In a statement released on Tuesday July 7, Gary Gensler, chairman of the CFTC, said the hearings would help determine "how the agency should use all of its existing authorities to accomplish its mission" to regulate the futures markets.
He highlighted the CFTC's role in setting position limits with respect to certain agriculture products. In the energy market, such limits are currently set voluntarily by futures exchanges. "The different regulatory approach to position limits for agriculture and other physically delivered commodities deserves thoughtful review," Gensler added.
The regulator will also look at the case for and against providing exemptions to position limits for certain hedging transactions or positions, including whether this should apply to traders using the futures market to hedge purely for financial purposes. The role of index traders and exchange traded funds (ETFs) in the market will also be examined during the hearings.
Intercontinental Exchange (ICE) has welcomed the CFTC's decision to discuss the initiatives and said it had already expressed concerns to the CFTC about the current processes for establishing position standards in the US energy markets. The CFTC requires ICE to adopt the same position and accountability limits as its competitor, Nymex. However, ICE said it had no access to the information, methodology or determining factors used by Nymex to grant hedge fund exemptions.
A statement from ICE said: "Despite the substantial increase in the size of the energy markets, including growth in contract volume, participants and physical production, position limits in US energy markets have remained unchanged for years. Therefore, it appears that hedge exemptions have been increasingly granted to meet the needs of market participants in today's large, global markets."
However, any changes are likely to affect market liquidity. Gregory Mocek, former director of enforcement at the CFTC and now partner, energy and derivatives markets group at law firm McDermott Will & Emery, said: "The implementation of federal position limits in the energy markets could have a dramatic effect on liquidity in the futures space. Depending upon how far the CFTC decides to go and how restrictive those limits are, you could see a dramatic reduction in speculation."
Mocek also applauded the CFTC for holding public hearings on the issue, warning that changing regulations can have serious repercussions on an open market. "It's important that there be a public discussion of the issues and a dialogue with those that trade on exchanges before any changes are made," he added.
Gensler also announced plans to change the regulator's weekly Commitments of Traders report, which details open interest levels for all commodity markets. As well as separating out and categorizing swaps dealers from the current "Commercial" category, the "Noncommercial" category will also be disaggregated so information on professionally managed market positions, such as hedge funds, is listed separately. All data on foreign contracts linked to domestic contracts will now be included and the CFTC will also incorporate data from contracts that perform a significant price discovery function.
No date was given as to when these changes would be implemented.
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