CFTC Commissioners Sharon Y. Bowen, J. Christopher Giancarlo and Mark Wetjen delivered their opening statements at the second meeting of the CFTC Energy and Environmental Advisory Committee (“EEMAC”). Commissioner Giancarlo began the meeting by highlighting the topics to be covered by the EEMAC.
The first panel considered a framework for the CFTC authorization of the exchanges to grant bona fide hedging exemptions for legitimate risk-reducing strategies. The panel also explored the possibility of exchanges administering a position accountability regime as a way to soften the impact of the declining liquidity of the spot period.
The second panel examined the possibility of adopting a phased federal position limits rule, the initial phase of which would cover the spot month. Commissioner Giancarlo said that this approach would avoid exacerbating the present liquidity problems outside of the spot month that were identified at the last EEMAC meeting.
Finally, the third panel explored trade options and forward contracts with embedded volumetric optionality (“EVOs”). Commissioner Giancarlo noted that the CFTC recently finalized a revised interpretation of the Commission’s seven-part test for EVOs, which provides market participants with certainty on whether their physically settled and often long-term contracts must be treated as swaps. Commissioner Giancarlo assured the Committee that the panel would provide it with an update on the degree to which the CFTC’s recent actions resulted in the intended regulatory certainty.
The Commissioners’ statements shared a common theme: that the CFTC should provide additional relief and clarity with regard to the regulatory treatment of volumetric options, which would allow end users in the energy and agricultural industries to make more productive use of their investments.
Commissioners Bowen and Giancarlo diverged in their views on positions limits. Commissioner Bowen stated that the CFTC should “buckle down and finish the [position limits] rule” rather than reopen the comment period for it yet again. Commissioner Giancarlo, who generally opposes the imposition of broad position limits, stressed that any such rules should be adopted slowly (if at all), beginning with spot month limits.
Lofchie Comment: The argument that Commissioner Bowen makes for not reopening the comment period again is that the comments received by the CFTC during its first reopened comment period were virtually identical to those that it received on the original proposal; thus, nothing would be gained by a second reopening. However, the reason that both sets of comments were so similar is because the CFTC did not take material account of the first set. Since the CFTC left its original proposal largely untouched, and since the CFTC Chair did not seem open to taking comments at the time, there was no reason to expect that the second set of comments would differ from the first. That said, reopening the comment period again would make sense if the CFTC took account of the first two sets of comments and issued a reproposed rule that reflected what it had learned.
Regarding the specifics of position limits, particularly concerning energy, it seems possible that persons who have been advocates of those limits might rethink their advocacy in light of the events of the past several years. Given the various conflicts in the Middle East, the developments in Russia, the sanctions against Iran, the ability of large oil producing countries to withhold or market supply, the growth of fracking and the crash in energy prices, is it plausible that evil speculators are going long on oil derivatives to drive up prices? Because if they were, then they would have been bankrupted by their utter failure, and I am unaware of any such bankruptcies. Doesn’t the reality of that situation do anything to dent the assertion that position limits are a worthwhile form of regulation?