Commercial Energy Firms Argue for Higher Position Limits for Cash-Settled Derivatives Contracts
Jonathan D. Gupta | Bloomberg Law
Hunton & Williams LLP, on behalf of the Working Group of Commercial Energy Firms1 (Working Group or Group), issued a comment letter on the Commodity Futures Trading Commission’s (CFTC) proposed rule on position limits issued per the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Limits for Cash-settled Contracts
The Working Group discussed the conditional exemption from spot-month position limits2 for cash-settled contracts (i.e., contracts where the cash equivalent of the underlying reference asset is paid from the seller to the buyer). The Group noted that the rule proposal would set spot-month position limits for cash-settled contracts at the same level as physically-settled contracts, namely 25 percent of “deliverable supply.”3
Higher Level for Certain Contracts
The Group offered several rationales for setting the spot-month limit at a higher level for cash-settled contracts. First, the potential impacts on pricing of cash-settled contracts are less significant than for physically-settled contracts, according to the Group. Further, the Group suggested that the currently proposed limits would likely reduce market liquidity and disrupt price discovery in the underlying markets.
Retention of Conditional Limits
The Working Group also discussed the CFTC’s proposed conditional spot-month limit for cash-settled contracts that would permit a trader to acquire positions five times the normal spot-month limit if the positions are exclusively in cash-settled contracts and the trader holds no more than 25 percent of deliverable supply of the physical commodity. The Group argued against compressing or eliminating this conditional limit, suggesting that lower limits would “severely disrupt the practices of the entire market,” since higher limits allow market participants to hedge their final settlement price risk more effectively. As such, the Group also suggested that any proposal to compress the conditional limits should be by way of a supplemental proposed rule allowing for an additional comment period.
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