Position Limits Regulation - Comment Letter - Dr. John R. Morris & Dr. Lona Fowdur, Economists Incorporated - March 28, 2011

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Dodd-Frank Timeline, Position Limits for Derivatives
Interim and Final Rule VACATED BY COURT ORDER Re-proposed Rule Issue Comment Deadline (reopen February 26, 2015)
November 18, 2011 September 28, 2012 November 5, 2013 March 28, 2015

Position Limits for Derivatives
March 28, 2011

From the comment letter:

  • "Some aspects of the NOPR may be better suited for the idiosyncrasies of agricultural markets rather than the day-to-day realities of energy markets."
  • "The definition of bona fide hedges in regard to swaps trading may be overly restrictive and that they may in fact be detrimental to the efficiency and competitiveness of the energy market."
  • Prior interpretations of the CFTC's rules regarding bona fide hedging “provided flexibility for the Commission and the Designated Central Markets to review applications for bona fide hedging exemptions and make appropriate determinations that certain activities constituted bona fide hedging, even if there were not literally a later transaction in a physical marketing channel,” and that, in a prior interpretation of the old rule, the CFTC ruled that substituting later positions in physical marketing channels “is not a necessary or required condition of a bona fide hedge.”
  • Citing to the CFTC’s own interpretation of the Dodd-Frank Act: “the CEA places ‘no restriction on the Commission’s ability to define bona fide hedging for swaps…’”
  • The proposals "show a bias of an agricultural-market view and ignore the dynamic realities of modern energy markets."

The comment letter provides specific examples of a natural gas pipeline transportation hedge and a natural gas storage facility hedge, and recommends "that the Commission’s proposed definition for bona fide hedges either acknowledge that pipeline and storage hedges constitute bona fide hedges or that the definition, as it applies to swaps, be modified to allow for legitimate hedge transactions like pipeline and storage hedges to take place without the need for a subsequent physical cash transaction."

The letter closes with recommendations that the commission:

  • "revise the proposal to allow for anticipatory hedges, and
  • redesign the reporting process for bona fide hedging exemptions so that it is efficient and commercially practicable."


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