CFTC Commissioner Brian Quintenz called for a reconsideration of the bona fide hedging provisions in the 2016 reproposal of the CFTC position limits rule. In remarks at the Commodity Markets Council State of the Industry 2018 Conference, Commissioner Quintenz said that the 2016 reproposal made significant improvements, but still needs adjustments to ensure an appropriate and effective position limits regime.

Commissioner Quintenz asserted that there are several tools already in place to address price volatility from excessive speculation, and that position limits should be tailored to fit within the broader scope of existing measures. He argued that position limits should (i) provide market participants flexibility to hedge risks efficiently, and not impose one-size-fits-all mandates, and (ii) avoid creating additional price volatility risks by hindering liquidity and price discovery. Specifically, he emphasized the need for ensuring that there are no unnecessary restrictions or burdens for firms to engage in bona fide hedging activity.

First, he contended that the reproposal's definition of bona fide hedging is not broad enough. Commissioner Quintenz observed that the "economically appropriate test" does not properly account for risks other than price risk. He said that the definition should be revised to encompass other risks that may contribute to price risk, thus allowing firms to appropriately hedge in accordance with several different types of risks. In addition, he expressed concern that firms would be required to hedge cash exposure on a net basis. Commissioner Quintenz argued that companies often participate in regional markets and, thus, may logically wish to manage exposures in a manner consistent with the complexities of their businesses rather than by adhering to a one-size-fits-all net hedging mandate.

Commissioner Quintenz further took issue with the reproposal's list of enumerated bona fide hedging positions. He stated that the list may be overly narrow, suggesting that the CFTC's default position should be that firms relying on bona fide hedging exemptions are engaging in legitimate activity, as opposed to taking the position that all market activity is speculative until proven otherwise. While broadly advocating for a more expansive list of enumerated bona fide hedging exemptions that appropriately consider legitimate commercial hedging activity, he specifically pointed to "anticipated merchandising activities" as activities that the CFTC should consider adding to the enumerated bona fide hedging positions.

On the subject of exchanges granting exemptions for non-bona fide hedging activities, Commissioner Quintenz indicated that the reproposal should be amended to make the process less burdensome for both market participants and exchanges. He suggested that there should be a process for providing greater regulatory certainty for market participants if the CFTC approves of an exemption granted by an exchange.

Commentary / Bob Zwirb

When all is said and done, the effort by Commissioner Quintenz and others to broaden the scope of what constitutes a bona fide hedge is aimed, as Professor Craig Pirrong, one of the members of the CFTC's Energy and Environmental Markets Advisory Committee ("EEMAC"), once put it, at "help[ing] hedgers escape limits intended to constrain speculators."

This is all for the good, but, again, as Professor Pirrong observed, this "at most . . . mitigates a harm, and at a cost." While mitigating that harm at minimal cost appears to be the worthy goal of Commissioner Quintenz here, the framework being advanced by the CFTC's reproposal will still subject market participants to "a heavy compliance burden," as Professor Pirrong puts it. That is why it is encouraging that at least one member of the CFTC is open to allowing the hedge exemption process (if not the entire position limits regime) to be administered by the exchanges, subject to CFTC oversight. While that would not satisfy the more fundamental criticism of imposing new federal position limits in the first place, it would at least be more in line with the recommendations made by the EEMAC in 2016, and by leading industry groups last year, that exchanges, rather than the CFTC, be allowed to administer the process for setting limits and hedge exemptions as well as allowing exchange-set accountability levels in place of government-mandated hard limits.

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