Comment for Proposed Rule 75 FR 4143

Comment Text:

10-002
COMMENT
CL-08387
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Sent:
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Subject:
Attach:
Architzel, Paul
Monday, April 26, 2010 4:42 PM
secretary
Gensler, Gary ; Dunn, Michael ;
Chilton, Bart ; O'Malia, Scott ;
Sommers, Jill ; Berkovitz, Dan M
; Shilts, Richard A. ; Sherrod,
Stephen ; Van Wagner, David
; Fekrat, Bruce ; Hirst, Ben
; Architzel, Paul
Comment letter--Delta Air Lines, Inc--Federal Speculative Position Limits
Stawick, David-Commodity Futures 4-26-10.pdf
Dear Mr. Stawick:
Please accept for filing the comment letter of Delta Air Lines, Inc. on the Commodity Futures Trading
Commission's notice of proposed rulemaking entitled, "Federal Speculative Position Limits for Referenced
Energy Contracts and Associated Regulations; Proposed Rule."
Paul M. Architzel
Alston & Bird LLP
The Atlantic Building
950 F Street, N.W.
Washington, D.C. 20004-1404
Tel: 202 756-3492
Fax: 202-654-4893
Mobile: 301 785-0115
email: [email protected]
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Senior Vice President & General Counsel
April 26, 2010
~TA
E~,~:f_,4[[.: secre~ary@q/ic
David
A:
Stawick
Secretary
Commodity Futures Trading Commission
I 155 21st Street, N,W.
WashingtRe:
"Federal Speculative Position I,imits %t Ret~:rencc:d E~ ersy Contracts and
Associated Regt~lations; Proposed Rvtle," 75 Fedl Reg: 4144 (Janumy 26,
20 i 0).
Dear Nlr. Stawick:
Delta Air Lines, Inc. C'Delta') appreciates the opportunity ~o commem on the
Commodity Fut~cS Trading ~
' ' '
"
t C:ommlsmon") Notice 0£ Proposed
Rulemaking entit~ed~ "Federal Speculative Position Limits for Referenced Energy
C )mracts and Associated Regulations;.. Proposed Rule," 75 Fed. Rcg. 4144
{."ianumy ....
26,
20!O)("Noticc,). The Notice proposes to implement speculative position limits
ce~Nn, specified energy contracts.
!
'The Notice also proposes seYeral related
exemptions.
De#ct AirLines,
Delta ~s the world's largest airline both in terms of passenger traffic and fleet size.
It offers service to more than 170 million passer, gets annually to 382 destinations in 69
different countries on every continent o~
"
the wo~ld, except Antarctica. Delta employs over
70.000 #eopIe worldwide.
Delta consumes approximatel.~ [bur billion gallons of jet fuel annually, making it the
second largest consumer of jet luel in the world, next tu the U.S. gt~vcrmner~t. Dcl[a's
business has been, and contim, es to be. dramatically m~pacted by volatility in the oil markets.
The purchase of jet fuel is Delta~s targest expetasc, c(msuming 40 per cent or more of Delta's
total revenues. Movements in the price of oil directly affect the .~-iabilit'v el: Delta's
operations and its levels of service and. emp!oyment. The 2007-2008 price bubble in oil
caused a l0 percent reduction, in Deita's capacity and the climinatior~, of nearly 10.000
jobs.
Oil price volatility begi~ming in 2007. with prices peaking in 2008 and then
dropping precipitousIy cost Delta approximately $8 billion, including $1.7 billion in
hedge losses and premi-ams, compared with whal Dclta':s cost of jet fi~el would have bee~
had the price of eli remained at $60 per barrel.
' Specifically, tl~ese inct.t~d.e futures aad options co~tracts and significant price discovery comracts traded'Ihere is no question fl~at speculation in oil futures and optio~as has been a cause of
the volatility ttlat has i~creasingly destabilized prices itl ttle spot market since 2004. No
~onom~c; model exists w[~ich can t~lly cxplai~a movements in oil prices, in pa~ because
thed!ata ~' s ¯
.
neces..,ary m produce such a model does not exisTt, However~ even Goldman
Sachs, a proponent, of the view tha~ eliprm,a~ a~'e primarily determined by N~.damentals,
co,cede8 that speculatio~ played a significant role
is clear that speculation can be significantly reduced t}om cu~em levels without affecth~g
liquidib. or price disco~ery, ttiere is no need ~Br regu{atory action to await the
d~Velopmznt of additional inIk)m~ation or new ¢conoini¢ a~aiyses The risks to the
ezonomy of regulatory inaction, i,~ the ti)rm of oil price volatility induced by excessive
speculation, pIainIy outweigh any risks of acting on the basis of what is known abot~,
these markets today;
I. cltas continuing ability m operate its business is dependen~ upon a futures
market rc!gnlatory structure ~hat effectively addresses a) excessive: speculation and the
price volatility that it causes and b) the pm'ticipation of speculami:s who do not aid
i%adamemat price discovery, which participation results ir~ artificial upward pressnre on
pricesa As exp~ai~ed i~ this comm~:n~ l.ct~¢r, t!~c Commission can achieve these goals by
adopting an overall timit o.n the open interest held by speculators, based on the estimated
number of contacts held bv speculators and their counterpa~ies in the period o~ z00)-
2003. DcRa applauds the Commission tbr ils courage in t~-fldng the first step to curb
excess~x.c ~peculmmn m the energy :Ihtures markets by proposing to adopt positio,~ limits
applicable to ~ndividual tmders~ it.o~.e'~.~:r, a..~thout an o-~e~all cap on speculative interest,
tIlcsC limits
',;viii be
incff;iactivc
it'~
controlling excessive spot, darien.
Statutory purpose of specMative p~sition I~mits
,~ tares
Organized Ntures trading, wlatch first developed in ~he Uniled S
in the later
p~t of the
19
m
century~ can fulfill the eco.nomic ~eed t~r a means 1o shiR ris~k in tt~e
merchandizing of agricul*ura~ and other commodities, t:~ addition, wt~en properly
structured~ [i~ures trading o:n 0rg.anized exchanges provides a means ~k~r discovering
prices ~md I~r price - '
basing, improving {he transparency of commodily markets~ As
markets evolved in ihe 19
~t
amd 20
th
centuries, it became clear tha~ along with these great
benefits came glariag abuses, i~ac]udiug price ma~aipulatlons, m, rket comer ~ : ~xtreme
and sudden price fluctuati{)ns on the organized exchanges. These c~stly abe~ations
crcalcd repeated demands l~r [cgislmivc action {o prohibk or comprchcnsivcly
rcg~llatc
ttae Commodity t~:xchange
A~tures
trading,
in response to these abuses. Congress enacted
Act ot 1 ~36- to comprehensively regula, e the tutures markets,
~ See Jefli!ey Ctmie, Allison Nathan, Dav:id Greely and Dam{en Cm, rvalin,
Commodgty~'ric'es and
Voh~litio:,; Old Am~,,ers to New ()ues:tions,
Gtobal Eco~mmic s Pape~ No: 194, (Goldma~ Sachs Global
Economics. Conamodities an8 Stra*egy Researct~), Marcti z0, 20 I0, al page 7i {siatii:!g '!Acc(~rdii~gly,
s!~ecuIators also coi~ribu{~d 'to the
ex*reme [,i!ice
movements over *l~;e ]as~ ~wo years. For example:, new daia
suggests thin specula{ors increased the price of oil by $9.50/bbl on average during the 2008 rtm-
:÷ CommodiD.' Exchange Am of I936, eh. 545 §5, 49 Star, t49~ (icodiI~ed as amended at 7 U.S.C. §§1-27).
4 ~owever, the first ~egu{atio~ o.f~be grain futures markets is even earlier, dat}ng fi~om ~he ~920"s. See
Grain ;Fumr~z..s Act of [ 922, eh. 369, 42 Star, 998 (!922) (cun'ent version art U,S~C. §,§t
-2.Section 3 of the C,,-~mmodity E.~change Act, 7 I_LS.C, §1 et
seq.
(',Act."), provides
that,
trm~sactions subiect to the Act .... are aftiac,ed with a national public inlerest by
providing a means for managing and. assuming price, risks, discoveriag pr[ces~ or
disseminating pricing in~b,anation through tradi.~~g ir~ liquid, fair mad fi,~ancially
Secure trading facilities..,; To foster these public intemsts~ it is *~rther the
pum. ose of flu:is Act to deter and pr.event price manipulatior~ or ar~y o~ther
dlsn~p~ions ~o market integrity... ,,5
As evidenced by section 3 of the Act, the purpose behind regulation o4! the futures
rnarkets was and is to encourage and preserve the public benefits of futures trading--its
use for hedging and price disc.<~very .....
v&ile at {he same time minimizin:g any disruptive
eI~cts upon tile economy~
~;
Sec!ion 4a of the Act restates arid builds upon ttlis legislative purpose fi.nding that
e:veessive speculation in futures contracts traded on designa!ed con,tact markets
causing sudden or unreaso,~.aNe fluctuations or unwarran,ed changes in the iprices
of such commodity is an undue and unnecessary burden on interstate cotnn~erce:'
Based upon that findir~g, sec.tio~ 4a directs the Commission to '!fix such limits o~ the saIe
of such. comm.odi.ty *br ~}ature deliveu on or subject to the rules of any contract marke~
¯ . .
or {~n any electronic trading t:aeility wi*h respect to a significant price discovery
contrac,, as the Commission finds tu-e necessmT to diminish, eliminate, or prevem such
burden.,
''~
5 7 U.S:C. }5. Section 3 of,lie Act x;:aa amended iu 2000, The current, amended version strcmg:ly echoes
Sec~i0n 3 as it was incorp0raled ~nt0 ~he Ac:l in 1936;, which read:
Transactions in ~ommodities involvi~g the sale ~hereof for fiiture deIi~,~ry a:s ¢ommonl> conducted
on: boards 0f trade and known as "thtures" are affected with a natkmal public imeres.t: Such
Ntures transact{ons are. ca~T{ed oia ilt large volume by ttie public genera!ty and by persons engaged
in the b~:Sine:sS of buying ~d seIIing c.omm odltieS and tlm produc~s and byproduc*S ~hereof....
'l'l~e wices i~X'olved i~ such transactions ~e generally qu0ted ~md disseminated ~t~rough the United
States and in foreign
cotm~ries as
a basis for
deternii~iing
~he ~rices to tk~e
producer
and the
consumer .... The {,ansac,lons arid prices olTcommod~ties o~ such boards :of trade ar'e sus:cept~ble
to e,x:ee~sive speculation and can be man~pMate& co~.~rolled~ cor',!ege~.t or .sqt~eezed, tO
detriment of tt~e producer or tl~e consu met. .....
Accordin!!y, des~gm~t,o~ of Co~m'act ma.rkeiS under ~t~e AcI ~as traditRmalty been grotmded i~
for hedging and price discovery.
