The White Paper recommends a hard position limit regime for energy markets, balanced with the assurance that such limits do not have a detrimental effect on price discovery and hedging functions of futures markets.
On September 16, 2009, CME Group released a White Paper (Paper) addressing concerns of “excessive speculation” in the energy markets. While dismissing the notion that “excessive speculation” was the cause of increased energy prices from 2007 to mid-2008, the Paper acknowledges that confidence in the markets may be undermined by the perception that speculators may be driving commodity prices. The Paper recommends a hard position limit regime for energy markets, balanced with the assurance that such limits do not have a detrimental effect on price discovery and hedging functions of futures markets. According to the CME Group, such hard position limits should be implemented in a way that would deter a displacement of trading to unregulated markets. CME Group also stated that it is “prepared to lead, but any steps taken to impose hard position limits must support the national policy of enhancing transparent markets and central counterparty clearing and prevent market participants from moving away from the best regulated, most transparent, safest marketplace to less regulated or even completely unregulated markets that are and will continue to be beyond the control of the Commission and Congress.”
Specifically, the Paper recommends the following measures:
- Each regulated exchange would set position limits for all months combined, single months and the delivery period, based on traditional considerations such as open interest and, at or near the delivery period, the deliverable supply.
- Until the U.S. Commodity Futures Trading Commission (CFTC) establishes a common exemption standard, each exchange would be responsible for administering its hedge exemption program for its markets. Additionally, Swap dealers and index funds would remain eligible for risk management exemptions to hedge bona fide exposure but would remain subject to position limits for their speculative trading.
- The CFTC should establish a system for reporting of end-user over-the-counter (OTC) positions, and the CFTC would be responsible for ensuring that an end-user’s combined on-exchange and OTC speculative positions do not exceed the aggregate total market position limit.
The Paper embraces the current regulatory structure where authority to enforce speculative positions limits is shared by both the CFTC and the designated contract market (DCM). Currently, the CFTC establishes and enforces speculative position limits on futures contracts for a limited group of agricultural commodities. For all other commodities, the individual DCMs establish and enforce their own speculative position limits, subject to the CFTC’s oversight.
However, the CME Group points out that the CFTC’s authority regarding position limits is limited to futures contracts traded on U.S. DCMs, derivates transaction execution facilities (DTEFs) and price discovery contracts on exempt commercial markets (ECMs). In turn, the CME Group recommends amending the Commodity Exchange Act to grant the CFTC authority to impose and enforce position limits on excluded OTC transactions. Additionally, in the Paper, the CME Group suggests that the ECM category should be eliminated and Core Principle 5 should be expanded to apply to DTEFs.
In supporting a hard positions limit regime, the Paper emphasized the need for ECMs and foreign boards of trade (FBOTs) to impose hard position limits for all similar contracts. Finally, the CME Group stated that “placing DCMs, ECMs and FBOTs on equal footing with respect to position limits will ensure that market competition among these trading platforms is based on liquidity, technology, clearing quality, price and customer service, and not regulatory arbitrage.”