NGSA Urges Changes to CFTC’s Supplemental Position Limits Rule

The Natural Gas Supply Association (NGSA) has recommended that the Commodity Futures Trading Commission (CFTC) tweak a proposed supplement to its position limits rule, after identifying three specific areas of concern.

Last May, the CFTC voted unanimously to put the supplement, which would affect the position limits proposal it made in December 2013, up for public comment (see Daily GPI, May 27). The supplement called for modifying the procedures that were originally proposed for anyone seeking exemptions from speculative position limits for non-enumerated bona fide hedging. The CFTC also planned to define procedures for recognizing certain anticipatory bona fide hedge positions.

“We commend and support the spirit of the proposed draft supplemental rule,” NGSA’s Jenny Fordham, senior vice president, said Wednesday. “Exchange administration of the hedge exemption is appropriate; however, we have identified key areas where the specifics of the proposal are not viable and conflict with good commercial hedging practices.”

Specifically, NGSA said the CFTC should avoid narrowly defining “economically appropriate” risks, and revise its guidance over a proposed test to determine whether cross-commodity hedges are “substantially related.”

“Congress intentionally made the standard for ‘economically appropriate’ a flexible one,” Fordham said. “There are risks other than price risks that are economically appropriate to address in the conduct and management of a commercial enterprise, including operational risk, liquidity risk, credit risk, locational risk and seasonal risk.

“An approach that is limited to addressing only price risk — or even more narrowly, only fixed-price risk — would unnecessarily threaten market participants’ ability to effectively hedge.”

On the “substantially related” test, Fordham said such hedges “must be considered in context, since highly correlated cross-commodity hedges are not always available. In many cases, perfect or near-perfect hedges just aren’t practically available, and a cross-commodity hedge should be considered economically appropriate.”

According to Fordham, the NGSA is also concerned with the CFTC’s “five-day rule,” which would require early liquidation of certain hedges during the last five days of trading, coinciding with bid week. “Such forced liquidation would leave market participants exposed during the expiry period, distorting market signals,” she said.

The NGSA filed its comments jointly with the National Corn Growers Association.

“We urge the CFTC to address these concerns, in addition to our long-standing request that the CFTC update deliverable supply methodologies to reflect actual market conditions,” Fordham said. “Markets can function well where speculative position limits are appropriately set and where exemptions for bona fide hedging are appropriately managed. While the proposal is a step in the right direction, changes are essential to ensure a viable hedge exemption process.”

In 2013, after withdrawing its appeal of a federal court decision that tossed a controversial final rule aimed at limiting speculative trading in the swaps markets, CFTC voted to propose new rules in place of the discarded position limits rule (see Daily GPI, Nov. 5, 2013). The proposed rule would implement section 737 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, clamping down on speculation in 28 selected physical commodity futures and swaps, including four energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and New York Harbor Heating Oil.

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