Se~'
~'Co~fhrence Repot," H.R. Rep, No. 93~ i38:3, 93rd Cong., 2d Sess.,
_,6 (1 ~74).
:' Ti~is finding was incot~porated in the Ac*in I936, and reiterated w~tt~ the creation oftfie Comm:isskm.
S. R.ep. No.93-113 !, 93 d Co~g, 2d Sess, [8~ 19 ( 1974)~The Commission and its predecessor agency have repeatedl.y fulfilled this
statut<~.~?
~
mandate by imposing position limits on speculation. As the Commission noted,
as of 1975, speculative position Iimits were in effect for atmost aI! actively traded
contacts.
`)
In 198 l, the Commission reaffirmed the i~npo~'tance ~_~1:' speculative position Iimi~s
as an elI"ective prophylactic measure, man, dating that all: futures market~ shall have
spect~lative position limits. The C.ommission t~ok ~t~is ac4ion based upon i.~s conclusion
that
m r~.cm~nts which are attributable t~) extraordinarily
the prevetition .of abrupt price
large speculative positions is a Congressionally endorsed reguIatory o~jeefive of
the Commission~ Fu~:her, it the Commissi.on's view that this o~jecti.~e is
e~lhanced by speculative position limits since it appears that the capacity of any
c~mtract market to absorb the establishment and liquidaIion of large: speculative
positions
in an orderty mariner
~he capacity of the market is not unlimited;
Tt~e Commission determined that m.~der this ~:ule, spectdative position limits
would be appropriately se* based upon "'the historical distributions, of speculative
positions considering, among other things, recent trends in position patterns, tl~e
~)~equeney of positions occu~ing at different levels and the levels at which occur
preponderance of specuiative positions ncnnaliv~ ' ./ observed in the matke:t.
~
Thus,
t[~ct:, speculative
Cominission Rule 1.61 provided that cot~tract mm,kets shall base ~'r-.:
position limits on "such Nctors as position sizes customarily held by speculative traders
oI? s~!ch market {br a period of time selected by the contract market, which shall not be
extraordinarily large relati~:e to total ope~ positions [br such period.
''!~
This remains one
ofthebasesforsettina
' ,~ ' ' S ' ~~
.. speculat~ lmuts today: "
Periodically, in reaction to market events, the Commission has revisited the need
for speeMative positio~ limits as a prophylactic measure to address unwarranted price
movements caused by excessive speculation in the tk~tures markets, Each time, the
Commiss%n h~ reaffirmed the wisdom of the Congressional m.a~date to fix appropriate
speculative position lira:its.
The oil futures market tias experienced dramatic changes since 2004, There has
been a substantial increase ill t~taI oper~ interest, whictl has been accompanied by
increased price volatility. During tliis period, however,, oil supplies remained _qtable. as
bpecutat~ve os~tmrt Llniits; 4a }~ecI~ R¢:g. ?983 ~, 7~'9832 {December 2, 1980).
~o 198 i Notic:e~ ~'upra na~e 34 at
~ [d. at 50940.
~ gd. at 50945; See ag, s,o i7 CFR
~ ¯
'- 5,ee, 17 C2F,R. ~1505(C)(2). "['he alternative i~r setting speculati~'e: positio!! limi~:s on the
months is a tkmnu!a ba~ed o~ ope~ interes~.
[d.oil consumptior~ decreased in the developed cou attics while it increased in tl~e developing
regions of,he world. 4
From 2000 ~larough 2003, open interest in the New York Mercantile Exchar~ge
West Texas ]mermediate ("NYMEX WTI") crude oil contracts was relatb~,ely
stable, growing modestly from 690,000 futures and options contracts to 822,000
cont~-a.cts.
During 2004-2009, the rate of g~:owth accelerated at~d si~.ce then open. imerest has
remained at historically high levels.
A:t its peak in 2008, total futures and options open interest was 529% of open
interest ~n 2000, haying increased fi~om abou:t 630,000 contracts to: 3,330,000
co.ntracts~
Th~ tb!lowing Cha~ illustrates this
Tota! Open Interest in NYNS.X ~I Cm~e 0~ Futures and Options
Contracts
3;500~000
3:000~000
2,500;000
2,000,000
1.500,000
t .000 000
5001000
0
Jan-00 Jan,01 Jar~,02 Jar>03 Jan~04 Jan~o5 oan,o6 Ja.n-o7 Jamo8 aan-o9
Data are: #am we.ekfy Commissio:n Commltment of Traders ("COT!') ~epo:,dS,
a r)at
a
~om the E
.~ergy haf0rmation Administration ("EIA") show that from 2004 to 20.07, tl~e average
annual petroleum consumptio~ of developed com~ies decl~ed from 49.43 milUo~ t~ 49 16 million barrels
per day, while the average annual petroleum consumpt., oa ..... m deve :op ~g c )ung~e',
. mc eased " "
~
~
radium to ,. 6~9S m~lhon ba~'els per day over the same per}od,In contrast to the dramatic increases in total open interest over this period, trading
by.'
bona
tide tledgers
15
grew relatively ii~tle and, for a lime, dipped below its !eveI in
2000.
Bona fide hcdgcr open imcrcsl a:vcragcd 249;840 t~mrcs and options contracts
in 2000. We ~rived at ,t~is figure by subtractitig the nmnber of contrac.ts held
(; O i1t1~1
l S S 1011 S
by swap dealers from ~he total open interest in the '
"'' '
"commercial" category or its Commitments of Traders (~'COT',) Rcporls,
t~
The rerunning open interest was composed of swap dealers, ~.on-commercial
traders and non-reportable traders.
In. June 2006, when the C.ommission first started to rcpor~ separate irading by
bona fide t~edgers, !hey ihad an open interest of 4t[19,91 .~ contracts.
On August 26i 2008, bona l~de t~tedgers h.ad open interest of 236;93:3. Thus,
their total opep~ mt:e~est .~:as 1o ,er in absolute terms it?an it is esIimated to
have bee:~ i~ 2000 a~:td tllei! pm:ceatage o floral op~m interest declined to less
ttian a quarter o~7 what it had been in 2000.
On December 29, 2009, bona fide hedgers opet~ imerest was 424~i22
contracts:.
®
-fl~e lbllowing cI~.arts ~lhistrate the open interest of bona fide hedgers in
contracts and as a percentage of open inmr:est.
Pmdu~er.,.Mercha~t/ProcessoriUser category i~ Commission d{saggregated COT repor*s.
:~' Swaps dealers generally are {~cJuded m t~e CF l"C's COT R:epol~s as "commercial" tradecs, We were
able to e:stimate the amom~ ogopen i~tere:st ofbo~a {Sde }~edgers based on inter~al CFqC dNa included in a
s¢hola:rly paper. See Bal~at~im Buyuksahin, e~ al., Fundamentals, Frader ActiviU and Derivative
Prieing,(Decemher & 21)08) (w~rkh~g paper} ("Buyuksahin 2008"), included a~ Appendix 1. However, as
e:xplained below, a: s{g~}i~ca~{ amount of swap dealer open interest must be added to *be abo~.'e ammmt in
order to capture al{ hedging ope~ i~terest:
-6-Contracts
3,500i000
2,50&000
2:000;000
1,500,000
l,O00i000
500,000
o
Jam00
Bona Fide Hedger and Total Open Interest
in !NYME× ~il Crude Oil Futures and Options
2000
-2009
Jan-01 Jan-02 Jgn-03 Jam04 Jam05 Jam06 Jam07 .fan+08 Jan.0£
data: are f~:om Buyuksahin 2008 and Commission disaggfega~.ed COT top.otis:
Bona Fide Hedger Open Interest as a Percent of Total Open Interest
in NYt~EX ~! Crude Oi{ Futures an~ Optior~s
45%+
35%
30%
25%.
20%
t5%
10%
5%
J
Jam01 Jan:02 Jan-03 Jan-Q4 Jiam05 Jam06 Jan-07 Jan*Q8 Ja:n~O9
Note: 2006 - 20~,9 r~ata are from weekly CemmJss on: d sag#regaled COT ~'eports, 2000 af~d 2004 data are fi'om
BuyukSah~
2008.
-¸'7"In. addition zo fl~e bona t.'i.de open interest totals reported by the Commission. total
hedging open interest also includes that portion of swap dealer positions which mintage
the dealer's risk of over-the-counter transactions that are entered in'~.o by a swap
counterparty tbr bona fide hedging purposes. Tlnese mus~ be added to the above bona
fide h.edger open tnteres~ for an accurate picture of the percentage of open interest tha,
represents ioml hedging open interest. Similarly. in order to obtain a true picture of thc
open imerest held by spect~.lators, an estimate mus{ be made of the percentage of swaps
trea~sac.tions that are speculative in purpose. When these adjus{ments are made. as
discussed below, il remains clear that the dramatic increase in market open interest since
2004 is due to ~m onpreeedented influx of specu]ative trading.
Growth in open b~terest i~" div~ropor¢ionately spec~tla¢ive ae~i~,iO;
The drmnatic increase in open interest siuce 2004 has been caused by an influx of
speculative traders]"
At its peak on September 1.6. 2008. non-commercial traders' open interest in
futures and optio.rts was 1,440% of th.eir 2000 mmual average, growing t¥om
approximately¯
. .... ! 13.428 contracts to 1.633.534 contracts,
On December 29. 2009 no~-commerciaI open interest was 8i5% of their 2000
annual ave rag¢~.
Non,commercial traders' po:sitions as a percent of total open interest more tNm.
doubled frt)ni, fiom stigt~tly
u~ld~r l,
5~':~ Of file market at tlic b~ginnlng ot' 2000
38 ~'~ by the end o~ 2009.
