Comment Text:
10-002
COMMENT
CL-08369
From:
Sent:
To:
Cc:
Subject:
Attach:
David Murphy
Monday, April 26, 2010 1:49 PM
secretary
Jenny Fordham
Comments of the Natural Gas Supply Association: 75 FR 4144
SKMBT_C65210042612370.pdf
Dear Mr. Secretary,
Please find attached the comments of the Natural Gas Supply Association regarding the CFTC's Federal
Speculative Position Limits for Referenced Energy Contracts proposed rule.
Thank you,
David
David W. Murphy
Energy Markets & Government Affairs
Natural Gas Supply Association
Direct: (202) 326-9301
Cell: (205) 657-1848April 26, 2010
Mr. David Stawick, Secretary
Commodity Futures Trading Commission
Three La~a'vette Centre
115,5 2"1
st
Street, N,W.
Washington, DiC. 20581.
Re: Pro.posed Federal Speculative Posi{ion Limits for Referen~:e Energy Con.tra~:ts
and Associated Regulations, 75 Fed. Reg. 4144 (Jan.. 26, 2010}
Dear Mr. Stawick:
~ILEe N a mral Gas Su ppl y Association (, NGSA") submits these com.ments on the
Commodity Futures Tradi~,.g Commission ("CFTC" or "Commission")Federal
Speculative Position I~imits ~or Refere~n.ced Energy Contracts a~d Associated
Regulations Notice of Proposed Rule Making ("Position Limits NOPR").
NGSA represents "
," -
~
.
.m.teg~ ate~.~ and independent companies that produce and
market [approximateiy 40 percent of the nat-urai gas consumed i~. the Uni{ed Seates:]
Established in 1965, NGSA en.courages the use of natural gas within a balanced national
energy policy, and promotes ~he benefits of competitive markets to ensure reliable and
efficier~t .......... -
~
~
~ranspo~ ~t~on ant~ delivery of ~aturaI gas and ~o increase t}~e SUDDt~"
of
natural
gas to U~S. customers.
NGSA members enter i~,,to thousaads of physicai and finar~:clal na~:ral gas
marke~ t',.:a~sact~ons dam an.d invest billions of dollars in the long4erm deve!opment of
na{ural gas supply for sale in th.e U:S. natural gas market. As large producers and
marketers of natural gas, NGSA members would ~xot be participatirtg in the na:turaI gas
market if they did not believe the market exhibited three key bedrock principles of
health: 1) integrity, 2) trai~sparency and 3) efficiency.NGSA supports the Comrn~ssioffs commitmel~.t to ensuring well-functioning,
effi.cient markets that are free from manipulation. If position Iimits are required
markets can functiot~ well if the pos~tio]-~ limffs are appropriately set. The key is
ensurir% position limits that are dynamic, re[lective of tb, e underlying market, and
establlshed in: a way tha~ is transparent and pr:incipled, ~n order to minimize market
d.isrup~ions and unintended col~sequences, such as reduced liqufd~y:
Since such unintended consequ~ces would ultimately come at the expense of 60
millio~-t U.S. natural gas consumers, NGSA urges th.e Commissio~ to exercise cau.tion as
it considers establishing new position lirnit rules. This need for caution is ur~derscored
by recent Comm.[ss~on staff reports. Spec~fically, the reports did not establish any
definitive,, consistent influ.ence between the financial and physical markets
~,
although
tt~ev did suggest steps for greater transparency to improve market understanding and
confidence. Tl~e Commission staff's prelimir~ary analysis suggested ~hat changes in the
position, s of swap dealers and noncomme~'clal traders most often
&flowed
price changes
This refutes the hypothesis that the market act~;itv of swap dealers and no~.~.commercial
traders, targeted by the Position Limffs NOPR, is driving prices higher, h-c~tead0
positions of hedge funds appear to !-~ave moved inversely w4.th the D-eceding prfce
changes, suggesting tt'~at their positions mfght have provided a buffer against volatilitv-
induced sb.ocks.
