Sunday, September 25, 2011

Federal Legislation Would Curb Excessive Energy Derivatives Position Limits and Define Excessive Speculation

Concerned with proposed CFTC regulations on energy derivatives position limits, Senator Bill Nelson (D-FL) has introduced legislation under which no single investor could hold more than 5 percent of the oil futures market thereby greatly reducing speculators ability to manipulate prices. And because more speculators have jumped into the oil flipping business, said the Senator, the bill caps the overall level of speculation in the market at its average over the most recent 25 years. Rep. Peter Welch (D-VT) has introduced a companion bill in the House. The lawmakers say that the legislation could reduce present day levels of speculation by more than half.

The Anti-Excessive Speculation Act of 201, S 1598, would also clarify for the first time that one of the fundamental objectives of the Commodity Exchange Act is to ensure that the commodity markets accurately reflect the fundamental supply and demand for commodities, and establish the deterrence and prevention of excessive speculation as an express purpose of the Act. In order to end decades of legal uncertainty and ambiguity that has thwarted enforcement efforts, the Act defines “excessive speculation” and creates legal presumptions that would give rise to a determination that excessive speculation exists.

Under the draft, excessive speculaiton in a commodity market exists if speculative traders have a substantial impact on price discovery. For purposes of the Act, speculative traders must be presumed to have a substantial impact on price discovery if the CFTC determines that gross positions, long or short, attributable to speculative trading in a contract for future delivery, an option on such a contract, a swaps contract listed for trading on a designated contract market, or a swaps contract listed for trading on a swaps execution facility exceed the gross positions, long or short, attributable to bona fide hedging transactions traded in such a contract or option; or the average percentage of open interest, long or short, held by persons primarily engaged in speculative trading during the most recent 12-month period for which data are available exceeds by more than 10 percent the average annual percentage of open interest, long or short, held by persons primarily engaged in speculative trading during gthe preceding 25 years.

The draft also establishes individual statutory speculative position limits for energy futures, options, and economically similar contracts, whether they are traded on an exchange or over-the-counter. The position limits would be set at 5 percent of deliverable supply in the spot month and 5 percent of open interest in the out-months. The speculative position limits would not apply to bona fide hedging transactions. No single trader could hold more than 5 percent of the oil futures market, thereby greatly reducing the risk that any trader will be able to corner, squeeze, or otherwise manipulate oil and gas prices.

The legislation would also establish aggregate speculative position limits in energy contracts that would apply to speculators as a class of traders. The aggregate position limits would cap the overall level of speculation in the market at its historic, 25-year average. The effect would be to reduce oil speculation from about 45 percent of the total market to 20 percent of the market. The aggregate speculative position limits would not apply to bona fide hedging transactions

The Act also closes a loophole by requiring foreign exchanges seeking access to U.S. traders to adopt rules prohibiting excessive speculation that are comparable to the U.S. rules. It also broadly authorizeso the Commodity Futures Trading Commission to issue rules necessary to prevent persons from circumventing or evading the speculative position limits and to carry out the purpose of the Act.

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