity interest in multiple independently operated non-U.S, businesses.
8. In conclusion, AMAFI recognizes the merit of the CFTC's proposals in its willingness to improve
transparency while reducing potential damages from excessive speculation. But the suggested solutions
are not perceived as being appropriate as they could affect market liquidity and create for the aggregation
of positions a destabilizing effect if the independent account controller exemption that is prevailing
through the regulation 150.3(a)(4) is not extended to the current project.
Request for comment
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 in such contracts ?
AMAFI reiterate its view that such Federal speculative position limits for energy contracts are
unnecessary. They could result in deteriorating the price discovery mechanism by pushing some
participants/trades from reporting markets to OTC markets. This would be counterproductive looking at
the trend international trend to repatriate OTC trades towards central cleared systems.
2. Are there methods other than Federal speculative position limits that should be utilized to
diminish, eliminate, or prevent such burdens?
As mentioned in the point 5 here above, CFTC having the supervision of the clearing houses under its
jurisdiction has a privilege access to control position if necessary. In addition, clearing houses could set
up additional requirements i.e. increased margin calls for excessive speculative positions (some foreign
clearing houses have already that facility available in their procedures). This gives the additional charge
and burden to the "excessive" speculator while leaving other participants unaffected.
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?
As mentioned in reply to your first question, implementation of such proposed speculative position limits
decided on a unilateral basis rather than on an coordinated international basis could impact negatively the
liquidity and market efficiency of US referenced energy contracts.
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
-3-AMAFI / 10-21
21 April 2010
a subgroup of contracts within a class be treated during the spot month for the purposes of
enforcing the proposed speculative position limits?
No comment
5. Under proposed regulation 151.2(b)(1)(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, all-months-combined aggregate position limit would be fixed
at 9,400 contracts under the proposed rule and 16,300 contracts under the alternative.
To be efficient, limits need to be measured on the outstanding position of an account versus the total
exposure of the market. By establishing limits based on an annual basis this could lead to the set up by
CFTC of under or over estimated limits depending of the prevailing market conditions or appetite of
accounts to be exposed to these referenced 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 .....
No comment
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.
AMAFI considers that the current rules are efficient. Consequently, no additional guidelines should be
added.
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?
No comment
-4-AMAFI
/ 10-21
21 April 2010
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?
No comment
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.
NO. As developed above, CFTC approach on the aggregation limit is a major concern for AMAFI. The
same analysis would apply if the proposed rules on referenced energy contracts were extended to the
agricultural commodities.
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.
AMAFI would strongly urge CFTC to postpone any decision as long as major revision of the financial
system is adopted by Congress.
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?
While AMAFI understand the CFTC's position to extend its no-action relief to FBOTs trading contracts
linked to CFTC-regulated ones, subject to the existence of comparable position limits, international
cooperation should be a high priority. As such coordination with local regulators of the FBOTs should be
considered.
13. The Commission notes that Congress is currently considering legislation that would
revise the Commission's section 4a(a) position limit 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.
Same as question 11.
-5-AMAFI / 10-21
21 April 2010
14. Under proposed regulation 151.2, the Commission would set spot-month and all-months-
combined position limits annually.
a. Should spot-month position limits be set on a more frequent basis given the
potential for disruptions in deliverable supplies for referenced energy contracts?
b. 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?
No comment
15. 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.
a. Should the Commission propose regulations to limit the positions of passive long
traders?
b. If so, what criteria should the Commission employ to identify and define such
traders and positions?
c. 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?
No comment
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?
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.
No comment
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?
17. Under the proposed regulations, a swap dealer seeking a risk management exemption
would apply directly to the Commission for the exemption. Should such exemptions be processed
-6-AMAFI / 10-21
21 April 2010
by the reporting markets as would be the case with bona fide hedge exemptions under the
proposed regulations?
YES
18. In implementing initial spot-month speculative position limits, if the notice of proposed
rulemaking is finalized, should the Commission:
a. Issue special calls for information to the reporting markets to assess the size of a
contract's deliverable supply;
b. Use the levels that are currently used by the exchanges; or
c. Undertake an independent calculation of deliverable supply without substantial
reliance on exchange estimates?
No comment
Contact:
Dominique Depras - Director of Market Infrastructures,
[email protected]
+331 53 83 00 70
-7-
