Industry renews CFTC position limits concerns

OREANDA-NEWS. Oil and gas producers, utilities and exchange operators today voiced concerns about the Commodity Futures Trading Commission's (CFTC) efforts to set position limits for energy contracts and to modify rules governing when companies can hedge against commercial risk.

The CFTC has been struggling since passage of the Dodd-Frank Act in 2010 to write rules setting position limits for 28 energy, metals and agricultural commodity futures and options contracts, as well as the physical swaps economically equivalent to these contracts. Key contracts for crude, natural gas, ultra low sulfur diesel and RBOB gasoline are all captured under a pair of proposed rules, as regulators try to guard against excessive speculation.

But the CFTC's rulemakings also would affect whether a company's transactions qualify for a bona fide hedge exemption or get caught by the position caps.

To air concerns about the position limits rules, the CFTC – at the urging of commissioner Christopher Giancarlo – convened the first meeting of its newly reconstituted energy and environmental markets advisory committee.

"Dodd-Frank has had an impact on the markets. We cannot ignore that," electric generator Southern Co. manager of risk control Paul Hughes said. "The burden of excessive speculation that we are trying to relieve has become a burden of liquidity on hedging."

But the CFTC commissioners made clear they intend to proceed with the rulemaking. Commissioner Mark Wetjen said that Congress when writing Dodd-Frank mandated that regulators set position limits. "I do not think they were giving us an option," he said. "We have to do this job."

ConocoPhillips manager of corporate studies and initiatives James Allison, speaking after the session, said "the commissioners clearly are interested in hearing the concerns. They have got a tough job."

Limits on the Nymex Henry Hub natural gas contract have been a key area of concern. The Natural Gas Supply Association has argued that the calculations regulators use for estimating deliverable supply are woefully outdated in the wake of the shale boom.

At the meeting, the CFTC's Division of Market Oversight released new data showing that in 2013-14, 187 individual entities would have exceeded the agency's proposed limit of 1,000 contracts for the spot month, cash-settled contract, while 46 would have been five times over the limit.

Some 83 entities would have exceeded the 1,000 contract limit for the spot market, physical delivery over those two years. Those position limits would cover three days in the spot month. Exchange operators CME and Ice have similar position limits for those three days. That suggests many of these companies would have qualified under the exchange's rules for bona fide hedging exemptions.

Division of Market Oversight senior economist Steve Sherrod noted that only a handful of traders would have exceeded the CFTC's much higher limits for a single month or all months in a contract.

But participants took heart that some of their concerns appeared to give commissioners pause.

The commissioners were clearly interested in examples that Ronald Oppenheimer of the Commercial Energy Working Group gave of transactions that traditionally would have qualified for hedging exemptions but would not under the CFTC's proposed rules. Oppenheimer's working group represents producers, processors, merchandisers, and owners of energy commodities.

Energy companies are worried that the proposed rules would hamper their ability to hedge using cross commodity transactions involving, say, natural gas and power or fuel oil and crude. The agency's proposals would require that movements of the cross commodities correlate closely for those transactions to qualify for the hedging exemption.

Exchange operator CME chief regulatory officer Tom LaSala, speaking on the sidelines of the session, said that "cutting back on certain practices which today are allowable under exemptions that we have in the spot month would potentially be detrimental to the market."

Generator Exelon director of government and regulatory affairs and public policy Lael Campbell said what started out as a conversation about excessive speculation has thrust companies' hedge exemptions under the microscope. "It seems like the hedgers are the ones under attack here," he said.

But consumer advocacy group Public Citizen energy program director Tyson Slocum said that while he is sympathetic to companies wanting to engage in legitimate hedging "the lines between hedging and speculation had been intentionally blurred."

The CFTC initially approved a position limits rule in 2011. A federal court threw out the rule in 2012 over procedural issues. The agency proposed a new rule in November 2013.

While the CFTC has not set a deadline for completing the rulemakings, many observers expect they will finish their work this year.