2
Likewise, academics share the view that specuia~ion plays an
important ~ole in markets. Dr. Peter Locke, former Fina~tcia.! Economis~ for the CFTC,
noted "Speculators add liquidity .... The aliernative, a lack of speculation, is [results in]
potentially large Iiq u~dlty shocks, with prices pushed far from fundamental vatues."~
This leaves no doubt- that caution is clearly, necessary for a prud.ent patl-t forward with
respect to position limit regu !a tio~s.
3 U.S. Commodity Futures Trading Commission (CFTC) Staff,
Report
on ~ornrnodity $~va# Dealers & tnde~ Trader~
w~# Comm~sio~
Re~ommea##~ioas
(September 2008~, and CFTCqed l~teta~e~c'y Task Force on Commodity
Markets (indudin~ the Departments of A6r~cu~tu[e, EnerBy, Treasury, Federal Reserve System Board of Governors,
Federal ~rade Commissio~ and Securities & ~xchan~e Commission) ~nterim Report on Crude Oi~ (Ju~y 2008):
~ Choo, Lee-Ken, Annotated
Bibliography on Financia~ "Fundamentals" in Natura~ Gas Markets,
April 6, 20~0~
http://www~ngsa,org/newsletter/pdfs/20~O%20Press%20Re~eases/~2a-
Bibl~ography%20for%20EIA%20release%20..2_,pdf
~ Locke, Peter;
Natura~ Gas Price Transparency and
Liquidity, October 2006, p, 6~
htt~://www~ngsa~r~news~etter~pdfs/Natura~Gas~Market~ransparenc~-~t~ber%2~2~5-F~na~pdf
2};our concepts in the Posit~on Limits NOPR risk unir~te,.'~ded co~.sequences to the
~.~_atural ~,a~ market m~d consequentiy natural gas m~d energy consumers uniess they are
appropriately addressed. SpecificaIly--
IV.
Arty crowding out provisions must allow for diverse portfolio approaches to
avoid harming liquidity,
New position Ii.mi~s, i.f required by the Commission., should be appropriaMy
established by the exclaartges, with guidelines and oversight provided by tlae
Commission, to ensure a transparent, dynamic approach that isr~sl:," :~ons,x. "'e to
the market, and produces a single set of position limiks instead of multiple
Conflicting limits.
Aggregation requlreme~ts must recognize tb, e po~ential for multipIe
decentralized trading strategies based on unique subsidiary hedg~x~.g
interests.
Risk management exemption categories must be clarified to correctly
distinguish commercial hedgers.
Any crowding out provisions must allow for diverse portfolio approaches to, avoid
ha:truing liquidity~
The Commission recognizes the importance of the bona f~de hedge exemption i>
t~e Position Limits NOPR, and recognizes that positions held as bona fide hedges do
rtot tt'a'eaten the functioni~:g of ~he marke~. The Commission also recognizes that
speculative positiorts ~ha~ are sma!ler than the posit-io~ Iimi~ do no~ pose a threat to the
market. There is no benefit, therefore, to prohibiting an entity from holding speculative
posi~io~.~s that are within the speculative limits merely because ehe entity is also usi~g a
bona fide hed.ge exem.ption. Also, the financially settled contracts for which positio~
~,
~imits are proposed are not st~bject to finit.e supply so the question of "crowding out"
does ~not arise, l.t is simply r~ot the case fl~at a hedger t!-tat also specuia~es in any way
reduces the supply of contracts available to another market par{icipant, so ~here is no
reason to limit the activ'itv to a level below lhe normal position limit, ln fact, while the
Commission's argumeat for setting position ]imi.~s as a percent of open interest is to
limit the degree of cor~centration among specc~Iators, this crowding out provision works
to remove speculators from the market thus increasing concentration and reducing
liquidity.In addition, compliance with this requirement could require an. entity to
].iquidate speculative positions abruptly, ~].~,us possibly c~eating the chaotic m.arket
conditions that- the limits are ~ntended to avoid, The requirement for abrupt liquidation
wou!d arise if an entity b, oiding a mix of speculative and hedge positions crossed the
threshold that required use of %e. bona fide hedge exemption, thus forcing immediate
liquidation of all the speculative positions, if tee speculative positioixs were within, the
appropriate limits, then they were not a source of potent{al harm to the market; the
abrupt liquidation, however, is ham-flu1 to the market. Therefore, (he proposed
crowding out provisions have the perverse effect of creating the very harm they are
intended to prevertt. Worse, it wou.ld reduce the participation of tl~e entities that are
most familiar with market fundamentals, those with a physical presence in the contract
markets. This means that contract prices may be tess reflective of supply arid demand
conditior~s and the quality o:f price discovery may suffer.
