The oil markets have been waiting for it since the summer of 2009; some players have even acted in anticipation already.
But it wasn’t until Thursday that the commodity world got details of what the CFTC really had in mind in terms of increased regulation of energy markets, and position limits.
So without further ado here are the main proposals, via Reuters (our emphasis):
RTRS – CFTC SETS LIMITS FOR ALL TRADING MONTHS COMBINED AT 10 PCT ON FIRST 25,000 CONTRACTS OPEN INTEREST, 2.5 PCT ABOVE 25,000 CONTRACTS
RTRS – CFTC WANTS SINGLE-MONTH POSITION LIMITS SET AT TWO-THIRDS OF THE ALL TRADING MONTHS COMBINED POSITION LIMITS
RTRS – CFTC WANTS SPOT MONTH POSITION LIMIT FOR CONTRACTS PHYSICALLY SETTLED AT 25 PCT OF ESTIMATED DELIVERABLE SUPPLY
CFTC SAYS PROPOSED RULES, IF FINALISED, WOULD AFFECT SOME 10 LARGE TRADERS, BUT THEY CAN SEEK EXEMPTIONS
The long awaited proposals, part of the Obama administration’s push to overhaul financial markets, will apply to the four most-traded energy contracts on the two major exchanges.
But it remains to be seen if the limits — which it said would affect only the 10 biggest position holders if implemented today — are sufficient to satisfy lawmakers who have clamored for regulatory action since oil prices surged to a record $147 in 2008.
While more rigid, the limits did not appear strenuous compared to the exchange’s own guidelines: A CFTC official said that if the rules were applied today, for example, the limit for NYMEX crude oil contracts across all months would be 98,100 contracts.
The NYMEX’s own so-called “accountability levels”, which were frequently exceeded, is 20,000 contracts across all months. “I think that first we’re going to err on the high side. We don’t want to do any damage,” CFTC Commissioner Bart Chilton told Reuters on Thursday, ahead of the release.
The four commodities to be affected will be oil, natural gas, heating oil and gasoline blendstock contracts on Nymex and ICE.
The proposals vary from existing limits already enforced in agricultural markets –which mostly focus on key limits in spot months — by targeting aggregated positions on physically settled and cash-settled contracts across the entire reported markets and on an owner level. They are responsive to the size of the overall market too.
It’s worth remembering that one key issue for the market was always going to be the CFTC’s treatment of so-called swap dealers – institutions like Goldman Sachs which bridge the worlds of physical and financial energy trading through their hedging operations.
Would they decide to treat them as speculators and remove critical hedge exemptions or permit them to continue loading up on as many futures as they liked? The justification for the latter treatment would be that these swap dealers operated in the interests of physical operators (even if they themselves weren’t strictly taking delivery or moving cargoes).
Well, according to today’s announcement a “limited risk management exemption” will be applied to differentiate them from ‘bona fide’ hedgers, who continue to have no limit:
RTRS – CFTC SAYS RULES WOULD ALLOW IT TO GRANT SWAP DEALERS ‘RISK MANAGEMENT’ EXEMPTION FROM POSITION LIMITS, CAPPED AT 2 TIMES PROPOSED NORMAL LIMITS
In other words: all you need to get more flexibility around the restrictions is to take on a physical hedging business, or go physical yourself.
Although we understand the bona fide and limited risk management exemptions will only apply to the hedging and physical activities of an institution and not its proprietary ‘speculative’ trading operations.
Long-only passive investors (aka evil speculators) won’t be entitled to exemptions but won’t be singled out either:
RTRS – PROPOSAL OFFERS NO SPECIAL TREATMENT FOR LONG-ONLY PASSIVE INVESTORS, SEEKS PUBLIC COMMENT ON HOW TO IDENTIFY, DEFINE SUCH POSITIONS
All in all the light-touch rules are good news for big institutional commodity hedging banks and intermediary physical players like Vitol, Trafigura and Glencore, and worse news for hedge funds and index-funds – the main conduit for allowing retail investors to gain exposure to commodities.
That said they’re certainly a measured rather than over-reactive response.
It will also be interesting to see how the proprietary trading operations of swap-dealing banks will fare without the ability to benefit from bona fide hedging exemptions.
The market will have 90 days to provide feedback to the CFTC.
Banks’ flashy commodity positions – FT Alphaville
How effective are speculative limits in commodities anyway? – FT Alphaville
Presenting, the ‘physical loophole’ – FT Alphaville
Dresdner/Commerzbank blames oil speculators – FT Alphaville