Monday, June 20, 2011

Senate Legislation Would Direct CFTC to Impose Position Limits and Margin Requirements on Oil Speculation

Senate legislation would require the CFTC to impose unilaterally position limits and margin requirements to eliminate excessive oil speculation, which would remain in effect until the date on which the Commission establishes position limits to diminish, eliminate, or prevent excessive speculation as required by title VII of the Dodd-Frank Act. Introduced by Senator Bernie Sanders (I-VT) the End Excessive Oil Speculation Now Act, S 1200, would direct the CFTC to establish strong position limits to eliminate excessive oil speculation and impose margin requirements so investors would have to back their bets with real capital.

The measure states that it is the sense of Congress that, if finalized, the proposed position limits for derivatives that the CFTC included in the notice of proposed rulemaking entitled `Position Limits for Derivatives' (76 Fed. Reg. 4752 (January 26, 2011)) are not sufficient to fulfill the statutory requirements of title VII of Dodd-Frankto diminish, eliminate, or prevent excessive speculation.

The legislation has a number of co-sponsors, including Senator Bill Nelson (D-FL). According to Senator Sanders, Rep.Maurice Hinchey (D-NY) will be introducing this legislation in the House. Senator Sanders also noted that the legislation already has the support of a very diverse group of organizations representing small businesses, fuel dealers, consumers, workers, airlines, and farmers.(Cong. Record, June 15, 2011, p. S3

Senator Sanders noted that the measure would classify as speculators bank holding companies, investment banks or hedge funds that engage in proprietary oil trading. The CFTC Chair would also be given broad power to take any other actions needed to ensure that the price of crude oil, gasoline, diesel fuel, jet fuel, and heating oil accurately reflects the fundamentals of supply and demand.

Senator Sanders said that the legislation would require the CFTC to establish speculative oil position limits equal to the position accountability levels that have been in place at the New York Mercantile Exchange since 2001. The measure would also require the CFTC to double the margin requirements on speculative oil trading so that investment banks back their bets with real capital. (Cong. Record, June 15, 2011, p. S3822).

However, S 1200 provides that position limits and margin requirements established pursuant to the legislation would not apply to bona-fide hedge trading. The Act would define bona-fide hedge trading and bona-fide hedge transaction to mean a transaction or position that represents a substitute for a transaction made or a position taken at a later time in a physical marketing channel that is economically appropriate for the reduction of risks in the conduct and management of a commercial enterprise and arises from the potential change in the value of assets that a person owns, or, reduces risks attendant to a position resulting from a swap that was executed opposite a counterparty for which the transaction would qualify as a bona-fide hedging transaction.