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Commercial Energy Firms Argue for Higher Position Limits for Cash-Settled Derivatives Contracts

Monday, August 22, 2011
Jonathan D. Gupta | Bloomberg LawCFTC Comment Letter, Hunton & Williams LLP on behalf of the Working Group of Commercial Energy Firms (Aug. 16, 2011) Hunton & Williams LLP, on behalf of the Working Group of Commercial Energy Firms1 (Working Group or Group), issued a comment letter on the Commodity Futures Trading Commission's (CFTC) proposed rule on position limits issued per the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Limits for Cash-settled Contracts

The Working Group discussed the conditional exemption from spot-month position limits2 for cash-settled contracts (i.e., contracts where the cash equivalent of the underlying reference asset is paid from the seller to the buyer). The Group noted that the rule proposal would set spot-month position limits for cash-settled contracts at the same level as physically-settled contracts, namely 25 percent of "deliverable supply."3

Higher Level for Certain Contracts

The Group offered several rationales for setting the spot-month limit at a higher level for cash-settled contracts. First, the potential impacts on pricing of cash-settled contracts are less significant than for physically-settled contracts, according to the Group. Further, the Group suggested that the currently proposed limits would likely reduce market liquidity and disrupt price discovery in the underlying markets.

Retention of Conditional Limits

The Working Group also discussed the CFTC's proposed conditional spot-month limit for cash-settled contracts that would permit a trader to acquire positions five times the normal spot-month limit if the positions are exclusively in cash-settled contracts and the trader holds no more than 25 percent of deliverable supply of the physical commodity. The Group argued against compressing or eliminating this conditional limit, suggesting that lower limits would "severely disrupt the practices of the entire market," since higher limits allow market participants to hedge their final settlement price risk more effectively. As such, the Group also suggested that any proposal to compress the conditional limits should be by way of a supplemental proposed rule allowing for an additional comment period. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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