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CFTC to review carbon, gas contracts

20 Apr 2010 20:37 (+01:00 GMT)
CFTC to review carbon, gas contracts

Washington, 20 April (Argus) — The Commodity Futures Trading Commission (CFTC) is again reviewing whether the Chicago Climate Exchange's (CCX) spot CO2 product performs a significant price discovery and is subject to regulatory oversight

The CFTC will hold a public meeting on April 27 to review the Carbon Financial Instrument (CFI) spot contract, as well as 23 other contracts on the IntercontinentalExchange (Ice) and the Natural Gas Exchange, including natural gas contracts traded on Ice.

If the CFTC issues an order determining the contracts perform significant price discovery functions, the CFTC must regulate the contracts and market participants, which may include setting position limits for traders' positions and large trader reporting requirements.

The CFTC first proposed to review the CFI contract in August 2009, after the commission found a different contract, the Ice Henry Financial LD1 Fixed Price Contract, served a significant price discovery function and was subject to position limits.

Each CFI contract represents 100 metric tonnes of CO2 equivalent. CFI contracts are comprised of exchange allowances and exchange offsets. Exchange allowances are issued to emitting exchange members in accordance with their emission baseline and the CCX Emission Reduction Schedule, while exchange offsets are generated by qualifying offset projects, the exchange said.

CCX would not comment on the proposed rule today but in August 2009, Richard Sandor, the exchange's chairman and founder, said the CFTC's review “reflects the increasing maturity of the carbon market and we welcome the critically important function that regulation and transparency plays in new and emerging markets of all kinds.”

In a separate action earlier this year, the commission moved to set position limits for futures and options contracts for Nymex or Ice for light, sweet crude; Henry Hub natural gas; New York Harbor No. 2 heating oil; or New York Harbor gasoline.

The proposal is part of the agency's move to avoid a repeat of the experience with hedge fund Amaranth, whose position limits were blamed for impacting the natural gas markets in 2006.

The CFTC is proposing limits for those key energy futures and options combined, as well as mini-sized contracts in the same commodities. The rule would set aggregate limits across all contract groups — all-months-combined, single-month and spot-month contracts would cover physically-settled and cash-settled contracts. The limits would be reset on an annual basis.

The rule does allow for an exemption for the use of the futures market to hedge against commercial risk. The CFTC is taking comment on its proposal through April 26.

Ice opposes the limits on oil and natural gas futures, saying they are ill-timed and “anti-competitive” for new or smaller exchanges trying to compete with incumbent exchanges.

CFTC Commissioner Bart Chilton said yesterday at a regulatory conference that he is dismayed by arguments against the position limits, which are “sensible” and will protect the market.

“I've been told that it will force markets overseas, that it will move trading into unregulated markets, that a poorly designed limit would harm price discovery and risk management,” Chilton said, adding that “perhaps energy position limits will start the Cold War again too, raise childhood obesity levels and create more volcanoes.”

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