CFTC Holds Energy and Environmental Markets Advisory Committee Meeting (with Delta Strategy Group Summary)
Commentary by Bob Zwirb and Steven Lofchie
The CFTC Energy and Environmental Markets Advisory Committee ("EEMAC") reviewed important new developments in the energy and environmental derivatives markets. EEMAC discussed new challenges and potential regulatory responses to ensure market integrity, competition and consumer protection.
Key takeaways from the meeting include:
- Chairman Massad stated that the timing to finalize the position limits rule has not changed and Commissioner Bowen expressed her desire to finish the rule by the end of the year.
- Participants indicated that the current position accountability regime works and a one-size-fits-all stance on estimating deliverable supply is not ideal.
- Participants generally agreed that current bona fide hedging practices such as anticipatory merchandising, gross hedging, cross commodity hedging and unfixed price hedges should continue.
- Some participants expressed concern over the "economically appropriate test" and its new interpretation in the proposed rule, stating that it does not provide any risk management value.
Click here to view a summary of the meeting prepared by Delta Strategy Group.
See: Commissioner Giancarlo's Opening Remarks; Meeting Questions for EEMAC Consideration; EEMAC Meeting Press Release.
Related news: CFTC Reopens Comment Periods for Position Limits and Aggregation Proposals (with Lofchie Music Selections)(February 24, 2015); CFTC's Energy and Environmental Markets Advisory Committee Announces First Scheduled Meeting(February 12, 2015); CFTC Announces Members of Energy and Environmental Markets Advisory Committee (January 26, 2015).
Commentary
This roundtable discussion raised a number of important concerns as to the position limits proposal. Serious questions were raised as to: whether the CFTC's narrow definition of bona fide hedging will allow commercial firms to properly manage risks; whether the CFTC's proposed restrictions will reduce liquidity and negatively impact price discovery; how the failure to recognize an exemption for general risk management and for merchandise and anticipatory hedging will make it more difficult for commercial firms to manage risk; and whether it is proper to apply a standard developed for agricultural products to energy and power contracts. An issue of very significant concern relates to certain real-world fact hedging scenarios that had been deemed permissible by CFTC staff under a prior definition for bona fide hedging (one that appeared in the position limit rule vacated by a federal court) and how those identical scenarios would not pass muster under the current proposal.
One might think that the problems revealed at this meeting would give pause to the CFTC Commissioners. Indeed, some of the more worrisome comments as to the CFTC's proposal came from those dealing with these issues in the real world, i.e., the regulatory heads of the CME and ICE, the risk managers of public utilities such as the Southern Company, and the compliance managers of energy companies. Indeed, a number of them raised serious questions as to the need for hard limits, pointing out that exchange accountability levels do a good job of preventing market abuses.
But in the end, it does not appear that any of this has dissuaded the CFTC, with the majority appearing to be simply in a "tweaking" mode. That is, while recognizing that a number of good critiques were made and while adjustments to the definition of bona fide hedging may be in order, nothing more fundamental is necessary. The majority is taking the view that Congress "mandated" this rule and the CFTC must follow through with it.
Commentary
It is hard to understand how the recent crash in energy prices does not detract from the self-assurance of those who were pushing for position limits based on the view that energy prices were driven by (evil) speculators. Fundamentally, this feels like the imposition of regulation because it can be imposed rather than because it will provide a clear benefit. It is not that we should be fundamentally opposed to increased regulation, but rather that we should be skeptical of it. It is not that the government will run out of things to regulate: why not focus on areas where there is at least some consensus that regulation will provide a benefit?