The CFTC is proposing rules that would set position limits on the size of positions that a person may hold in certain energy contracts traded on a futures exchange or exempt commercial market, subject to some exemptions. These limits would be in addition to any position limits or position accountability standards adopted by the market for its contracts. The rulemaking proposal was published in the Federal Register on January 26, 2010 and comments are due on April 26, 2010.
Under the proposal, the CFTC would set limits on the size of a market participant's positions in futures and options on futures traded on a CFTC-regulated exchange and in comparable contracts traded on an exempt commercial market that have been designated as significant price discovery contracts, on four energy commodities: Henry Hub natural gas, West Texas Intermediate (WTI) light sweet crude oil, New York Harbor No. 2 heating oil and New York Harbor gasoline blendstock. In practical terms, the limits would apply to New York Mercantile Exchange (NYMEX) futures and options on the energy commodities at issue and to the Intercontinental Exchange (ICE) Henry Hub Financial LD1 Fixed Price natural gas contract. NYMEX is a traditional futures exchange that is regulated under the Commodity Exchange Act (CEA) as a designated contract market; ICE operates under the CEA is an exempt commercial market.
The proposal is significant because it is the first time that the CFTC has sought to impose its own position limits on contracts that do not involve agricultural commodities and to impose limits on contracts listed on both traditional futures exchanges and exempt commercial markets. Historically, the CFTC has deferred to the markets alone to adopt position limits or position accountability standards for their contracts (putting aside age-based contracts). Under the CEA framework, however, the CFTC has the authority to adopt position limits applicable to any exchange-listed futures/options contracts and also to any exempt commercial market's significant price-discovery contracts. In July 2009, the CFTC designated the ICE Henry Hub contract a significant price-discovery contract (which was followed by ICE's adoption in October 2009 of its own position limits and accountability standards for that contract comparable to those in place at NYMEX for its Henry Hub contract). If the CFTC designates any other ICE contracts as significant price-discovery contracts for any of the energy commodities listed above, those contracts would also potentially be covered by the proposed position limit rules.
Under the proposal, the CFTC would adopt spot-month, single non-spot-month, and all-months-combined position limits for the covered contracts, subject to reset annually, based on deliverable supplies and open interest. Notably, the CFTC also is proposing non-spot-month position limits on the combined positions a person may hold in substantially similar energy contracts across markets, which at present would apply to the NYMEX and ICE Henry Hub contracts. The proposal also would apply a higher spot-month limit to a market participant holding cash-settled contracts, but only if such person also does not hold physically settled spot-month contracts.
The CFTC's proposal includes certain exemptions from the position limits. In addition to a traditional exemption for bona fide hedge positions, the rules would provide a limited risk-management exemption from non-spot-month limits for swap dealers to allow them to hedge their exposure under their over-the-counter energy-swap positions with end-users. As proposed, a swap dealer's maximum position would be capped at two times the size of the single non-spot-month or all-months-combined limit that would otherwise apply. The CFTC, though, is requesting comments on alternative approaches for a swap dealer exemption, as well as on numerous other issues listed in the rulemaking release.