CFTC relaxes proposed position limits on energy

The US Commodity Futures Trading Commission (CFTC) today proposed establishing position limits for key contracts for crude, diesel, gasoline and natural gas that are significantly looser than previously contemplated.

But the agency is considering taking a more mixed approach to metals, relaxing restrictions for gold and silver contracts, while adopting tougher limits for platinum, palladium and copper.

Unveiling its surprise, 910-page proposal, the CFTC announced it is considering allowing a company to hold far more contracts in energy commodities before hitting the position limits than in an earlier proposal released in 2013. The revised limits take into account new data on the "deliverable supply" of crude, gasoline, diesel and gasoline in the market that could fulfill the specifications of core NYMEX energy contracts.

The revised position limit for RBOB gasoline, for example, would increase nearly seven-fold to 6,800 contracts for a given spot month while the position limit for light sweet crude would more than triple to 10,400 contracts. The proposal would set a 2,000 contract limit for natural gas that was twice as high as before, while nearly tripling the position limits for ultra-low sulfur diesel to 2,900 contracts.

The proposed limits on energy commodities, set at 25pc of what exchanges say is the deliverable supply in the market, are designed to help prevent manipulative practices such as "corners and squeezes" in energy markets, while also promoting market liquidity. The proposed rule maintains an exemption from the position limits for commercial businesses using energy contracts to hedge against price risks.

The decision to re-propose the position limit rule comes as the agency is poised to flip to Republican control when president-elect Donald Trump takes office.

CFTC chairman Timothy Massad today said he does not want to adopt the regulations, only to then have the agency under new leadership choose not to implement or defend them.

"Our markets and the many end-users and consumers who rely on them are served best by having reasonable and predictable regulation," Massad said. "Uncertainty and inconsistency from one year to the next are not helpful."

The CFTC for the past six years has tried to adopt the position limits to fulfill a mandate in the 2010 Dodd-Frank financial overhaul law, which ordered the agency to set position limits to guard against "excessive" speculation in energy commodities within 180 days. But a court threw out its first attempt at the rule in 2012, and the agency has been struggling since that time to craft a replacement.

The CFTC today re-proposed its definition of what qualifies as a "bona fide" hedging position that would be exempt from the position limits, such as positions established in good faith prior to the effective date of the eventual regulations. The agency also offered more details on a process for exchanges to recognize exemptions to the position limits rule.

Republican CFTC member Christopher Giancarlo, who could become the next chairman of the agency, has criticized past versions of the position limits rule and pushed the agency to propose them again. Doing so would provide the public a chance to comment on the revised deliverable supply data and other changes, he said. But he offered tentative support for the new rule.

"I feel comfortable that the proposal before us provides the basis for the implementation of a final position limits rule that I could support," Giancarlo said.

Massad today acknowledged the revised position limits might still draw criticism and requests to expand position limits exemptions so they encompass "practically any activity with a business purpose." But Massad said he felt the proposal was balanced and achieved the objectives in Dodd-Frank.

For metals, the proposal would allow traders to hold up to 6,000 contracts in the spot month for gold and 3,000 for silver, twice as many as the earlier proposal. The spot month position limit for platinum would drop to 100 contracts, from 500. The limits for palladium and copper would drop slightly to 500 and 1,000 contracts, respectively.

The CFTC plans to take comment on the new proposal for 60 days after it is published in the Federal Register, meaning the regulation could not be finalized until well into 2017.