The Commodity Futures Trading Commission’s (CFTC) proposed rule on position limits continues to be a priority for energy market participants, as both Congress and the CFTC are actively reviewing this issue. The final rule threatens well-established hedging and risk management practices related to the trading of futures and swaps by energy market participants.
Recently, the House Committee on Agriculture held a hearing to review the futures, options, and swaps markets that the CFTC regulates. Among the topics discussed was the CFTC’s re-proposal on position limits (“Position Limits Proposal”). The Position Limits Proposal has been pending since the CFTC voted 3-to-1 on November 5, 2013 to propose revised regulations setting position limits on speculative positions in 28 “core” physical commodity contracts – including natural gas, crude oil, heating oil, and gasoline – and their “economically equivalent” futures, options, and swaps.
It is notable that since CFTC Chairman Gensler departed in January 2014, the CFTC has reopened the comment period three times. The comment period recently closed on January 22, 2015 and was re-opened again on February 25, 2015 with a comment deadline of March 28, 2015. In addition, since January 2014, the CFTC has held a public roundtable on position limits, addressed position limits at a CFTC Agricultural Advisory Committee meeting and will again address position limits at a February 26, 2015 meeting of the Energy and Environmental Markets Advisory Committee. To date, the primary concern raised by some in the industry is that the Position Limits Proposal narrows the definition the CFTC has used for decades related to what is “bona fide hedging.” Bona fide hedging is critical because it allows a commercial producer or user of the commodity, such as a refinery that uses crude oil futures contracts to manage price risk, to exceed the position limits in order to align its trading with its commercial needs. In short, the Position Limits Proposal provides a list of what constitutes bona fide hedging and some industry participants have argued that elimination of the existing process for end-users to seek non-enumerated hedging exemptions is not workable.
During the House Agriculture hearing on February 12, 2015, Chairman K. Michael Conaway (R-TX-11), stated his position, in part:
[A]s the Commission contemplates its position limits rule, it is not enough to regulate simply because the Commission has the power. The law directs the Commission to set new position limits “as appropriate” and “as the Commission finds are necessary” to curtail “excessive speculation.” As the Commission moves forward, its proposed rule must first explain whether or not price movements in commodities are based on reasonable market forces… The Commodity Exchange Act also includes an expansive definition of bona fide hedging which specifically includes anticipatory hedging needs. It is important that this exemption remain broad enough that legitimate commercial hedging activity can be sheltered from any limits the Commission may demonstrate are appropriate.
CFTC Chairman Timothy Massad provided an update of the CFTC position in his opening remarks:
Congress mandated that we implement position limits to address the risk of excessive speculation. In doing so, we must make sure that the market works for commercial end-users seeking to hedge routine risk through bona fide hedging. We have received substantial public input on the position limits rule which the staff is reviewing. Most recently, we received valuable input from participants at the December Agriculture Advisory Committee meeting. It is important that we consider these comments carefully as we develop a rule.
Position limits have been in proposal phase for a long time period – the first proposal was published in 2011 and was vacated in 2012 – and the industry remains poised to receive a final rule that does not disrupt hedging activities. While some believe the final rule will be issued later this year, given the time the rule has been pending, the final position of the Commission remains to be determined. Commercial end-user, including energy market participants, must remain attuned to shifts in the debate at the CFTC and in Congress on this issue or risk having current hedging practices negatively impacted by the unintended consequences of the position limits rules.