CFTC: Fire Up the Lobbying Machine

On July 7 the CFTC announced they would be holding hearings (aka time to get the lobbying machine cranked up to 11) to determine the new regulatory regime of the futures market.

Aggregate Position Limits and Review of Hedge Exemptions for Energy Futures Markets

The Commodity Exchange Act states that the CFTC shall impose limits on trading and positions as necessary to eliminate, diminish or prevent the undue burdens on interstate commerce that may result from excessive speculation. The CFTC currently sets and ensures adherence to position limits with respect to certain agriculture products. This is not the case for energy markets. For energy commodities, futures exchanges set position limits and accountability levels to protect against manipulation and congestion. The exchanges are not required to set and enforce position limits to prevent the burdens of excessive speculation.

While the Commodity Exchange Act provides for exemptions from such limits for "bona fide hedging transactions or positions", the CFTC is currently reviewing the manner in which this exemption has been implemented. Recently, the Commission completed a comment period on whether the bona fide hedge exemption should continue to apply to persons using the futures markets to hedge purely financial risks rather than risks arising from the actual use of a commodity. In addition to the comments received, these hearings will further inform the rulemaking process for the Commission on this issue.

The New York Mercantile Exchange’s position accountability levels and limits restrict oil traders to 10,000 net futures for any one trading month, and 20,000 net futures for all months, though they can’t exceed 3,000 contracts in the last three trading days of the spot month. Natural gas traders are limited to 12,000 net futures and 1,000 in the last three trading days (more limits here).

Within the current guidelines (emphasis mine):

(A) Any person, as defined in Chapter 1, who owns or controls positions in excess of the levels cited in Chapter 9A, Appendix (A) below, under heading 9A.26 "All Month/Any One Month Position Accountability" shall be subject to the following provisions pursuant to position accountability levels:

(1) promptly supply to the Exchange such information as the Exchange may request pertaining to the nature and size of the position, the trading strategy employed with respect to the position, and the position owner's or controller's hedging requirements, provided, however, that if the position owner or controller fails to supply such information as and when requested, the Compliance Department may order the reduction of such position;

(2) agree, upon request by the Compliance Department, not to increase the position owned or controlled as of the time the request was received; and

(3) agree to comply with any prospective limit prescribed by the Compliance Department which exceeds the size of the position owned or controlled.

So essentially, you run up the limit, if (and its a big if depending on firm) the exchange requests information, you give them what you legally are bound to give them and go merrily on your way - oh yeah, wanna get around NYMEX limits? Move your orders to another exchange.

It will be interesting to see how Goldie (GS) and MS get around any new regulation or help shape regulation (but investment banks dont help shape their own regulation, right???).

Comments

[G. L. Turner:]

Right On, Bone Yard! - you get it!

Jul 09 11:48 PM