Comment Text:
10-002
COMMENT
CL-08374
From:
Sent:
To:
Subject:
Attach:
Christine Cochran
Monday, April 26, 2010 9:33 PM
secretary
CMC Comments on 17 CFR Parts 1, 20 and 151 Federal Speculative Position
Limits for Referenced Energy Contracts and Associated Regulations
Energy Position Limits Statement FINAL.pdf
Please find attached the official comments of the Commodity Markets Council on the Commission's proposed
rules for federal speculative position limits in energy markets.
Christine M. Cochran
President
Commodity Markets Council
1300 L Street, NW
Suite 1020
Washington, D.C. 20005
Tele: (202) 842-0400
Fax: (202) 789-7223
www.commoditymkts.o rgCommodity Markets Council
1300 L St., N.W. Suite 1020
Washington, DC 20005
Tel 202-842-0400
Fax 202-789-7223
www.cmcmarkets.org
April 26, 2010
Via Electronic Mail and Standard Post
David Stawick, Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21
st
Street, NW
Washington, DC 20581
Re:
Federal Speculative Position Limits for Referenced Energy Contracts and Associated
Regulations
Dear Mr. Stawick:
The Commodity Markets Council (CMC) submits these comments on the Commodity Futures Trading
Commission (CFTC or the Commission) proposal to implement speculative position limits for futures and
option contracts for referenced energy contracts. In light of the ongoing legislative debate, CMC
encourages the Commission to not adopt the proposed rules.
CMC is a trade association that represents commodity futures exchanges, regional boards of trade, and
numerous industry counterparts including domestic and multinational commodity merchandisers,
processors, millers, refiners, commercial and merchant energy companies, precious and base metal
trading firms, and bioenergy producers; US and internationally-based futures commission merchants; food
and beverage manufacturers; major transportation companies; and financial institutions.
The businesses of all our member firms depend upon the efficient and competitive functioning of the risk
management products traded on U.S. futures exchanges. Through the Commission's diligent oversight
efforts that have fostered Exchange innovation and technology adoption, we have seen the energy
markets grow and prosper. They have become deeper and more liquid, narrowing bid/ask spreads and
improving hedging effectiveness and price discovery. Meanwhile, liquidity, technology, clearing quality,
price and customer service have driven market selection. All of these developments serve the interests of
the trade as well as the public.
Since the implementation of the Commodity Futures Modernization Act 2000 (CFMA), the markets have
faced unprecedented challenges. Most notably, significant global growth in consumer demand for food,
energy, and manufactured goods, as well as the growth of commodity investment funds. The Commission
through its oversight and enforcement and Exchanges in their role as self-regulatory organizations, have
successfully worked together to fight fraud, thwart price manipulation and build robust energy markets that
serve market participants as well as the general public. To ensure market users and the public continue to
have access to open, competitive, and financially sound futures and options markets, CMC encourages
the Commission to not adopt the proposed rules.
Since publishing these rules for comment on January 26,2010, Congress has continued its robust debate
of the very issues embedded in the Commission's proposed action. Given the strong likelihood that
Congress will soon enact legislation that would render the proposed rules moot, the CMC strongly urges
that the Commission not adopt the proposed rules.
Should the Commission choose to move forward in its consideration of rules implementing position limits
in energy markets, CMC members have raised several concerns. We urge the Commission to take these
concerns into consideration to the extent final rules are developed.
The recent financial crisis shows there are gaps in the regulatory framework of U.S. financial markets;
however, the current system empowering exchanges, in conjunction with CFTC oversight, to evaluate and
set limits should be maintained. There are some market participants that believe the activities of largeCommodity Markets Council
April 26, 2010
Parle 2 of 2
speculators in the energy markets were solely to blame for the run-up in commodity prices in 2007 and
2008. However, the experience of many of our members and a review of the evidence from numerous
studies does not support the view that speculation was the sole or even primary reason for price volatility
in the market. Instead, many economists conclude that supply and demand fundamentals and other
macroeconomic factors proved to be the most significant factors driving the markets at that time.
By broadening the range of participants with access to the regulated and transparent U.S. energy
markets, the CFTC, through its regulation, surveillance and enforcement, has fostered the growth of
markets whose integrity led to increased liquidity and thus maximized the efficiencies of the market to the
benefit of consumers and businesses. The participation of swap dealers and index investors in the energy
futures markets reflects a change in the character of investment, but the liquidity provided by these new
types of investors helps lower the price of commodities in the long-run for consumers. CMC members
fear the current proposal would arbitrarily restrict hedge exemptions and drive some legitimate market
participants out of the domestic energy markets. For example, there is confusion presented by proposed
Section 151.3 that clearly states firms carrying a hedge exemption cannot speculate in the commodity;
whereas, the Commission's description of the proposal suggests the limitation would attach only to those
firms who have exemptions granted by the Commission for purposes of hedging financial, not physical
risks. Restricted hedge exemptions could also edge out market-makers from the exchange cleared OTC
swap market. Like any reduction in participation, we are concerned that this impact could widen bid/ask
spreads and ultimately increase costs for commercial enterprises and consumers.
Exchanges and the Commission have developed an expertise in maintaining orderly markets, including
setting appropriate reportable levels, position limits and accountability levels relative to energy
commodities. This system provides the flexibility necessary to prevent excessive speculation while
preserving transparent and liquid markets. Some observers may argue the proposed limits are large
enough to accommodate most trading. The current proposal, however, would aggregate positions under
the supervision of different controllers and CMC is concerned that by aggregating such positions, the
Commission could inadvertently depress volume and unintentionally constrain markets when they need
liquidity most.
Finally, action by the Commission on the proposed rules could create strong incentives for regulatory
arbitrage, hinder the performance of regulated markets, and undermine CFTC surveillance efforts. Acting
prematurely or not in concert with other regulators could harm market participants and the public.
Additional regulatory requirements imposed on the US energy markets currently under the Commission's
jurisdiction but not on OTC markets or foreign markets could push market participants onto less
transparent markets outside the jurisdiction of the CFTC. We encourage the Commission to take a
comprehensive and coordinated approach that will deter regulatory arbitrage and ensure trading venue
options and competitive pricing.
We believe that U.S. markets can continue to serve as global benchmarks and support the Commission's
mission to protect market users and the public from fraud, manipulation and abusive practices. At this
time and in the interest of the markets and the public, CMC encourages the Commission to not adopt the
proposed rules as currently drafted and instead await clearer legislative guidance from Congress.
Regards,
CHRISTINE M. COCHRAN
President
