CFTC Chair Heath P. Tarbert highlighted key hedging exemptions in the recently proposed new position limits for physical commodity derivatives. His remarks appeared in an interview with Bloomberg TV.
Mr. Tarbert praised the proposed amendments for specifically including the "right" hedging exemptions, stating that exemptions in prior rule proposals were not sufficient. Under the current proposal, the CFTC has somewhat liberalized the process of seeking an exemption. Specifically, the hedging exemptions would be:
- available for positions that satisfy all three of the following tests: (i) the temporary substitute text, (ii) the economically appropriate test, and (iii) the change in value requirement; and
- open to recognizing hedges that do not meet these requirements.
In addition to the new position limits proposal, Mr. Tarbert discussed several upcoming agency priorities.
Commentary Bob Zwirb
In his support of the CFTC's latest version of a new position limits rule, Chair Tarbert limits the stated rationale "to prevent[ing] things like corners and squeezes." This contrasts with ones previously employed by the CFTC, which ranged from preventing price inflation in the energy markets, to preventing systemic risk, to some nebulous "prophylactic" purpose, all of which were found wanting. It is not only good to see a more limited rationale, but one that fits within the agency's historic mission.
That said, one may take issue with Mr. Tarbert's characterization of the CFTC's 2012 final rule that "unfortunately . . . was struck down by the courts." (emphasis added). What was unfortunate about that case, however, was the agency's argument that it could impose limits without demonstrating that they were appropriate and necessary, without any serious cost/benefit analysis, and even without any need to review economic studies submitted by outside parties questioning whether position limits were effective or necessary, an argument that fortunately was rejected by the court. See ISDA v. CFTC, 887 F. Supp. 2d 259, 276 (D.D.C. 2012) (rejecting CFTC's argument that it had a "clear and unambiguous mandate" to set limits in the absence of such findings).
One may also quibble with Mr. Tarbert's critical comparison of speculation with hedging in his statement that "the goal essentially is to not allow people that are coming into our markets purely to speculate - they're not hedging anything - to get positions above a certain threshold." This juxtaposition, which suggests that too much of the former is bad, while the latter is always good, is not always valid. Cf. Sarah Toy, Hedging Strategy Likely Exacerbated Oil's Fall, Wall St. J. (Feb. 12, 2020) (noting that a rapid decline in the price of crude oil "was fueled by big banks making bets designed to hedge deals with oil companies").
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