US Commodity Futures Trading Commission (CFTC) staff weighed practical implications for potential revisions to proposed position limits rule for physical commodities, one of the most contentious energy provisions required by the 2010 Dodd-Frank Act.
The public roundtable marked the first public appearances of chairman Timothy Massad and commissioners Sharon Bowen and Christopher Giancarlo, who were confirmed by the US Senate on 3 June.
However, Massad and his fellow commissioners dropped no hints on how they might change CFTC position limits for 28 core commodities, including crude, natural gas, heating oil and gasoline meant to limit excessive speculation in those markets. The CFTC reopened the public comment period on the proposed rules on 22 May after energy traders and commercial hedgers complained that they are overly restrictive.
The rules were proposed last November under the leadership of former CFTC chairman Gary Gensler.
Today's hearing marked the first time the commission had a full complement since last July, after the departure of former Republican member Jill Sommers.
Massad limited his remarks to a brief opening welcome. Commissioners mostly left staff to conduct the meeting.
CFTC's proposed rule includes quantitative and qualitative tests to determine whether it is a bona fide hedge, whereby there must be an 80pc correlation between commodities in the hedge and a "reasonable commercial relationships" between the commodities in question. The rules also require companies to wind down their long positions within five days of the close of the spot month for all positions that exceed a company's unfilled anticipated requirements for the coming year.
Vitol general counsel Ron Oppenheimer cited gasoline as an example of the difficulties the cross-commodity hedging rules pose. Gasoline is composed of a number of component parts, each of which must be stored. Those components may not comprise an 80pc correlation, and would therefore have to be liquidated even though they are necessary to meet the formulation specifications of gasoline.
"This is a vast swath of the hedging that goes on in the energy space, and that's why it takes on a pretty significant importance," Oppenheimer said.
David Perlman, an attorney who represents the Coalition of Physical Energy Companies, said those tests would potentially penalize companies whose educated guesses about hedging do not materialize as planned. Hedging a commercial risk is necessarily a matter of anticipating future activities in the market, Perlman said, and that cannot be reliably done with 80pc accuracy. Perlman suggested instead having the commission presume hedges to be bona fide, subject to some minimal level of correlation and subject to audit by the exchanges or by CFTC after the fact.
Ed Prosser, vice president of agricultural trading at commodities trader Gavilon, said that no company hedges today in the way that CFTC's rules would require. Assets and contracts located in different places worldwide do not necessarily offset, and the rules should not assume that they do. "The reason that we do not all hedge gross is because it does not work," Prosser said. "It is not an effective hedge."
jh/dcb
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