In fact, active trading, including speculative tradh-~g, allows cornmerciaI hedgers
(and speculators) to gain in~eliigence ar-~d insight into the market informing-their
decisions about when a~~d how to im.pIernent hedges. Futures positions may also be
in.itiated as speculative, but then used to acquire the underlying physical commodity
needed for commercial purposes, if market participants retreat from the futures and
options markets because they do not want to risk violation of the position lhnits, tlh.e
markets may lose liquidity which will cause greater price volatility. If hedging price
risk becomes more diffict~.it and expensive for energy businesses, it will result in higher
energy costs for consumers.
Posit.ion limits, if required by the Commissio,~, should be appropriately established
by the exchanges, with guidelines and overs~gh~ provided by the Commission, to
e,~sz~re ~ t~'a,~sparent, dynamic approach that is responsive to the market, and
pro&~ces a sh~gle se* of position limits i,~s~ead of many "compe~i~,g" regu Iations.
As pro:posed, these position limits would be in additiort to the existin:g limits
managed by the exchar~ges. It is nearly impossible to determine.e, in advance, the market
~ ~
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C}
TC-establ,she :t ,rod exchange,established
impact of ~he interactions bet~ een many ': :
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differeat position iimits or ag~'egate exchar~ge position limits.
]instead of Commission.established position limits, NGSA suggests th.at the
Commission es{abIish a process for routine monitoring of exchange,set position limits.
This would leverage th:e existing system with.out i,~_troducing a duplicative layer ofregulation. NGSA is not awa.~:e of anything in th.e record that demonstrates the
existence of a market problem for which an additional layer of position limit regulation
is an appropriate solutio~, Absent such a fi~ding, we believe tha~ it is more appropriate
to moniior the exi.sth~g process~ If the rnt. _,,~tc ring ~dentl,~.~s issues for which federal
position l~mits a.re an apt solution, the CFTC can promulgate position limits at that time.
This would mitigate the impact of any political uncertainty, allow for objective position
limits that are dynamic and responsNe to changing market conditions, and result i~ a
transparent approach to formation of ~ew position Iim~ts should they prove necessary~
A ggrey, a fiou requirements m us t recogn iz e the po teu tia l fo r m.u ttiple decen Ira lized
¢radi~tg s~rategies based on unique subsidiary hedging i~terests.
Corn.mort corporate ownership does not ~.mply common trading direction "as if
the trading were done by a single person," especially whe~:~ the thresl~otd for
aggregation is as described in the NOPR. U~der the C£ommission's proposaI,
corporate position aggregation rules will limit the ability of companies to hedge
adequately; The inability to adeq-ua.tely heO~ge will i.nevitably lead to ~'eater energy
market w)tatility a~d unnecessarily increase the risk of bEingi~ng additional natural gas
st~pplies to market, To avoid th~s unintended co~'~seque~2ce, the n.~ethodology for
establishing position limits must consider individual company tracli.ng sDategies
regardless of corporate ownerst~ip; The proposal would also require companies that
operate both certain regulated entities and their affi!iated marketing entities to violate
existing federal requirements that limit i~fform.ati.or~ sha.ring between such reguIated
entities and marketing groups.
