When Congress passed the Dodd-Frank Wall Street Reform Act in 2010, it mandated that the U.S. Commodity Futures Trading Commission (CFTC) reform the commodities marketplace by improving market oversight. In the six years since then, the CFTC has failed to enact position limits for commodities traders, which is widely seen as an essential way to protect small hedgers and minimize the effects of speculation by large investors who are not engaged in bona fide hedging activities.
The CFTC has developed proposed position limit rules that would give commodity exchanges a hand in setting the limits on traders who do business there. Many observers believe that the exchanges would be reluctant to harm themselves by setting tight position limits, so they would set generous limits that would not truly protect small hedgers.
When the Commission recently invited public comments on the proposed rulemaking, the New England Fuel Institute (NEFI) and the Petroleum Marketers Association of America (PMAA) submitted a letter together, which they addressed to Christopher Kirkpatrick, Secretary of the CFTC. The following is a condensed version of the letter.
Dear Mr. Kirkpatrick:
The Petroleum Marketers Association of America and the New England Fuel Institute together represent more than 8,000 petroleum marketers that own or supply motor fuels to 100,000 convenience stores and gasoline stations, and that deliver heating fuels to more than eight million homes and businesses in the United States. These companies rely on functional commodity derivatives (i.e., futures, options and swaps) markets to minimize exposure to price volatility and to provide customers with the most affordable product possible.
We appreciate the opportunity to provide the Commission with our thoughts on the Supplemental Notice of Proposed Rulemaking (“supplemental rulemaking”) on Position Limits published in the Federal Register on June 13, 2016. Our comments will be restricted to Part D of the supplemental rulemaking, which concerns “Exchange Recognition of Positions as Non-Enumerated Bona Fide Hedges.” Please note that PMAA and NEFI mean for this letter to complement, rather than supplant, previous comments on the December 2013 proposed rule that were submitted by our organizations independently and in conjunction with allied organizations in the Commodity Markets Oversight Coalition.
In countless comment letters and testimony before the Commission and relevant committees in Congress over the last 10 years, PMAA and NEFI have repeatedly urged the imposition of meaningful limits on speculative positions in the energy markets. As we have argued, position limits are vital in preventing price manipulation and excessive volatility in the commodity derivatives markets. In light of its longstanding abuse, we have also urged a narrow “bona fide hedge” definition that restricts exemptions to commercial entities that deal exclusively in the production, processing, refining, storage, transportation, wholesale or retail distribution, or consumption of physical commodities. Many associations that represent businesses and professionals in the transportation, energy and agricultural sectors have joined us in these calls for reform.
In Part D of the supplemental rulemaking, the Commission is proposing to revise and expand original Notice of Proposed Rulemaking published in December 2013. Specifically, the Commission is proposing to allow Designated Contract Markets and Swaps Execution Facilities (i.e., “the exchanges”) to recognize certain positions in commodity derivative contracts as non-enumerated bona fide hedges or enumerated anticipatory bona fide hedges, as well as to exempt from federal position limits certain spread positions, in each case subject to Commission review.
Our associations have been skeptical of the idea of ceding the Commission’s authority in approving bona fide hedge exemptions to the exchanges, as they are publically traded for-profit entities and not governmental agencies tasked with protecting the public interest. In recent testimony before the U.S. House Committee on Agriculture we noted that the exchanges “benefit from higher trading volumes and a large number of market participants” and as a result have a financial incentive to “institute broad hedge exemptions that may include non-commercial market participants (such as financial speculators).” Doing so would be in conflict with the Commission’s obligations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“the Dodd-Frank Act”) and consequently with Congressional intent.
Given this, PMAA and NEFI object to the supplemental proposal, as it would establish a dangerous precedent whereby the Commission cedes important Congressionally mandated authority—in this case, the issuance of bona fide hedge exemptions—to the exchanges. We understand that this proposal may have been influenced (1) by failure on the part of Congress to provide the Commission with the funds necessary to fully implement a robust position limits regime; and (2) a desire on the part of the Commission to complete outstanding Dodd-Frank rulemakings before the conclusion of the current Administration. We do not feel, however, that the end (enacting a final rule on Congressionally mandated position limits and bona fide hedge exemptions) justifies the means (ceding statutory authority to the exchanges).
PMAA and NEFI prefer that the Commission design an alternative process for the issuance of bona fide hedge exemptions. For example, the Commission might establish a streamlined process by which Designated Contract Markets and Swaps Execution Facilities recommend the issuance of non-enumerated bona fide hedge exemptions and advise the Commission on the reasons for their alleged necessity. Should initial review find them to be sufficiently “bona fide,” an interim approval could be granted until a final review and determination can be made by the Commission.