Tt~c pcrce~.~tag<: of speculative open:
inter~.:~
~,ould bc even higticr i£ us they
should be, swap dealers engaging in specuIative tr~sactions were included with
noia:-commerci~ds,
Invesm~ent in commodity index funds during this period, which are heavily
weighted toward the purchase of long oi! futures contracts and as a consequence
do not contribute to intbrmed price discovery, increased from aro~.d $15 biiliou
in. 2003 to around $200 billion in mid-2008,
The following c.ha~s illustrate the growth of the open interest of non-commercial
~raders in. contracis and as a percer~ge of" ope~:~ i~terest.
t7 The "non:-commercia! traders" category t}om the C0mnfission COT reports is t,sed as a proxy
specuiative traders. However, i[Tswap denier positkms were mciucle:d, as. they shotfldbe. Sl_~e:ctiiative
interest would be s!gtfiIicamb t_~igi~er borJ~ as an absotute number of cot~lracts and ;as a perce~iage of open
imerest:Corlt r~tcts
3,500,000 -[
3,000,000 ~
2.500. OOO 4-
Non=Commer¢ia~ and Teta~ Open ~r~terest
in NY~EX W3"! Crude Oil Futures and Options
2000 - 2009
Z,0o 0. 0o0 ~-
Jan-O0 Ja~-01 Jam02 Jam03 3an-04 Jam05 Jan~08 Jan-07 Jan-08 Jam09
Note: Da~,a are fro~ weekty Commission COT repods, Nomcommercia~ opea in[erest is the spread po~,fflOr~
Non,Commercial Open l;nterest as a Percent of Total Open ~nterest
ir~ NY~EX ~ Crude Oil F~tures ane Opt~on:s
2000- 2009
60% ~
50%
40%
30%
20%
t0%
Jan-gO Jano0i Jano02 dang03 Jan-04 Ja:n-05 Jan-06 Jam07 Jan:-08 Jam09To obtain a complete picture of speculative activity' in the market, speculative
s',~aps t~:a~sacdons must be added to the reported speculative interes:t of no~-commercial
traders. Such transactions, for example, manage ihe swap deale~:'s risk or" e, nteriug into
over-the-counter l:ransactions with speculator
coun.tc~artics,
such: as h.c~dgc ~:unds. .,ks
the tZ~ilo~ing charts illust,-ate, swap deale~"s held, and hold, somewhat over 35% of the
total open interest
Swap OeaIer and Total Open interest
Cor~tracts
3,500 000
~
31000 OOO "-.~-.
2,500 000 ÷
2.000 000
1.500,000
t.ooo.000
500 OOO
Jan*O0 Jan-01 Jan-02 Jan-03 Jan-04 Jam05 Jan,.-06 Jan-D7 Jan-08 Jam09
Note To~al o#en interest data are from
week{y
Commissior, COT reuorts. Swap d.ea,e~ o~e~ mte[est
dat~ are frer~ 8uyu~,sahir~ 2008 a~d Co "am ssio ~ disa~grega:ed COT reports
is Data *'or 2tui3:e 2006 and tat~:r are 5Tom the Swap l_)eate:r category i.n Commis_qon all,aggregated
COT
reportsi Data prior m 2006 are II2om Buyttksahin 2008.Swap
Dealer
Open lnteres~ as ~ Percent of Total Open interest
in NYNEX WTI Crude Oil Futures and Options
2000 - 2009
50%
=
40%
J-
30%
25%
20%
15%.
io%
0%:
jarl-0t Jar-~02 Ja..q-03 Jan-04 Jam05 Jan,0:~5 3a..'>07 Jarl:0B Jar~09
Note: 2006 - 200£ dat~ are from weekly :Commis~.io~ disaggre£ated COT reports: 2000 ar~d: 20i04 ~ata a~ f~m
Buyu:ksabin 2008.
At the same time that total speculative open ime:rest has been growing at a
disproportionately high rate, the amount of passi'~e, lor~g-only speculative investors has
also been growing. As discussed be:low, betwee.n zOO>, and mid-2008, the value of
investment in commodity index funds h~creased over 1.200%. from around $15 billion ~o
$,.00 billion, These i.ndcx funds generally are weighted heavily in their trading toward
the energy futures markets. Moreover. individual passive, long-only fimds may have
very substantial positions in particular energy comxae~s,
t9
(..omm~.ss~on dat~ with tc.spec t( the am( unt of open interest held by passive.
long-only traders i~ energy contracts or ibr such traders through their over-the-cou.nter
N
'X.
.....
"
transactimas is limited, especially prior to 2008. ;. e ~tbd;e,s,., some conclusions about
the overall impovance of passive, long-only traders to the market can be made.
According to Commission data tbr 2008-2009, passive, long-only traders held a
position equivalent to _~ ~ 1.000~464.000 ~ t 1. m I tutures contracts, or 12-19% ot- total tong
open interest in futures and options during 2008-2009 {see graphs below). These
positions are generally held by swaps dealers and thus are not reflected in the
Commission's repots of non-commerci al
trading activity,
As the following graph illustrates, pas.~ive, long-only trader positions, measured
in contracts or as a percentage of open imerest, fell in the third qum'ter of 2008.
;~-* For example, the position of the L.".S. Natural Gas Fund during the stemmer of 2009 wotdd have exceeded
the proposed aggregate sit~gte mon.th _~pemdative position ]imit i~ ~atural gi~g of 88.500 corttrae~s &,~
" Meet:lug on Energy Posidon L.hnits and Hedge Exemptions/' Commodity Futures "I'radit~g Commission.
(Jmmary 14, 20t 0)(*~CVI'C t~ca:ring
~')
(Statement of Steve Shen-od atHowever, passive, lor~g-only positions ha,'e since rebounded m~d now exceed the levels
seen in the first half of 2008. According to Commission data, passive, long-only
positions at the end of 2009 were 23% greater than at the end of June 2008. growing Erom
the equivalent of 366°000 to 4-5 t,0f.X) futures contracts. "l'his corresponded to a growth in
passive, long-onIy positions tTro~n [he equivalent of 13% of total long open interest at the
end o.f Ju,~.e 2008 to 19% al the e~d of 2009.
Commodi~ In~ex Investment in W3rl Crude Oil Futures and Options
50&000
45&000
400i130Q
350,000
:300;000
250;000 -
2ooiooo
150~0,00
I00~000
50,000
! 2/31 i07 3,.'31 !08 6.'30108 9!30f08 i 2t3 !/08 3/31 ~09
Note: Data are qua:rt, er!y from ~he Commission [l~dex lrwes~men~ Data.
6/30i09
9/30,"09
i 2/3 ! f09Commod~i~ ~ndex Investm:en~ in ~ C:~ude OH Futures and Options
2008-
20% -
16%
14%
12%
10% --
8%
4%
2%
O%
t2131!07
3/31i08 6.i30,'08 9./30;08 1213
Note: Comm{}c~ ~y index nvesl nen:t tiara ate quarfert¥ #o:m the Comrnissjon: !nt'Jex hwestment Dsta. Total o~ei~
!l;]~e marked rate el" ~rowth of open ii~terest m the =utu.~es and opdo.ns markets,
most particularly by nonzbona fide hedgers, corresponds to a l?eriod of very high price
volatility:;
During the period 2005,2008 the yearly variance in tI~e price of a barrel
ot"
oil
was $52, compared with an an.nua! variance of $16 duri:ng the 5~year period of
1999,2004.
2004, dail~v votatili.b.. was generally less than $1. [)urir~g 20{}8+ daily
volatility of $3 or more was tl~e nom~,
*
On June 6,2008, the price of crude oiImcreasea- ~l" .....
u:'~5~..-
:'r"
The following ci~art illus,:rates the i:ncreased vola~illty in oil prices bc;gimaing in 2004.
13per Barrel)
$'160.
$140
$120
$:100
$80
$60
$40
$2o
$0
Jan:-oo Jar~÷01 Jan,02 Jan.-O$ Jam04 Ja~-05 Jam06 Ja~--07 Jar~-08 Ja~-O9
Note: Data are ~fora '~h:e EtA ~or Cushing:, OKI
The pert:brrnance of the crude oil l~lt~res market to accttratelv discover prices
reflecting f~mdamental supply mad demand conditions is also being a~?[~cted bv the
holdings of passive, lo~-only traders. Every month, holding everything else constant,
the price of an oil ti~tares contract must be sufliciently high to induce other traders to sell
the equivalent of 12 ~o 19 ~ of total open h~terest to passive, long-only traders beyo~.~d the
amounts other traders already demand in. the market. [f there is not sufl'icient imerest
sell this percet~tage of total open interest, the price must rise until enough sellers are
~_
to I...0 o('total .open interest ma be
willin ~ to enter into these trades. 'This estimated 12
even target during rot1 periods. Thus, prices may ~eed to rise to bring sellers imo the
market and induce them to assume the risk that the price of oil might increase still
furd.~er, which woul.d cause a loss on the positio~.~, This can create struct.ural upwm'd
21
pressure on pr.~ces.
The sharp increases in open in~erest in the oi_i futures and options market conlras-ts
to the steady level o;f crude oil p:roductio~a over this period, keeping avaiIable supplies
" Most passwe; io~g-on:ty traders hold pr{marily ihe ~roni and second month contractsi rotli~.g into the next
month out as the ti~onl: month contrac~ expiratie!! approac:hes; Thus, most passive longs purchase their
holdings every month: Depending on Imw ihe holdiTag.~ are purchased -physical delivery ~mres con{tact,
financial l~tures contract, or overathe,counter contract- passive ongs may a!so se the r ho{d n~,s eve~
~
month:.stable over: this ten year period. As the t'ollo~dng chart illustrates, throughout the .period
production hovered around 70;000,000 barrels a day
.{Millions of Barrels per Day)
70
60
40
30
World Crude Oil Production
2000 -2809
J8r~40 JamO~ Ja:n--02 Jar>03 Jam04 Jam05 Jan-06 Jam07 Jan-08 Jar~09
Note: Data are monthly from
the
Duri~g this period, economic growth in th.e developing world caused developing
world demand for oil "to grow,
:~
Howeve~ as tinted above, ~his growth was offset i~. pm~
through dampe~?.ed demand in the ecor~omically developed countries:
a::"
Numerous
commentators have concluded that the increase in price of crude oil in the i~rst haif of
2008 ~md the; thll in the second half materiNly div#rged from: the increase aild decrease
n;ecessary to balance s.upply and demand.d)
4
:: For e×ample, see H amihor~, J ames D., "Cause.~ and C{mseqae~¢es of the Oil S hock ot~
Brook~ngs Papers on Economic Activity, Sprhlg 2009 {~H;m~i~ton 2009"), pp. 11)~ I 1; and Sapor~a, V
and Matt "FroR. "'Wh~t Ca~ Be S~{d about the Rise and Fat[ fi, Oi~ P:rices?" Bank of England Quar~er!y
Bulletin, 2009 Q3 ('~Sapo~a 2009"), £, 2
:~ Hmnil/m~ 2009, p, t
I,
>~ For example, se~ Saporta 2009s p: 222 "Based on news abrupt ~he balance of demand and supply in. 2008,
therefor< it seems that one can justJ@ neither fl~e rise in prices
in
the first half'of 2008, nor the fall in prices
in the second halE" See
a&o
H~ilton 2009, p.~ 16: ~;But: the speed and magnitude of~he ~ri~e coI}a~se
~ea& o~e to give serious consideration to the altemative hypothesis that this episode represems a
speculative price h~bb]e ~ha~ ~uhsequen[ly popped," Na~,
M.~'o Jhid.
p. 23: '~WJ~h l~it~ct~igh~, it
~e
W
that the pdve rose ~oo high h~ July 2008,
.~nd that this miscalcuta*~o~ was influenced in pa!~ by theThe Commlsslc n is responding "to ~hese profound changes inthe oil market m~d to
the recent price bubble in oilby proposing to adopt: individual trader po:sition liniits that
arc aggregated across markets, using a ~kmnuta based Cm total open iutercst. T!~m
wmfld resuit in. the all-mm~ihs speculative position limit in crude oil being 98,000
comracts m~d the single month limit being 65,400 contracts. Tlie Commission has
proposed m~y regulaticms addcessing the role of passive, loiig-o,~ly trade,a, also
kllox~11
index traders+ under it:s framework of energy s~eculative position limits. Rather, it asks
*i3r comment on whether ,he Commissim~ s~onld propose regulations addressed to
unique issues posed by the ~recent i~rflux into tile market of i~de:x traders. Nor lias tt~e
Commission proposed an overall cap on the level of speculation in th.e m~ket.
