CFTC’s Gensler sees chance of position limits on energy trading already in fall

Exclusive reporting for FinReg21 by Darrell Delamaide 

The Commodity Futures Trading Commission may publish draft rules on position limits for energy trading as soon as this fall, chairman Gary Gensler said.

The CFTC chief made his remarks on CNBC after the third day of hearings on whether to impose the limits for oil, natural gas and electricity futures. Currently, the agency only imposes limits on agricultural commodities, while the New York Mercantile Exchange sets limits for near month contracts as they near expiration to dampen last-minute speculation.

Open questions remain: How large should the limits be, which contracts should they effect, and who should qualify for an exemption from the limits.

Over the course of the hearings, which began last week and continued on Wednesday, Gensler seemed to grow surer about the need for the agency to act.

In his opening remarks on Wednesday, Gensler again said that the CFTC should “seriously consider” position limits. He gave several reasons, starting with the agency’s statutory mandate to reduce the impact of excessive speculation.

He also said there is no reason to apply position limits to some physical products like agricultural commodities and not to others.

“I believe that position limits should be consistently applied across markets for physical commodities of finite supply,” Gensler said.

Just because the energy markets are bigger than those for agricultural products is no reason not to impose limits, he said.  “To the contrary, I believe that the size of the markets and the effects that they have on the day-to-day lives of the American public make it that much more important that we aggressively fulfill our mandate,” Gensler said.

As large as these markets are, there comes a point when a trader becomes so large that he detracts from liquidity and limits the number of market participants, Gensler said. “Position limits should enhance liquidity by promoting more market participants rather than having one party that has so much concentration so as to decrease liquidity,” he said.

At Wednesday’s hearing, a representative from the Industrial Energy Consumers of America, a group of diverse businesses that consume energy, urged the commission to imposed limits because speculation is causing price volatility that hurts industry.

“We believe that excessive speculation is a reality that must be addressed through aggregated position limits, limiting speculative transaction exemptions and increased oversight,” Cicio said in his testimony. He singled out exchange-traded funds for having an impact on price discovery in the energy markets.

However, the operator of the two biggest energy ETFs argued that the funds behave like commercial hedgers and should have an exemption from any limits. John Hyland, chief investment officer of U.S. Commodity Funds, presented data that he said demonstrated the fund trading – which is passive and unleveraged – did not impact prices.

Last week, major financial institutions that trade in commodities, JP Morgan Chase and Goldman Sachs, testified that they should not be subject to position limits because they trade on behalf of numerous and diverse clients.