Final US position limits rule will take ‘at least a year’

CFTC expected to draft a narrow list of contracts in scope

The US Commodity Futures Trading Commission acted unanimously December 5 to re-propose regulations setting position limits, meant to head off excessive speculation in 25 physical commodity futures and swaps markets.

Chairman Timothy Massad said the decision to propose the rules again reflected the reality that the commission is in a period of transition.

With President-elect Trump coming into office in January, Massad had faced pushback from Republican lawmakers since the election about his stated intent to move ahead with a final rule by year’s end.

“I do not want to adopt a final rule today that the commission would choose not to implement or defend next year,” Massad told reporters Monday.

“Our markets and the many end-users and consumers who rely on them are served best by having reasonable and predictable regulation.”

Massad also emphasized that the re-proposal includes many changes to the version the CFTC proposed in 2013, and that certain aspects have previously been proposed in separate pieces. “I believe the public would benefit from seeing the proposal in its entirety, to better understand how the various changes work together.

Key Republicans back postponement of final rule

Notably, the decision to re-propose the rule won support from the panel’s only Republican, Commissioner J. Christopher Giancarlo, who had made clear in internal discussions that he did not support issuing a final regulation in the wake of the election.

“I feel comfortable that the proposal before us provides the basis for the implementation of a final position limits rule that I could support,” Giancarlo said in a statement. His view is important as he is considered likely to step in as chairman under the new administration, at the very least on an interim basis.

Republican leaders of the House and Senate agriculture committees also welcomed the decision in as far as it avoided pushing through a final rule. House Agriculture Committee Chairman Michael Conaway, Republican-Texas, thanked the commissioners for their action and said Monday’s proposal would offer derivatives end-users across the economy “the opportunity to refine this rule and ensure that it does not negatively impact their ability to manage their risks.”

Senate Agriculture Committee Chairman Pat Roberts, Republican-Kansas, said that while he did not appreciate so-called “midnight rulemaking,” he was was encouraged that the CFTC decided not to make controversial parts of the rule final.

“With the new administration preparing to hit the ground running and critical issues remaining unresolved, I’m hopeful the CFTC will not take away valuable risk-management tools for our farmers, ranchers and end-users. They need more tools — not less.”

The proposal applies to 25 core physical commodity futures contracts and their economically equivalent futures, options and swaps.

Position limits to be based on up-to-date information

In one area of concern to natural gas companies, the re-proposal takes steps to ensure the position limits are set based on up to date information on deliverable supply of a commodity. It allows substantial increases in deliverable supply estimates in the energy sector, and Massad pointed to the sector as an example in which proposed limits for the spot month would be higher than the exchange-set limits today.

For NYMEX Natural Gas, Light Sweet Crude, NY Harbor ULSD and RBOB, the commission proposed initial spot-month position limits at 25% of estimated deliverable supply.

However, text of the regulation also states that the commission is re-proposing a conditional spot-month limit exemption of 10,000 contracts for cash settled contracts in natural gas.

“This exemption would to some degree maintain the status quo in natural gas because each of the NYMEX and ICE cash-settled natural gas contracts, which settle to the final settlement price of the physical delivery contract, include a conditional spot-month limit exemption of 5,000 contracts (for a total of 10,000 contracts),” the regulation said.

In a key change strongly pushed by large energy companies, the proposal includes a provision to allow the major exchanges to grant exemptions to position limits for bona fide hedging that are not specifically enumerated by the commission. That approach has come under criticism from some public interest groups, who argue the exchanges have a financial incentive to increase their volumes.

Massad noted the exchange-administered process “must be subject to our oversight as a matter of law and as a matter of policy, given the inherent tension in the roles of the exchanges and as market overseers and beneficiaries of higher trading values.”

Nonetheless, Tyson Slocum of Public Citizen was critical of the CFTC’s steps Monday. “Consumers lose with today’s decision to delay and weaken the long-stalled position limits rule,” he said in an email.

As part of the package, the CFTC also re-proposed the definition of bona fide hedges. It said exemptions are also proposed for positions set in good faith before the effective date of the initial limits under the rule.

Comments are due 60 days after the final rule is published in the Federal Register.

In conjunction with the re-proposal, CFTC also made final a rule requiring aggregation of positions across a company and its affiliates. The rule aims to simplify the process for exempting companies from aggregation requirements when they lack control over trading by an entity.

Energy interest groups were still reviewing the proposed position limits regulation, which stretched to 910 pages, when all the background and appendices are included.

The American Gas Association, in a statement said, “We look forward to reviewing the new proposal and will be evaluating whether the proposed speculative position limits regime is established in a way that allows commercial end-users, such as gas utilities, to continue to enter into bona fide hedges to manage, hedge and mitigate the commercial risks of their natural gas distribution business in a cost-effective manner on behalf of customers.”

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