~ !nfortm~atelv, tile position liinits proposed b.: the Comm~ssmn, 1~ adopted, will
have no effect on excess~x*e speculation o:r oil price volatility. Sectio~.~ 4a of the Act
directs the Commission to "{ix such limits on the sale of such commodity fi~r furore
delivery on. or subject to t~e rules of alay contract market. :. or on any electronic trading
facility with respect to a significant price discovery coniract, as tiie Commission finds a~e
necessary to diminish, eliminate, or ~revent" sudden, or ~reasonable fluctuations or
unwan'anied price changes ca:used by excessive specuIat{o~.
The Commission is proposing a f'ormula that would ~esult in the all'months
combined speculative position limit in crude oil being 98,000 comracts ar~di the si:ngle
monih limi:t being 65,400
COiltlac:ts, hi
additi,.m, in cont.rast to t:la¢
~lO!l~SpOt month
speculative position limits which apply across markets, the proposal would set the spot.
monih speculative position, limit separately by market and separateIy t~>r physicalIy :-rod
financialiyasctticd contacts.
25
The proposed alMnonil~s Iimit is approximately five times the NYMEX all-
m,antt~s position acco:untabiJity lc~:cl tk~: crude oil ot 20,000 co,ittac*s
~
a~?:d 50%
higher than tim proposed speculative position limit R~r crude oil recommended by
the Chicago Mercantile Exchangel ~'
zs; Uncter Proposed Rule 151.2~ no perso~: may ho!da positlo~ n the spo~ month which exceeds the limi~ for
that '~etass" of c:~mt~:ac,. A ontract "c:laSsT' is defined as either a phys~call~y or financially Settled contract
a s[ngte market. In contrast, proposed rule 15 i :2(b)(1)(i) and (i[)sets a~l aggregate at[-m0nths combined
:;~ngte month ih~{t across m~ke.ts in a refe:r~,~ced energy. ~o~tract, ~R~f~r~:c~e e~ergy c.o~tract" inC[udes
both physically or flnancial!y seuled c0n~racts on t!~e same u~derl}~:ng commodity; Notice~ supra at 4167,
4168,
~+; In June,. 20f[J I. N' }*MEX" .... cemfwd amendments to the Commi ssion replacing its speculati v¢ posi~itm limit
in crude oil which wa~ 2{},0(10 contracts a! Mnon~hS or any Single
ti!OIi[ll Wi~i pOSfl:iOI1
accoun:tability rules
Set ai the same level. Subseqtmnt!g, in 2007, NYMEX re.duced tt~e Single month iimi! in crude o~t contracts
to 10,000. Se~ CFTC lqeariug (statemenl of Dan M. Berkov~tz; Ger~eral Counse!, ai ~. 7~.
:::" The Chicago Mercanti:le Exchange Ja a
conce~t release
recommended iliai ~he Commission
propose
an
t6z. I~is s~riki~z
alt,mont!~s speculative pos:itioi3 limit of 65,000 cm~tracts. See Notice, saq)*",:~ at 4
~
seltLregu[atm) organization on which oil fiitures cm~acts are g'~ided recommended a limit h~wer tl~an
which tl~e Comm{ssi~>~i proposed This aIone shoukt acl as a wamiag*o the Commission that i{s proposalAt these proposed levels, tl~e limits will not be a meaningful cow, straight on
excessive speculatiwould have affected a maximum of three traders in the NYMEN oil futures
market
~'~
and only tell traders in all energy contracts during ~he period Januaw I,
20:08 to December 31
As proposed, a single speculatm- cou|d hold contracts equaling the entire available
deliverable supply by holding both physically at~d tina~cially seti-led contracts on
two diff~rm~t: ~xchanges (fbttr contract c~.a.ssc~s, each with its ow.~ spot mon.th
limit of one.quarter the available deliverable supply),
As proposed, a speculative trader in I]mmcially settled contracts might be able to
hold a spot month ~osi.tion on a single market that is 15 times the spot month limit
for physically set~:led conIracts {five times the spot month limit------the proposed
e×pm~ded spot month limit fo~"-l]nar~ciallv-settled contracts-- [br each of" three
delivery days).
~°
lnves~mem i.n commodity index t'-unds dufi~3g this ~"-1
..
per~o~ which me heavily
weighted toward the purchase of long oil futures contrac'ts increased from armmd
S15 billion in 2003 to arom:td $200 billion m mid-2008.
The reason that proposed speculative position limits [br the back-months are so
high and would affect so few speculators is that they' appear to be designed to prevent
marke~ m~mipulation bx' individual t.raders, .rat.her than excc:ssive levels of overal!
speculation i~ the market This *boils 1s retlected in ~.he use ot dd~.~erable ~uppIa, to
calculate the spot month limit levels, but stating very expansive back-month limits based
on a percentage
of
open interest,. "l"hi> design may wo:rk ~¢ell in detw-ring market
m~m~pulation, pa~icularly with respect to lhe agricultura! markets t;br which this model
was developed initially by the Commission. However. this l}amework does not address
excessiv~ sp~'.cula6ve activ][y that in ~l~e aggregate may t~ava~ aa mawa~amed efl)c:[ on
prices, Since 2004. open interest has been inflated by an i~flux, of speculative acti.ib'
Using this inflated o~en interest as a measure against which to set speculative position
limits catmot possibly curb the very' excesses in speculative activicy-that tim Comm~ssmn
is directed to limit.
In the spot month, the Commission has proposed separate limits by market m~d by
type of contact { financially or physically-settled'~ which in practice permits a single
speculative trader to hold positions that are multiples of~he spot-month limit. The
Commission ha~ recognized that,
tI-~ I (. Hearing,
supr~~
(:slatement ot Stex~e Sherrod, Actiag Director o[ Sm,ve~Iiance at p. 7),
3o The Com.misshm ~:otes ~hat "the spot.m,onth tbr ~e major energy cont~Tac.ts ge~!eral~y is t~a~ee days
durations:," Notice,
s~:p~a
at 4i59,applying a speculative position . . , without consideration of other directly or
highly related contracts could resuIt in applying a position limit only to a very
limited segment of a broader regulated market)
~"
This reasoning is equaliy true l:br spot month positions~
~"
pmaicuiarly in light of the:
Commission's conclusion that concerns with respect to excessive speculative trading are
t~eighte~ed dt~ring the spot mo~th.33
Finally, the Commission has not made any proposal to address the issue olf the
effect of passive~ long-only lraders in the mariket. Any effective speculative limit
tram~, mk must address t}lis issue, In recent years, index traders have grown rapidly in
both s
~
.....
p,
"
'
ab,,olut¢ and relative terms. It is of parammmt iin olxance that ihe Commlssmn
address this issue
in
light of that growth, the Commission's finding b~ i981 that ~he
markets' capacity to absorb speculative interest is no~ unlimited, and tile danger that the
rapidly growing presence and activities of h~dex traders is impairi~g the Nnctioning of
the mm'ket. Futures market regulatio~ is based t~pon the ability of the m,~kets and their
pagicipams to provide public benefits in the li~rm ~:f he&,in~ and price basinR
opportunities, Passive, long-only traders, unlike {ypicaI speculators that trade on the
basis o~7 a view of market direction--whether i~formed by market fundamen:tals or
technical analysis,,do not contribute to the aggregation, of market int~mnation.
Moreover, the mm-ke{ behavior of index traders is unlike that of any other trader and their
uniform presence affects the market, creating eon.ditians ~2~r market congestion,
pa~i.c.ularlv during rolt periods. As tt~.e Commission
[iaS
concluded, the capac.~ty c f a
market to absorb the establishment and liquidation of large specuiative positions in an
orderty manner is not unlimited]
~
More generally, bm of equal concern, passive,
only traders, by holding positions that: are
~tMformly
long, ~..¢.rt all upward bias in the
prices of the commodities ~hat they hold.
The purpose of the Futures markets, as determined by Cm~gress in ~he Commodity
' ~ ' -'
~
l~r producers mid end
Exchange Act, is two-fold: they. are ~n.tended t~ pro'ride a means
users o1! commodities to manage price risks and discover prices: " Thus, the: punic
interest in: the regulation of futures markms is in their utility as a vehicle ~'or hedging and
price discove:ry; I~t-~ey
'
were
not,
and are not, intended to create a veNcle ~k/r investment,
;* Notice~ s,,¢,~ra at 4 ! 53,
'~Exces~!ve Speculation m {:he Namrat ~as Market." Repo~x o£the Senate Permag:e~t Subcommigee
[nves{igatkms, (2007)("PSI RepoW'}i A recen* report ogthe .Senate's >em~a~e~t Subcommi~ee on
!nves~igations {"PSI Repo~")made a number of fi~di~gs relating to excessNe speculatio~ a~d its e:ff?c~
[tJ he data analy~e:d sho v tha~
pricing in at, e:nergy commod{~
~
.
The PSI Repo!~ co~3Clu:ded, in pa~, t!~aL
"
:
"
prices on one excM!!ge affect the prices o~ t~he other,"/~L at3, *~e PSI Repo.~ recommended that ~ order
to prevent excessive sWculaliot~ l~om causing unwarrante~ price ct!anges, the Commission must
oversight "over a broade~ market." That conctt~sion remains v~fiid wtg respec{ to enforcement of spot
moat[i speculative position ~imi~s.
:~? Notice,
sapr~
at4159.
~ "Establishmem ofSpecula*~ve Positio~ ll,im~ts~" 46 Fed. Reg. 5{)939.
50940
(~I981 NoticU~).
~ Sec~im~ 3 of the Act, 2 U.S.C. {5.ex+cept lo the limited extent necess+u~y to perform these+ two t+mctio.t~s,
s6
Speculative
position limits should+ first and foremost, be set to or+sure that the market can perform its
hedging and priced discovery fuaction.s. In this eontext+ excessive spec~latioa can be
viewed as thai speculaSv+ trMi++g acfi'vity tha¢ is in excess of the trading necessary +o
Wovlde Iiquidi~yto hedgers or which comdbutes to informed price discovery.
