Thursday’s CFTC proposals on position limits in the energy markets were largely seen as a ‘light touch’ by industry voices. This is because, quantifiably speaking, they set loose limits that hardly went beyond those already enforced by exchanges in the form of accountability limits.
The CFTC also confirmed the new rules would only affect about 10 larger traders, who could probably seek exemptions anyway. That said, in historical terms, the limits would have prevented the likes of Amaranth, the USO and UNG amassing the sort of positions that skewed the markets in previous years.
Where the new rules really do stand out, however, is in their treatment of exemptions and trader classifications.
First, they appear to have ruled that passive long-only funds (along with funds generally) would never be eligible for exemptions.
Second, they initiated a “limited risk management exemption” for swap-dealers who were previously eligible for bona fide hedger exemptions.
Third, they appear to classify the speculative operations of bona fide hedgers and swap-dealers completely separately.
The above could have a bearing on physical trading intermediaries who consider themselves bona fide physical operators but who also operate sizeable speculative books (remember the case of Vitol?)
Meanwhile, it could also have a bearing on the prop desks of banking institutions — although it’s not clear to what extent a physical presence on the prop side could offset the restrictions.
Olivier Jakob at Petromatrix, for one, plans to investigate the matter further. As he stated on Friday on the matter:
The CFTC issued its Proposed Position Limit Rule for the energy futures. We still have to make a thorough analysis of the proposal. At first glance it does seem that the objective is to prevent a repeat of 2009 and the way some single-commodity ETFs cannibalized the Futures market. The CFTC took three examples to illustrate their ideas of position limits: Amaranth, the United States Oil Fund (USO) and the United States Natural Gas Fund (UNG). In the beginning of 2009 we had qualified the single commodity ETFs as a “cancer” for the Futures industry and in the end the exchanges have only themselves to blame for having allowed those risk-evasion instruments to blossom.
There is however a controversial part to the proposal: commercial traders and swap dealers could apply for exemptions but having a “hedging exemption” would limit their capacity to hold a “speculative position”.
We still need to make a full analysis of the proposal (hence we are not yet jumping to full conclusions) but it seems that the CFTC is trying to limit the capacity of some Wall Street institutions to be large swap dealers and large speculators at the same time, but in the process it could also lead to some limitations for certain large commercials that also have a speculative book.
We need to keep in mind that this for now is a proposal and it is still subject to the public comments for further review.
We would add that if Jakob’s interpretation is correct, it gives us a clue to the CFTC’s real thinking over who was responsible for last year’s energy price hikes.
That is to say, it’s telling that the CFTC opted to curtail physical operators’ spec ops and swap dealers on exemptions, while imposing fairly loose limits on everyone else — limits which in most cases will not have much of a bearing on index funds already in existence.
The CFTC has also demonstrated it understands that too oppressive a limit on all fronts would only have forced institutions and funds into the even murkier off-exchange world.
All in all, a hand well played by the CFTC.
CFTC targets funds in position-limit clampdown – 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