The CFTC Energy and Environmental Markets Advisory Committee reviewed proposed rules on position limits for derivatives. The proposed rules include (i) spot months, single month, and all month-combined and (ii) bona fide hedge exemptions from such limits.
In written remarks, Chair Heath P. Tarbert encouraged the CFTC to be "mindful of the balance" between position limits that are high enough to allow for (i) liquidity provision and (ii) "a healthy level" of speculative trading, and also low enough to inhibit excessive volatility. Regarding the scope of bona fide hedge exemption, Mr. Tarbert expressed interest in expanding the enumerated hedging strategies to include "all legitimate" strategies.
Commissioner Brian Quintenz endorsed expanding or further clarifying hedging practices, with an emphasis on cross-commodity and anticipated merchandising hedges. Mr. Quintenz supported the position limits proposal but wants potential improvements that can better accommodate commercial hedging practices.
In his written remarks, Commissioner Dan M. Berkovitz focused on recent activity in oil futures markets, and said the "CFTC must determine the causes of the divergence." He said that such an analysis could inform the CFTC "on the effectiveness of the current and proposed position limits and accountability levels for crude oil futures contracts." Mr. Berkovitz also urged the CFTC and the Chicago Mercantile Exchange to consider the effect of exchange-traded funds and other passive investment vehicles on the structure of, and liquidity in, oil markets.
Commentary
It seems curious that the CFTC is moving towards the establishment of position limits just after the utter collapse of the energy market. The last few months have shown that the United States, Russia, Saudi Arabia and Iran can't control energy prices. Does the CFTC really believe there is some wealthy wizard behind the curtain who can corner the energy market? For that to happen, the wizard had better have a wallet thicker than that of any government, and use the Grand Canyon for storage capacity.
Originally published May 07, 2020
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