With this ill mind, Della recommends thai: the Commission se:t in,di:vidual
s~ecuiadve position limits based
Upo!i a
target amotmt of speculative open interest
aggregated acros,+' aft :~7+e+.'ulag++e U:a~+k++;s'. The
aggregate tin'get amount of speculative
activity would be set in
re.feretlc¢:
10 file
ltlOSt
retch t period when thee market-fulfilled its
intended hedging and; price discovery tk~nctions, before being aff?cted by excessive levels
of speculative activity, This corresponds to the period between 2000 a~:d 2003 (the
"bakse per.~ dO. This .aggregate iara¢l: mno:u~il: would be adjusted anmmlly to
growth in bona fide hedging activit
E
in the market
. The fotIowing exainpie illustrates
¯
.
; ~ ~7
the s
c
alculatm a. using data tot z000+.
During 2000, the average open. interest of nomcommcrcials~ as reported, was
121.i800 futures and optio!~s c(mtracts. Total speculative: open interest would also inct.ude
that potion of swap dealer open interest tha* t.~t"~[~e{ dealers' risk of iraasactioas with
speculator com~terpanies. Because the data does not separate :swap :dealer activity into
its hedging and speculative components, we have assumed that o~e,l~a!f of the average
swap dealer open interest durir~g 2000 (I04,319) was associated with specuiak)r
cotmte~arties, Thus, we estirna-ic the *otaI average sr~eculative open imerest
commercials plus one,half swap dealer open interest) durir~g the base period at 226,! 19
contracts,
Similarly, bona tkle hedging interest wonld be calculated by adding ~he bona fide
hedger open interest to the amotmt ol'swap dealer activity that is associated with hedging;
transactions by the swap deNe~ counterpaeies: We ~have ass~m~ed that the remaining one-
half of swap dealer open interest is a~socmtcd with bona fide hedging activit~
~,
The
avcra~c~, hedgit!g open: intc:res~ during. 2000 was 354+1.. 59 t~turcs contrac~= (249.840,
. ~ bona
fide hedging open interes~ plus I04,319, which is one-half swap dealer open intere:s~):
Thus, in 2000, hedgi.~g interes~ was 6!% of total open interest and @ecntative interest
was 39% ofto~aI open interest
By contrast, using the same methodolo~v~ ......... i...n 2009, ax.:er.a~e hedgina ~ntete." "~st was
only 35% of lotal open, interest and speculative in.terest 62%
of
open intcrcst, with lion+
Atthougn the desire 0~ investors to di;versi~, theii
~
po~lbfios is tmders!:andable, inVesiors seeki~ig to
d~vers i~ their po~fotios o~er dJ fferent asset classes ]~ave mm~y 0pportu~i*ies to do;s0 witho~it creating the
uninte~ided and adverse Social cosis Ilia{ are a COnsequence o~attemp~ing to invest in [~at:tires as atiotlier
fbnn of asset class.
See e.g.; 7)~+ (h:ea~ M~a~a~ l:und 7~.ap
¯ An lm.,esw:~en~ R~'cby Gensier and
Baer. Broadway Books (2002)
Delta
0i~}V
has bona fide bedaer and swap trader position da~a availaNe ik)r ~he year 2000 during the base
period. T ~is data is ~om Nu:5+'uksahin 2008. "l'!~e Commi:~sion wmfld have avails+hie to it, or be able to
obtain, dan ~+r the entire base period. Allhough *he catclda+ion: are pet+formed using only data ~om 2000,repur{ing traders making up th.e iemainder, The ratio of hed~i~g to speculative open
interest has fiip.l~ed.
:'~
The target amount of aggregate speculative open interest (the '%peculative Open
lnterest Target") would be set to mabtain an approximate 61%~39% ratio oi" hedging to
speculative interest. The Speculative Open Interest Target would be adjusted mmua!Iv ~o
reflect changes in the total open imerest of hedgers in the market. [;or example, average
hedging open i.n.terest durin~ 2009 was 951,451 (378.124 comracts bona fide hedging
plus 573,328, which is one-half the swap dealer open interest). For this 951.451 hedging
open interest to be 61.% o1 total market interest, the Spec.ulau:¢ Open Interest I'atrgct
amount would be 608.260 contracts.
Adjusting the base period Speculative Open Interest Target am otmt in this manner
ensures that tl~ere is sufficient growth in the aggregate targe~ amount of speculative
activity ft.~r the current period to continue to meet t!~e liquidity needs of hedgers, This
adjustment maintains the s,-~mae ratio between hedgi~ag m~d speculative trading in the
current period as prevailed during the base period
The aggregate target amount of speculative open imerest would then be transl.ated
to a limit thin would apply to individual traders. The Commission would se~ th~s number
taking into account the s~e of the aggn'egate target, the nmnber of speculative traders in
the market, a~.d the distributio~ of size of individual positiot~s, One method for translating
the aggregme target to individual speculative poskion limils would be simply to divide
~e aggregate tm'~et limit by the number of ~p~culat~ve traders. However, this
would !.kely result i~ ate. u~-m.ece~sadlv restrictive ~imit because many tra.ders arc unlikely
to approach a limit based on a sm~ple average calculatiot~. A better method tbr
translating the aggregate target ~o indhidual speculati .,e position limits would make use
of the Commission's large trader data, Using that dam. each rcpo~ablc lradcr in the
market would be enumerated andranked"
~
-
by.. open interest. I%ose amounts would be
summed in order of ranking from smallest ~o largest, using an iterative process to find the
individual spccuIa~ivc pos~t~on hm~t."
"~ Average hedg:ing ope~ interest during 20tl}J was 95 I,-45 f (3'/8. t24 c0~tracts bon;-~ fide hedg{~g ptt~s
~ ~,~,~, which is one,half~ the swap denier ope~ interest): Average spectfla{ive open {nterest dud~ig 2(109
was 1,69b; :,{~ ~ {I,12~.4~9 contracts no:n,comme, c~al interest plus 5 ,, 3oz8~ which is o~ie~hatf t~e :swap
dealer open in:totes0. T{~at ope:~ inte~,est was 2j40,266,
:,s, By way of iilus~ration, aRer nil traders are emm~eraWd .a~d ra~ked by ope~i
~[:eresh
sm.~ii~g from the
trader with tl~e smalles~ open in~ereSt~ ~h~ .open interes~ of all ~raders with m~ ope~ m:eres~ Jess than or equal
to the aggrega*e *argot limit divided by ~h:e ~itm! bet 0f spec u!at~ve traY!ors wou~d be: suinme~l This sum reed
o p¢n i nte}:e ~t of s ma il ert ra ders wOu] d b e subB a¢te d fi:om the ~ggregat~ t:m7 ge * a mo *~ n t of s peculat i Ve (~p en
interest, and the co~esponding mtinber of smaller traders would be subtracted frmn the t0ta! nmnber of
traders: ll~e remaining target amount would be divided by {he remaining number oftr,iders to identil}
~
the
i:ndbidual speculative position linii~. This process could be iterat:ed using the ne~, spec:utative position
~mit. I:he .posit~on limit would rise sligi~tty whh each iteration until ihe increase Caused ~o additional
traders to }told a ~sition less titan the updated limit This woald be t~e 15~al til~iii:.
The C:ommigglo~i eurt,et~:tly sets a t itni;t tbr long and short poskkms, ratlier than an opei~ interesi limit
While not i dett{i:cal, the aggregate oper~ interest I imit number could aIso be used asthe aggregate [imit on
sh~rt a~d long positie~aa,
-
20
-The target amourtt of speculative: op~:n hlterest is +tt_~t httend~d to be. and would
not ace as, an absolute limit on overall si~eculatfve op¢n in.retest. Rather+ i+ +s intended
be a guide and measure to be used in settit+~ th+ l~ ¢ls of speculative poskion timi+s. In
any give~ year, total N)ecula~ivc ~)pen int+r+st might v¢r~, ~.~elI ¢xceed the Speculati~e
OI}en ln~erest Targe~ amount Ibr that year. For example, if ~here were an influx of
speculative traders in one year. or if the number of specula~i~e traders sta~ed conslant but
i~.dividtml speculators began to assume much larger than their customary positions,
o~,era.lI tarRet amount would be exceeded even though each individual trader remained
within the applicable speculative position ~imit. "tlms~ the target amount would no~ act as
a hard and li'~st cap on market activity and wou.ld allow considerable llexibility for traders
to respond to ch.a~ging marke~ conditions. However, the Comm~ssmn would use that data
in adjusting the speculative position limi~ t:k~r the tbllowing year, restoring the market
its apprt~ximate [~ase peri.od co.mposi.tio~? arid mam~ai~ai~.g a hcalth~.- balance bctw"~cn
hedging_ and speculative activiW.
The targcl amount methodology olI)rs a mean.i~gI?u~ method of correcting for the
anomaly of incorl~orating into the calculation of position l.imits the influx of speculanve
a:ctivitv that etgered the m.arket starting in 2004. and based on historical precedent, this
le-~,cl of speculative activity should provide axe. adequate amount of liquidity to b,?r~a fide
hedgers in the market m~d would constrain only excessive speculative activity. The target
amount mett~odo~ogy, malikc the Commission's methodology, does not rely on a
percentage of total opera imerest as a measure fbr setting speculative opct~ interest.
This proposed framework fbr establishing speculative position limits reflects the
growth in ope~. i~terest is.~ t[~e crudt:: oi! t~tures, market of bo.na fide hedgers and maintains
a suf~ficient oppommity for speculative trading to provide adequate liquidity to hedgers
and robust price di.sco-ver~,, but withou~ unbridled and excessive speculative activitv, and
by doing s~,, more closely meet Congress' direction to set limits on excessive speculation.
I)clta's approach is informed by Commission precedent. The formula used b~, the
Commission which yields-the unreasonably high speculative position limits is only one of
two alternative methods under which exchanges may determine the appropriate levels
exchange-set speculative position limits m~der C.omna~s..m~ rule 150.5(c)(2). 17 C. :~.R.
~I.50.5(c)(2~, That role p~rovides that stgcculativc position limils may also ;;be based on
l~os~tiot~ sizes customm'ily held by speculative traders on the con{racl, market, which shall
not be extraordinarily large rela, ive ,o total ope~ positions m the contract." Delta
believes tha:t in light of the pronounced influx of s.pecutati.ve activity t~ the oil ma~:kct
during the recent perked marked by extreme price volatility-, using customary position
sizes will yield a specula-tive positio~x limit flaat more closely adheres to the statutory
goals ot" section 4a of the Act. Delta believes that in ordcr to set posi{ion limits based
customarx~ ,~ :e of positions, the Commission must determine a base period prior to the
recem and unprecedented in.~ux of; speculative open mteresi. Delta t_ehe~es that in light
of tee drastic rccen~ cha.nges i~ ~he co.mposi~km of the oil t=t~l~rcs markcL the most
appropriate re.ensure fbr determining customm'v size of positions is based on the cI~a~ge
in size 04" hedger s positions using a. base period preceding 2004. when the market
appeared. ~o Rmctiotx well and without the recen~ unprecedented price vola{ility.With respect to th:e spot-mo~3tla speculative position limit, 13el~a agrees that a
fommla of one-qt~arter of the available deliverable supply is an appropriate measure, b~tt
o,~ly if strictly applied as a unified limit across markets and type of contract. No
speCUlative trader stiould be able to exceed that amount by div:iding his or her position
between different markets or by holding Inis or her position eitiner entirely or partialIy in
financially settled contracts.
