CFTC Interpretation: Regarding the Meaning of "Unfilled Anticipated Requirements" for Purposes of Bona Fide Hedging under the Position Limit Rules

The Division of Market Oversight issued an interpretation addressing whether, under Part 151 of the Commission's regulations, an electric company may treat as a bona fide hedging transactions certain derivative transactions that reduce the price risk associated with its unfilled anticipated requirements for natural gas, even though it has entered into some long-term, firm purchases of natural gas at an unfixed price. The interpretation notes that unfilled anticipated requirements may be recognized as the basis of a bona fide hedging position or transaction under Commission Regulation 151.5(a)(2)(ii)(C) when a commercial enterprise has entered into long-term, unfixed-price supply or requirements contracts as the price risk of such "unfilled" anticipated requirements is not offset by an unfixed price forward contract as the price risk remains within the commercial, even though the commercial enterprise has contractually assured a supply of the commodity. Instead, the price risk continues until the forward contract's price is fixed; once the price is fixed on the supply contract, the commercial enterprise no longer has price risk and the derivative position, to the extent the position is above an applicable speculative position limit, must be liquidated in an orderly manner in accordance with sound commercial practices.

Paul Pantano of Cadwalader had submitted the request for interpretation to the CFTC.

Cross-Reference(s): CFTC Reg. 151.5(a)(2)(ii)(C), Reg. Part 151, Reg. 1.3(z); CEA Sec. 4a(c)(2)(A).

View letter in full here (links externally to CFTC website).