On position limits, trading industry pushes hard against proposal for which it had pushed hard

Late last week, some of the world’s largest energy industry lobbying groups sent lengthy, detailed letters to the Commodity Futures Trading Commission outlining the numerous problems they had with the agency’s proposed changes to its position limits rule.

The letters were nothing out of the ordinary for industry groups which have fought the CFTC on nearly every financial reform rule it has pitched over the past two years. But there was one change: the idea the industry was so vigorously fighting against is now the one it had previously supported.

The proposed changes to the position limits rule are “constructive,” wrote lawyers for The Commercial Energy Working Group on the first page of a 14-page letter they wrote to the CFTC. But the letter also says the latest proposal would be “costly and impractical” without major changes.

“Absent further relief,” the lawyers wrote, “commercial firms and associated investors will be required to abandon existing ‘best practices,’ incur significant costs, and may be forced to engage in material restructurings with potentially adverse affects upon market liquidity.”

The group, which was previously known as The Working Group of Commercial Energy Firms and includes some of the most active energy derivatives trading firms such as Vitol, Gavilon and ConocoPhillips, had filed a petition in January to get the CFTC to relax the aggregation rules in its controversial position limits rule, which was finalized in October.

The limits, which are the subject of a federal lawsuit aimed at overturning them, would essentially prevent any one firm from holding what the agency deems an excessively large position in a given commodity (including crude oil and natural gas). The idea gets tricky, however, when you factor in all of a company’s affiliates, whose positions could also be counted toward those limits.

Under the CFTC’s original rule, an affiliate’s positions would count towards a company’s overall limits if that company owned more than 10% of that affiliate. But, in response to the Working Group’s petition, the CFTC proposed raising that aggregation limit to 50%.

The proposed relaxation of the aggregation rule brought the expected rebuke from financial reform advocates, such as Better Markets, who wrote that the CFTC was violating a “clear mandate” from Congress to set aggregate position limits. “This is a consequence of the law, and the CFTC has neither good reason nor authority to change the law,” Better Markets argued.

More surprising, was the response from industry, whose criticism of the rule was so voluminous that it almost seemed like it may have preferred the CFTC not changed the rule at all, never mind the fact that the change moves the limit toward what they sought in the first place.

The American Petroleum Institute called the 50% limit an “arbitrary benchmark.” The Working Group argued that the required non-stop communication between affiliates could raise “potential allegations of anticompetitive behavior,” while the Edison Electric Institute said the rules could cause its members to violate state laws. Many EEI members are barred by state public utility regulations from sharing “competitively sensitive information, such as position data, with affiliated competitors,” the group argued.

The dominant argument by industry appears to be centered on the CFTC abandoning the 50% threshold entirely.

“Aggregation is appropriate only when one entity controls the trading activity of another entity or has unfettered access to trading information of such other entity that could be used to facilitate its own trading,” the Commodity Markets Council wrote. “Absent such control and access to information, aggregation should not be required, regardless of the percent ownership or equity interest in the owned entity.”

Commissioner Jill Sommers, a Republican who voted against the original position limits rule, wondered if a “one-size-fits-all answer” was even feasible.

“In the absence of knowledge of, and control over, trading of an owned entity, is there a real difference between owning 49% and owning 50%? I don’t think there is,” Sommers said when the CFTC originally proposed the change to the rule.

It remains unclear if or when the agency will finalize the proposed change to its position limits rule. But the limits are expected to be imposed 60 days after the agency finalizes its definition of the term swap. A vote on that definition is scheduled for next Tuesday.

 Platts