Separate sub-limit for aggregate posi¢ions of passive, long-only ,v)eculator.~
l.Jsi~ag this as a general framework. Delta would also establish an overall target
limit for passive, long-only traders within the larger target ['or all spe:culative traders.
Delta strongly recommends that the Commission propose setting a speculative position
limit applicable to passive. Iong~mty traders ensuring that such traders, as a group,
l including swap dealers covering the risk of over-the-counter transactions with such
cou.nterparties) do not exceed a stated proportion of speculative open interest. This limit
would be adiusted periodically to reflect chm~ges h~ market compositio~ and in total open
interest.
Although the Commission has not prewouslv distinguished *ypes of speculative
_
. Section 4a of the Act empowers
trading strategies in setting speculative position limits,
~"
'
the Commissio~a to do so, providing {hat.
Nothint< in ins section shall be construed t.o prohibit tine ...omm.~ss,on t}om fixing
different trading or position limits t?.~r d~lerent cc mmod~t~es, markets, futures ...
or di£t;eren, trading limits tbr buying and selling operations ....
Accordingly. Section 4a contemplates t!n.at a dif[?.ren~ speculative position lira.it could be
fixed for a trader that engages e×clusivelv in b~.~ying t\~tures with referen:ee to a
commodity in.dex
'['lae Commission's collection and publication o[ its C(YI" Repo.rts has over
years contributed a great deal to scholarly analysis of the markets and is an importmat
public scrvicc, However, that data has .~ot kept pace in reporting on the profout~d
changes in market composition, in order to impleinent the speculative position limit
fi'amework that Delta is recommending, supplementation and refinement of Commission
data are necessary in order to properly assign swap dealer positk)ns to the bona fide
hedge or speculator categoD'.
he data in the (..01 Reports is produced once a week. and provides only a very
summary view of the market, the Commission. collects large trader reports from every
~rader over the reportable level, which provides greater detail e~mbling more re*:ined
analvsis of these issues. By not releasin~ disa~gr%ated account-le'~:el information.
Sect|on 8.(a) e~t !e Act proh:~btts ilae Commtsston Irom releasing i,ilSmmtion that would separately
disclose ti~e business Iransa*_'tioras or marke
t
position~ of;any persom Position information could becommcn~crs arc precluded t'rom analyzing the relative distribu~it~n of traders witl~t various
size Ix~sitions i~ the market or from e'~:en ~mders~anding how many traders might be
aft?cted by the limits at the le~,els proposed by the Commission.
Moreover. the COT Report data has additional inherent limitations. The prm~m-y
lira.ira';ion with respect to the COT Reports is ~:he classification scheme in use.
The
Commission"s Ion.g-stranding classil5catio~ sclneme has divided ~1.1 market users into two
categories--commercial or non-.commercials. Swap d.eale;rs were classified as
commercials. Moreo~.'er. all speculators were included wit~?.in the non-commercia!
category, ha.cludi.og passive, long o.n.lv traders a~d i~dex t3.mds, who have a un.ique
¯ ti_~otprint in tt~e market.
In. response to concerns abou* the role of .~wap dealers and passive, long-only
traders, Commission staff in 2008 issued a report examining changes m the compositmn
of the markets m~d fl~e (,.omm~._s~.on s data as it relates to tf~ese two categories of market
participant,
a~
Based on. recommendations i~ this report:, the Coremission removed swap
dealers from the "~'commer¢iaI'" category and began, reporting their positRms in a separate
category. ~ne ~.omm~ss~n also began issuing: a special quarterly report detailing the
positions of index traders as a category.
Delta has analyzed ~he Commission's COT Reports to understand the changing
composition of the oil ft~tures market: betwee~ hedgit~g an~d spect~lati~e interests. I1 has
used "no.n-commercial': traders as a proxy for spec.nlative inter.est. However. tills
un.dcre~tunatcs the amoun, of speculative interest because it does not include the portion
of swap dealer positions which manage the risk of spect, lative po.~itions.
In analyzing the amount of hedging use of the oil market. [)e!:ta has relied upon
the Commission's ~'Disaggregated Commim~ent of Traders Reporl" data which removes
swap dealers l'rom the commercial, category. The revised cmegory includes positions of
producers, merchants, processor, and commercial
users,
which i)elta te~ns ~'B~na fide
hedgers." B~;caase the revised Cc.mmi.s:.,ion classiI:ication onIy apt: lies to data [ egmning
m 2006, data for t~er~ods prior to June 2006 are line,ted to averages m 2000 and 2004. "
I)e.~;pite the recent revisions to ttae COT Reports, however, the problem remains
that the new classification of ~'swap dealer" does not distinguish amo.t~g the types of
positions that the swap dealer may hold, A swap dealer's futures positions may be
managing the risk of its counterparties that are emering into over-the-counter {ransactions
t:br bona fide hedgi~:g pmt~oses, as does Delta. "I|-~e swap dealer also could be managing
the risk of i~s counterparties that are enteri~~g imo o'v'er-the-coumer transactions for purely
speculative exposure~ sucl~ as woul.d a hedge fund or an index trader, or the swaps dealer
released without identifying the identity of the person. °l'l~e Commissio~ should make such positio~ da*a
a~;ailaNe, cleansed of any iden.{ifying details, in order tO ~aSSiSt t!!e pt!b|ic i~ analyzing a~d co.mmentia~g
upo~ tt~ese impor~am issues,
4~ See. '°Staff Report cm Cc3mmodi~y Swap Dealers and I~.xtex Tra¢lers." available al
t~trp:.,'iwww.c fie. go~'!t~cm;group si~ub[ici@ne wsroom,~doc uments,'l} le,"cficstafi:}eportons wa~,dealers09.pdf.
(tast v-isited on April 26, 2010).
4:: Data [:or periods pri~r to june 2006 are based on ~3uyuksaMn 2008. See Appendix I.poss~[ie to: understand the true ma;ket composition between hedging and speculative
positions without being able to differentiate the swap dealers' positions as tepIe~¢.,ltll!g
either bona fide h~dging or ~pecuta~iv¢ imercsts. I)~Ita l'cc.olllillcild~ that tl~c Commission
fk~ther refine its publicly available data in this manner in order to pro~*ide greater
transparency on the composition of the market, Such transparency is necessary to
implement the fi:amewmek t~r speculative position limits that Delta has suggested in this
letter. More; basic, the Co.mmissimfs m~d commenter's very consideration of and public
discourse regarding: these critical policy matters would be aided by the availability of
improved data.
Commission should not delay actio,~
Some have suggested that the
~
' '
~
Commission. dday acting on this proposal pen.di~g
its ability to impose speculative position limits across a!I markets, including ove>the-
counter transactio~s and over non~ U.S. markets providing direct access to U. S~ traders~
~3
Delta strongly supports tim application of a unified, aggregate speculative position Ihnit
which applies to a{l eco.nomicaliyqii~ed exchange and over-the-counter derivatives
contracts on energy commodities. Delta ~aotes in this regard, that such proposals are
under consideration by fl~.e (..,ongress as part of the regulatory reform of tile financial
system.
lto .e'~cr, in Delta s view. the fact that the Congress may provide the (ommtss)o~
with additi~nal" : ~'" ':"
. ......
authc~mcs is not a valid reason Rw postponing actin~ within its
current
a:u*hority: Indeed some would a:rgu¢ that *he
CoDiill:igSio!I
ctirren.~ly is
directed by tb.¢ Act
to set specula, ive position limi,s when it determines such action ~s necessary to diminish,
eliminate or prevent unwarranted fluctuations ill. price due to excessive speculation.. In
2008, Congress provided the Commission with additional autl~orlty over exempt
commercial mar:kets with significant price discovery contracts. The current proposed
rulemaking responds to Congress:' intent that such economically Iin_ked contrac.~s be
regulated by the Commission. The Commission should exercise i:ts cu~en* mandate with
{he understanding that if Congress expands t!iat mandate; then further action will be
appropriate.
Of course.~ ~here is always fiae possibility thata more comprehensive response to a
problem can be taken, ltowever, section 4a has been in the Act
~,mces' -
~,
t 936 and was
exercised by tlae Commission's
predecessor agmicy~
the Comnaodity l~xchange Autlaority,
Some of t:he satne arguments being made now against setting speculative position limits
in energy corm'acts, such as the absence of such limits on fbreign markets, have been
44
raised fi'om the earliest days o~" the Commissionl
"
Tl~ose argument:s were rqiected then
and should be n ~ as ~ell,
See
Noti;ce:..S:uyra at 4170 (state ments of CoaimissJoners Du~m and Sommers)~
l~ ~ 98 ~' o~e comme~ter suggested that the (?o~lii~issioti should refrai~ from requiring u.s~ co!react
market~ t~ set ~pecu~ative p~giti
:[b~eign markets-dkt not ha~,e stsch linii{s. See ~ 98~ Notice, supra noI:e 34 at 50940. The Commission
~spo~ded ~hat ~t d~d not behcv~ thai tins ~ehev'e~ domestic ccmtract mm~ketS ti:om
- 24-As noted in this letter, th.e speculative bubble in oil iprices has col~cre~e
detrimental consequences for the real economy. Had the Coinmission acted sooner.
possi~te that :some of ~e worst excesses
may
have been. ave:~ed. In light of tha~
expefiie~ce~: tuXher delay will o1~1~, lea.re open the possibility' era ~:ecu~e~ce while tt~:e
Commission waits tBr more comprehensix, e a.u.thority~ By acting now to limit speculative
posit~ons in energy commodities.; i!f Congress p:r~:~;ides the Comnlisslon w~th such
additiol~al re:sponsibilities over over,the-counter transactions, th:e (.omm:~s~.on will
taken, the important step of: havil!g established a proper foundation}: *~, subsequent action.
By proposing aggregate speculative t_~osition limits across energy derivatives
markets, the Commission has take.~a the most important s~ep i~ addressir~g the
unwarramed price I]uctuati.ons of reeenl 5:ears----il has recognized the !;~roblem and taken
the firs* s~ep to Mdress it. The price bubble in energy occurred with r~o sig~ai.ficam
change in the dynamics of the cash marke{s. The main arena where this pricing bubble
played out was m the derivatives markets and the main effects of this bubble were on
persons not in the derivatJ~ves markels, including {he 10.000 Delta employees who
lost t;heir lix.,elihoods ~md the many commtmities that h.a~:e been hit witg reduced ser',,ice
b~: Delta an.d its sister air carriers as a result of the energy price bt~bble.
