cftc's trading proposals might not be too

8/14/2019 CFTC's Trading Proposals Might Not Be Too

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CFTC's trading proposals might not be too tough - Reuters.com

Reuters.com reports the top U.S. futures regulator will unveil long-awaited proposalson Thursday aimed at barring manipulators from high-flying energy markets, but the

agency is expected to tread lightly with its new regulations, at least initially. In adrawn-out process that has weighed over energy markets for the past several

months, the Commodity Futures Trading Commission will hold an open meeting todecide whether to adopt a "proposed rule" to limit the number of contracts trading

entities can hold in a particular market. The proposal, which has been kept underwraps, would still be subject to public comment that also could last several more

weeks. The new rules, if adopted, are a strand of the Obama administration's effortsto impose a new regulatory regime on the financial industry, widely blamed for the

meltdown caused by a series of global speculative bubbles.

CFTC to Propose New Limits on Energy Speculation to CurbPrices

Jan. 14 (Bloomberg) -- The Commodity Futures Trading Commission will take another steptoday in its efforts to rein in energy speculation, proposing hard limits on the number of

futures a single investor can hold.

Swaps dealers, index funds and commodity traders have been waiting for the proposal since

July and August, when the commission held hearings amid concerns that speculators drove oil

prices to a record high of $147.27 a barrel in 2008.

Commission ChairmanGary Gensler has pushed for tighter rules on energy speculators,

calling for strict limits on who is exempt from regulation. He has also asked Congress for

authority to regulate over-the-counter markets, where traders can sidestep restrictions by

buying unregulated, bilateral contracts.

Its likely that the limits that they set will be pretty liberal and generous, said Craig

Pirrong, director of the Global Energy Management Institute at the University of Houston.

The main issue will be how generous the exemptions will be for swap dealers and other

financial market participants.

The so-called position limits may apply to energy futures on regulated exchanges such as the

oil and natural gas contracts traded on the New York Mercantile Exchange. The restrictions are

designed to control risk and to keep one trader from gaining too much control of the market.

CME Group Inc., owner of the New York Mercantile Exchange and the Chicago Board of

Trade, proposed rules of its own in September that would have limited traders to 10 percent of

the first 25,000 contracts of open interest in a single month, with a 5 percent increase for

each 25,000 of open interest thereafter. Investors would have faced an all-months combined

limit of 150 percent of the single-month limit.

OTC Markets
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The CME said that hard position limits would be ineffective if the CFTC didnt gain power over

the OTC market. Tighter limits would push traders to shift their positions to the over- the-

counter market or unregulated exchanges overseas.

The $4.7 billion U.S. Natural Gas Fund, the largest exchange-traded fund in the fuel, began

shifting to OTC contracts in July in anticipation of new restrictions, and has $2.4 billion, or

more than half its assets, in OTC swaps, according to its Web site.

Without authority to police the OTC markets, the commission cant pursue strict position limits

because there are too many loopholes traders can exploit, said Stephen Schork, president of

consultant Schork Group Inc. in Villanova, Pennsylvania.

The whole thing is political, said Gary Dewaal, group general counsel in New York for Paris-

based Newedge Group, which calls itself the worlds largest futures broker. Energy prices

were the bogeyman before the financial crisis.

Doing Something

The commission has to be seen as doing something to curb speculation, Dewaal said.

Genslers focus on large, concentrated positions likely means that position limits will be set

high, and that most traders wont be affected, he said.

Congress gave the commission authority, through a provision in the 2008 Farm Bill, to impose

rules one some contracts if the commission found they served a significant price discovery

function. As a result, the CFTC moved to regulate swaps tied to natural gas and electricity

prices, including those on the Intercontinental Exchange Inc., the second-largest U.S.

futures market, and the Natural Gas Exchange Inc. in Calgary, Canadas leading energyexchange.

The House of Representatives passed legislation on Dec. 11 designed to shed more light on

the $605 trillion over-the- counter derivatives market. The measure would exempt corporate

end-users such as oil companies and airlines that use derivatives to hedge operational risk.

Narrowing Exemptions

Gensler has pushed Congress to narrow the exemptions and give the commission authority to

curb speculation in off- exchange commodity contracts.

Until the CFTC has over-the-counter jurisdiction, they wouldnt gain a whole lot from making

tight, binding limits because moving to over-the-counter traders is an easy solution, said

William Hederman, senior vice president for energy policy with Concept Capitals

Washington Research Group.

A lack of transparency in the over-the-counter market contributes to systemic risk, Gensler

said in a Jan. 12 speech.
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An opaque market, concentrated with a small number of financial institutions, contributed to

a financial system brought to the brink of collapse, Gensler said.

Gensler has said that the exemptions may provide a loophole for financial institutions with

end-user clients to circumvent the limits, saying in the Jan. 12 speech that it is the Wall

Street banks that benefit from the so-called end-user exemption from transparency, not the

businesses that use derivatives.

Commodity Businesses

Commodity-based businesses such as manufacturers, airlines and energy producers that use

derivatives would be exempt from the clearinghouse requirement if they can show they are

using the contracts to hedge operational risk. The transactions would have to be reported to

regulators.

Gensler has proposed a three-pronged regulatory approach: regulate derivatives dealers,

bring transparency to the OTC market, and move standard derivatives to regulated

clearinghouses. He cited estimates that half of all commodity and energy derivatives

transactions could be standardized.

cftc's trading proposals might not be too

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