Risk ma~ta.geme~.~t exemptio~.~ categories musl be clarified 1-o correctly disfittguish
corn n~ercia I hedgers°
h~ order to craft a potential distinction between th.e limits afforded to commercial
hedgers and thcse afforded to swap dealers versz~s pure speculators, the Commiss~o~.~. is
proposi~g a new r~sk-management exemption category. To achieve these various
distinctions, the Corn~nission is proposing a defini-tio.t~ of the term "swap c~ea~e~ to be
based on whether swap dealing is a "significa~t part" of an. entity~s business. While
NGSA appreciates the Commission's efforts to identify those who are wimarily risk-
management dealers, market participants may interpret s~onff,cant part in different
5ways thal~ the Commission, not
only
in terms o~ o ~ ~ '-- ¯.,
~ ercen~ag~%
but also: in t:erms of the
underlying metric (gross income, net revenue, number of employees, promotional
expenditures, etc.}, and then., as similarly discussed above, measm-ed relative to which
corporate entity. This Iack of clarity creates a risk that bona fide commercial hedgers
could be subjectively pulled into a net that is overly broad and applied case by case
without consiste~acy.
To correct this shortcoming, tI~e Commission should provide additional clarity
regarding the metrics it will consistentl.y employ, and how often, to make its
determinations about who will be eli~ble for which category of exemption. Certainly,
a~~y test of significance should not be based on an either an unreasonable or fluctuating
percentage,
Conclusion
NGSA member companies arein the business of producing and marketing
r~aturaI gas, investing billions of dollars annually under the wa ~chful eye of cotmtless
shareholders, i~westors, citizens, and federa1, state and Iocal regutators~ While natura1
gas producers and marketers have many different ~ us~ness models, risk profiies and
strategies ~t~at involve a huge variety of unique, graphically dispersed assets, the
fundamental objective is ~he same - the sa~e of ~aaturai gas througll efficient and robust
U,S. ~a~ural gas marke~s. Fu.lfill~ng this objective requires a U.S. market that is free
from manipulation and unencumbered by policy uncerta.in
b,
arid
. conflicting
regulations~
Natural gas producers and marketers make investment decisions and
commitments to assets ar~.d strategies for the longo4erm. Just as it can take years to bring
~aaturaI gas supplies to market, itcan take years for the unintended consequences of
policy decisions ~o be recognized,., _ and many .more vears~.~ for the market to restore
balance after policy missteps are correcked. AdditionaiIy, industries invest miilicms
anrma!ly to establish and ensure robust regulatory compliance p.rog~;ams. For these
reasons, NGSA urges the Commission ~o pause its efforts in the rulemaking until
!egis!ative resolution of the financiai reform debate, which could place ~aew, or per[~aps
co~ffticti~g, compliance obligations on energy industry finmaciai market participants,
We urge you to consider the value to the Americar~ energy consumer in taking the time
6necessary to resolve the leg~sm,~lve debate before :maki~.g a delerrnm.at~on or~ the
Posi]ion. Limits NOPR, eaabiing a more measured and appropriate appro~ch to
establishing any new position limit rules, and reducing the probability of additional
future revisions,
Con-tmlss.~or~ on dm issues raised .in ehe
NGSA stands read),'
to
work with the
'
~'
" ~-"
~
Positkm. Limits NOPR, Please do not hesitate to contact us if we can provide an?,
addit{onai information.
Sincerely,
J~nifer Fordham
Director of Energy Markets and Governmen[ Affairs
Natural Gas Supply Association
1620 Eye S{reet, NW
Suite 700
Washington, DC 20006
202-o26-9317
Direct:
~
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