DeIta s~pports this basic tenet of the C.omm.ission's ~.ropos~;.d rtttemakina-- that
intervention in e.~ergy commodity markets is necessary to address tf~e problem, o["
unwarranted price ttu.c{uations caused by excessive speculativ~e activity, l:lowever, if"
speculative limits are to be efl-'ecti,,:e, they must be set at meaningful levels. Delta in this
comment letter has suggested an alternative cMculation for determining individual
specu.lative position limit levels based upon a target amount of spec~,latix, e open interest
aggregated across all speculali~,e traders. Delta believes that limit le,~.~els see by this
methodology would bc cffective in achic~,.'ing ~he int.ent of section 4a el." the Act of
dimin.ishi~g, eliminating or preventing the suddem unwarranted and u~reasonabte price
.{.'luctuations ~:aused by excessive speculation, and urges the Commission to amend its
proposal accordingly.
Detta's responses to th.e specific ~Uestio.ns raised by ~he Con~mission in the N~tice
are ap.pe~ded hereto as Attachment A.
PIease co~itact the undersign.ed at (404) 7I>~a8.. 0, ~r our {mtside counsel. Paul
r .... iv:"
M. Architzel of Alst~n &Bird, L,L.P: at (.202): 756,3492, if you wvmld l~ke to ect: e the
data tmderlyi.r~g !he graphs in, this let*er or if we can provide any additional i~*brma*ioti.
preve~t the p{~tential ad~.'erse effect which may be :cat,seal by: extraordinary large speculative positions l~eid
{~n .~;uch cor~tract markets, tkf. T:he .';ame h~ids trueRichard B. Hirs~,
Ge.n~:ra! Counsel
Attactm~ents
cc:
Chairman Gensler
Commissioner Durra
Commissioner CNlton
Commissioner Sommers
Commissio~cr O'Malia
I)m~icl Berkovitz. General Counsel
Richard A. Shilts. Director DMO
Stcpt~cn Sherrod, Acting Director of Surveiallance
David VanWagner. CNef Counsel, DMOA! [ A(.HMEN [[ 1
JR.espouse of DeRa Air]lines, !~c, ~ ~ Questions
~FederM Speculative: P~si~n L~nfits fi~r ~efereneed Energy
Associated Regulations; Pr~sed R~Ie~' 75
Fed. Reg~
4144 (,Jan ua:~" 26, 20
Are Federal speculative posiiion limits for energy conlraets traded on repo~hlg
d,mmlsh, ehmmaSe, or prevent" ihe burdens on
A.s Delta distresses in i~s comment letter at ipages 4-15, lhere has been a recent:, sustained
price bubble in oil prices. This price bubble occurred at the time of a tremendous and
unrestrained infla× of speculative trading in the t'utures markets for 1his commodity
Speculative positions limits are necessary to diminish, eliminate or prevem the burden
caused by this unrestrained speculative acfivl, y.
2. Are fl~ere me,hods other ih~m Federa..~ specula~ive pi~sRi~ limits thai should be
utilized t~ diminish, dimina~,e~ tw prevent such burdens'?
Delta in its comment letter at pages 18-22 recommends an al~emative framework ~br
setfir~g speculative position limit levels,
3. How should the Commission evaluate the potential effeci eft Federal speeula,ive
posi~on [~mRs ~n the fiquidi~,~, market efficiency and price discover' capabilities of
~e!~renccd energy co~!racts in determining whether ~o establish position ]~ts for
such c~m~racts?
Delta. at page I9 re.commends that the Commission use as a base period for its
determination prior to the recent unprecedented m 1] ux ol .. peculat,,~ e trading activity into
the energy markets. The futures market in crude oil worked well during the period prior
to 2004 and that per:iod shouid be used to evaluaie proposed |imits, The marke{ during
that time provided hedging opportunities tb:r hedgers and was a good source for price
basing, The :Comrnissio~ can evaluate the liquidity ihat was in the market in that time.
compare that tothe current leve! of bona fide hedgers in ~he market, and determine a
level ~br speculative position limits that would continue to meet the liquidity needs of
hedgers in the market.
~
:
hereto, ho ~ stmu~d
4. Under the c~lass approach t~ grouping contracts as discussed
' : ~'
~
c~ntrac~s tha~ do ~m~ cash settle *o the price
of a
single co~tract, but sett~e to ~he
of contracts ~hm a cia.s be trca~ed during ~hc sp~t
average price of a subgroup
. ¯ .... " " ¯
,s
¯
m~mth Nr the purposes of enNrcing ~he proposed specuiative posifi~m limit;s?[ elIa bchc es tha~ there should be no difference in the f.ramework that applies: to the .spot
l.-I-;o~it~l 1}.;oI1-~ tll~ framework .pr~posed by the C.~mm~ss~on for nor~-spot month limits.
Delta believes th.a, the sI.~ot momh limit should be aggregated across all markets mid all
"classes.,' Where the spot month Iimi, applies on a daily basis, the limit should be
applied on botti a net and
gross
ha:sis so that il~ter~day nc~ing o!l positions would not be
recognizedl The Commission has noted that market surveiIIance concerns m,e heightened
during the spot month. Accordingly, spot month limits should be applied rigorously at
one-.quarter of ava:ilabte deliverable supplies;
mo~.~fl~s-combh.~ed aggregate pos~fi~m ~hn~t equal ~ 10% ~f ~he: average combined
Ntures and optkm: contract o~cn interest a~regated across all reposing marke~g
Nrthe m~st recent calendar year up to 25~00~ contracts, with a margh~a[ increase of
2,5% of open in~eres~ ~-hereaf~er. As ~n alternative ~o this approach to an a[~
mom~hs-combined aggregate ~osition limff~ the Commiss~o~ requests comment on
wheiher an addifi~nM increment with a marginal increase larger than 2.5% would
additional [ncremen~ woidd pern~it traders to hold !arger pos~tion~ relative o to!a!
leference( energy '
. ' " ......
"*
open positions in ~he ¯
' ]
contracts, ~n ~omparison to ~he proposed
positio~ ~im[* at 10% of the prior year's average opet~ in,eres~ up ~o 25,000
contracts, with a marginal i~crease of 5% up ~o 300,000 co:utracts and a marginal
h~crease of 2.5% thereafter. Assuming the prior year's average open in~erest
equaled 31~{L000 contracts~ an all.monihs combined aggregaie position limi~ would
be fixed at 9,400 co,tracts under the proposed ~ule and i6,300 contracts under ~h.e
alternative,
As Delta discusses at pages t6~18 of its letter, the proposed limits based on an open
interest formu|a are fimdamentalty flawed because ~hc c~pcn interest currently
incorporates the recent influx of speculators. As Delta poin,s out, this is excessive
speculative aclivity when compared to ~I~:e: open. interest of bona fide hedgers. Delta
believes flint in ligl!t of this. the limits as proposed by the Commission arc too high to bc
an effective constraint on excessive sp¢culation in these markets~ Delta at pages of its
comment letter recommends that the Commission adopt an alternative calculation for
determining the appropriate level [br speculative position limits.
6. Should customary position s~es held
moderating ~the ~.hn~t ~eve~s proposed by ~h¢ Commission? h~ ~his conne:cdon~ ~he
Commission n~tes that c~wrent regulation i50.:5(c) states conirac~
markets may ad~lgt their speculative limit levels *'based
on
position s~es
cuslomarity held by speculative leaders on ~;he contract markeL which shall no~ be
extraordinarily large relative to total open positions
As Dclta explains in its letter, using customary position size will result in speculative
position limits ~hat more clearly will achieve the pu~ose and mandate of section 4a of
the Act ilowever, it is important tha* the Cominission choose a base period fordetermining '°customary positions" that is representative oi-'ty.pical market conditlons.
this regard, De!ta not¢~ lh:at tbrmer ru!e 1.6I r¢c~:~gniz.ed that the exchange wo~ld have
some degree of discretion in choosing the base ~eriod examined i.n setting spect~lative
..
these: factors shal~ include position si zes customarilv held
position limits, providing ~hat, .... '~ "
' "
by st?¢Culadv¢ traders on such market tier a period of time s~Iectcd by ~h¢ cow, tract
market?' 1981 Notice~
supra
at 50945~
7. R~:p~rfing marke~s tha* lisi: rel~ere~lced energy co~ltracls, as de.fi~led by *lie
proposed, regulations, wou~d co~finue ~o be re~i~onsiMe for maima~nh~g their own
position limits (so long a~ they are not higher than ~h.e limits fixed by fi~e
whether it should ~ssue acceptable pracliee~ ~hat adop~ ............................
Delta is of the view ttiat the Notice sets forth the basis for requiri~ag that hard speculative
position limits als~ be adopted by the indivld~al contract market or exempt commercial
market, at a le'vel wlaich, will act as a meaningf~al, constrai~at on excessive
trading activiiy.
positions that are he!d to ~ffsc~ ri~ks associated wi~h c~s~omcr initiated swap
agreements that are linkeg to a referenced ener~
~
contract bu¢ that do not qualif3.: as
bona fide
~hedge ~osifions, The swa~: dealer risk management exemption wouid be
capped al ~vice ~he size of any otherwise appHcaMe all,months combined or single
~spot=nmmh tmsition Hm~t. The Comm~ssitm seeks c~mime:nt on any ai/eruafives
tO this propased approach. The Commission ,eeks parfiel~lar c~mmen, on ~he
feasibility ofa ~q~ok-thr~ugh" exempfi~n for swap dealers such ~ha, ~ealers w~Md
receive exemptions for positions offsetting risk~
resulting
from swap agr¢ements
opposite counter~arfies who wouid have been entitled to a hedge exem~ti~ ~f they
had hedged their exposure directly in the fmure~ markets. How v~able is such an
approach given the Commission's lack ~f regulatory authority over the OTC swap
marke~s?
As Delta explains at pages 22-24 of its comment letter, Cmnmissiot~ data should be
enhanced by categorizing swap dealer open interest as hedging or speculative. Delta
believes that "looking through" transactions is necessary, at leas~ ff-~r data collection
purposes.
9. Proposed reguiation 2i)~2 w~uid require swap dealers to file wi~h the
CommisMo~ certain information in connection
wi~h
the:it risi~ manag:emen~
exemptions to ensure ~ha~ ~he Commission can adequately ~ssess t:~eir
need Nr an exemption:. The C~mmission invite~ c~mmen~ on whether these
requirements are sufficienL in the alternative, should file Conimig~ion limi~ ~hese
fi~ing requirements, and instead rely upon i¢~ reguhtion 18.05 spechd c~ll authority
to assess the merit of swap dealer ....r~sk managementDelta believes that the Commission should rely on special calls ~nder rule 18.05 ordy tbr
unforeseen and un.usua! conditions, Where the need [br a report is I'oresceable, i.t should
be a routine reporting requirement that is carried ou~ periodically,
!0. The Commission's proposed part IlSl regulafio~as for referen~:ed crier@
~
contracts would set Nrth a comprehensive regime of position ~imit. exemption and
limit, exemption and aggregafi~ requirements Nr agric~It~ra~ co~tracts se~ fo~h
in par~ 150 of the Commiss~on's regulatio~s. WMie prop~sed part 181 borrows
many features of part tglL there arc notable distinctions be~,ccn ~he ~0 i~cludi~g
their me~hods of positio~ limit calculation and treatmen~ of positions held by swap
dealers. The Con~m~ssio~ seeks commen.~ on wbaL if any~ ~f the disfinctNe features
~f fl~e position li~it framework proposed herein, such as aggregate p~sifion limits
agr~culm.ral commodities listed h~ part 150 of the Commission's regulations.
Delta takes r~o position ~?r~ the application of the pro.posed framework to agricultural
commodities. - ~ .....
t Icwe,~cr. it would note that the issue o[ passrve, long-only traders would
apply to all fu.~u.res markets for langiblc comm.odities. JVk?reox, er, the concep~ of
aooreoate~
~
. speculative position limits that apply.
~ across markets to different contract
"classes" would also apply to all futures contracts on ~angibl.e commodities
Ill. The Commission is considering establishing specMative posithm llimits for
coatracts based on other physical commodities wi~h finite supply such as precious
metal m~d sof~ agricultural commodity con races. The Commission invite~ c~mment
on which aspects of t~e current speculatNe position ~imit ~amework for the
agricMtural commodi~
~
comracts and ~he framework proposed herein Nr the maj¢~r
of open h~terest and the proposed exemptions from the speculative position limits)
are m~st relevant ~ contracts based on other physical c~mmod~fie~ with finite
supply such as pr~ciaus metal and soft agricuhural commodity comract~.
Please see the answer to question 10 above,
12. As discussed previously, t~e Commission ha~ fMiowed a !~oiicy since 2908
of
conditioning FBOT no=action relief on the reqMre~en~ fl~ ~'BO'['s w]fl~ comr~cts
that link to CFTC regulated contract~ have p~s~fion limits that are comparable to
the position i~m~ts applicable to CFTC-regulated con~tracts, lf ,he Commission
adopts the proposed rulemaking, shmdd it confim~e, ~r modi~, ~n a~y
way~
this
policy to address FNOT contracts thai wo~ld be ~inked tt~ any referenced energy
contract
as defi~ed by the proposed regalations:
Delta supports the existiag policy, t.lowever, the Commission should explore mear~s of
ent:brcing an aggregate lJmlt that would include such tk~rei~4na ~narkets as it has proposed
t~or domestic markets.beyond po~Rions i~ repo~ng ~arket c~ntrac~s m reach posi~ns ~n OTC derivative
would be author~ed to set limRs for posRions he~d ia OTC derivative instruments
a~d FBOT contracts, The Commission seeks c~ment on how it should ~ake ~h~s
pending ~egMa~i~n into account ~n proposing Federal speculative pos~t~on l~m~s.
As Delta discusses at pages 24-25 ,of' its comment letter, the Commission should proceed
with adopting final rules with the amendments recommended by Delta If ttae Congress
amends the Act as suggested in the Commi.ssio~.'s question, thet~ the Commi.ssioa could
fold such trm~sactions and markets within the speculative position fl'amework.
14o Under proposed regulation 15I..2, the Commission w(~u[d set spot-mon~h and
months-combined position limits annually, a. Should spot-month positim~ limits be
se~ on a m~re frequent bas~s give~ ~h.e pote~iia~ ~or disruptions in deRveraMe
~upplies lbr refere~,ced e~er~ contracts'?
b. Should the Commission estaMish~ by using a rolling-average of upton intcrcslt
instead of a simple average for ~xample, all-mo~ths-c~mbined position limRs on a
more frequem basis? ffso. wha~ reasons wou~d support s~ch action?
Generall~,. Delta would support reviewflag and amending speculative position limits
more fiequently than annually'.
115. Concerns have been raised about the impact of large, passive, and un~e,¢eraged
Iong-~n|y positions o.~ tl~¢ futures markets. I ~s~ead of using the futures markets for
risk ~ransferencc, traders that own s~ch positions trea~ commodl
D'
futures contracts
as distinc~ assets that can be held for an appreciable duration. This notice of
ru]emaking d~es not propose regMatio~s tha~ w~uld categorize such posi~ions far
the pu~osc of applying diffcrcat rcguiato~ seandards. Rather, the owners of s~ch
positions are ~reaied as ~ther inves~ors ~hat would be subject to ~he proposed
specuIative position limits, a. Should the Com~uission propose
~he posRions of passive, long-oMy traders?
b. If s(~, what criteria should ~he Cmnmission employ ~o ~d.enti(~
~
and d.efi~e such
traders and positions?
c. Assuming thai passive l~ng traders ca~ properly be ~dcnfificd and defined, how
and ro what ex~en~ sho~id the Co~missi~n limi~ thdr partkipation in ihe futures
marke~s?
d. If passive l~g position, s should be limited in the aggr~gatc~ would it bc feasible
establish passive Iong posi~ons?
e. What un~ntcndc~ co~scqucnccs arc likely ~() rcs~R from ~h~ Commissk)n's
implementati~n of passive long p~si¢i~n linfi~s?Please see page 22 of tile Delta comment letter~
I6. The proposed defini*ion of referenced energ~."
r" '
~ndex, and contract~ ~f *he same class are in~ended ~o be s~mp]e definitions ~:ha~
process with~mt relying ~m *he: Commission's exercise of discretion.
a. Is the proposed defini*ion of
contracts
,~f ~he same class ~br sp~t and ~n-spot
~onths s~]~c~.entiy inclusive?
b~ Is it appropriate t~ define contracts of the same class du~ing spot: ~onths to only
include contracts ~ha* expire on t2he same day?
e, Should diversified com m~diD, ~ndexes ~e defined with greater
particularity?
Please note that DeIta does not support the approach ipmposed by the Commission of
applying separate spot tnomh speculative position limits te different classes of contract.
17, Under the proposed regu|at~ons, a swap deMer seeing a risk managemen~
exemption
woul~
apply directly ~o ~hc Commission :Nr the exemption. Should ~uch
exemptions be processed by the repoi~ing markets as wou.[d be the case with bona
fide
hedge exemptlons under the pr~posed regulations?
Delta believes that this authority is best exercised by ~ihe Commissior~, which unlike a
market, does ~ot haven commercial ince.ntive for approving exemptions,
a,: Issue special calls :~br inlbrmati~m to the reposing :markets 1o: assess ihe size of a
c~ntract's deliverable s~.ppiy;
b. Use the levels that are currently used by the exchanges;
c~ Undertake an independent calcula~o~ of :deliverable supply
.
¯ .....
.
lehanc¢ on exchange estnnate
Delta believes that the Commission should retain discretion to "take the approach that is
administratively most efficient tbr each commodky. Where data are readily-available and
pt
biicly a:'~.~adabl%" '
" ~ the ......... Qommlss:~on should
accep~ such data
and
permit the exchange to
ct~alienge ttae conciusion~ Where data is not p~ubliciy avail.able, the exchange should be
recfui~ied to demonstrate the reliability of data that it pro:vides to tar (?ommi,~sion fi?r this
purpose,APPENDIX 1
BUYUKSAHiN 2008 DATAt~ am~f~.t:~r~r~
30.3~ ~
~ 3. I~ 5
7 .~58
2 479
53. ~83
37 ~0 ~
15' 7~0
7.~5
2
Pr,~,:~s
~!..~i
&73S
2.Z13
S99
2I 176
~5.575
£947
2A;#4
89~
#~:dassfi ed Ce~me~ci~l~
~ z .7~ 5
4 ~ 2
! .688
72
~.117
16~57
e 018
1.997
~
To~
179,505
t 2~ 17 S
86.2S 6
19.487
~4,~23
262.425
196.155
1 e2.2~ O
19,~8
58~. 278
Cemmem~at
~47.,.3~3
$0G.(~$){~
Y2.~30
: ?.,'; 3
34.3.6~2
19£ 767
~54 409
86.588
17.713
45~ 477
~a~e| B: 2004
{~.~, merlttls
3-12 t#~f~th.s
1.3 yearn
3~ yeats
Tete~
I;iff ~.?0l]t}
~-3 menths
3.12 meaths
1-3 years
~* yea~
Tot~
Diff vs.2OOO
2.031
~8
t
2.~60
=54%
2935
909
36
;
3,882
t 1.1 t9
2.~7
486
t
14.503
-32%
"~2463
3~90
501
16.155
449
20_93]
9.~0
~.ES~
3.24I
3~,1~
16~%
4t.~0~
25.532
6.879
3,24~
77.460
129%
~6_~3~
20.~0
8.999
2.460
4~,I~0
89%
58,5~2
52.4~4
9 2:5~
2,450
t23.146
Z79,e95
~94 ~9
153,936
47,.S3~
~35,~35
53%
433,70~
3~3.904
1~ 7~
49.~82
971.,609
56%
5t%
32%
F44%
53%
65%
75%
4Z%
t 52%
;83.7~3
$46 757
92,;28
38.3~0
461 508
34%
258#34
235 $1 ~
"17.332
~£.963
652.53g
42~
96.2~2
47.713
21.7¢~7
9.226
174.~28
147%
[75278
to7 093
21.46~
£,~4{)
3t9:{}69
t6t_594
~25.&14
7y.470
3~.578
396.)57
95%
283.805
252 397
] 03.~48
34.0.49
673,598
104%
~s~.u~tt~re~ s
2~.~90
8.~5
4~78
"~9
3~,$23
.34%
26,~74
!O,069
5355
Oth.e~ Cemme rd,~s
861
373
~7E
I.~04
-?2%
I#00
387
1TO
1.556
~72%
Dea~ers,~ rchants
86.349
~3.~)8
43.39£
9,~44
202.800
8!%
~47277
tt8 308
62819
14.835
343.037
172%
Ned,= Fuads
~25.~66
145 ~2
76.89~
Z4,6#2
3~2 378
1 t13%
~8!.590
252 29~
137 S39
38.3~4
61~ 134
~605%
To~
47~.8,~0
42~ ~
Z7~.~8~
9S,~ZO
f,287.f31
206%
8~9.~82
1.0~5.082
~62 877
DS~ ~. Z0~O
;63%
~'1%
224%
2~-%
205%
25~%
428%
451%
7£3%
,~*ot~'.,~':
T~able 5 shows open interesl in crude oil {"atuces a~d opne~s. After averaging ~1~e long and s|mrt positions of evsry large trader Jn any" g~x.'e~ contract.
we add {,hese es, mtales of open interest appmprmtely (e.g., R'~r all comlgercial traders, or for a{] positions less ~ha~ 3 mo~ths, ere ~. We d~en complete atmuaI
averages for each trader catt~gory arid mat~dt¥ bucket in 2000 (Ju[y-Oe¢,), 2004 L!an.-Dec.}, and 2{}08 Llam~Aug,}. Table 5 is co~paraNe to Figures 5-6.