In the latest chapter in their long-standing feud, IntercontinentalExchange is fighting CME Group's attempts to eliminate a conditional limit on financially settled natural gas contracts.
In a paper sent to the US Commodity Futures Trading Commission Friday afternoon, ICE argued that the conditional limit, which was first put in place in February 2010, has improved hedging between cash settled and physically settled contracts, curbed market volatility and helped keep gas prices low.
CME is only pushing to eliminate the conditional limit, ICE argued, in order to improve its "competitive position" in natural gas markets and is basing its arguments on a flawed analysis.
"The only party advocating for a change in the well-functioning status quo is CME, who is clearly biased regarding the issue and whose own analysis supporting the change is significantly flawed," ICE argued.
CME, the parent company of NYMEX, is pushing to eliminate the conditional limit which allows a market participant to carry a position in financially settled natural gas contracts that is up to five times the size of the physically settled natural gas contract's position limit as long as the participant does not hold a position in that physical contract in the last three days.
A version of this conditional limit is included in the CFTC's position limits proposal, which it unveiled in January and is expected to finalize this fall, although the limit is converted to an aggregate limit across designated contract markets, swap execution facilities and the bilateral over-the-counter derivatives market, according to ICE.
In a paper submitted to the CFTC earlier this month, CME argued that this conditional limit should be eliminated in order to "avoid decoupling the physical delivery spot market from the forces of price discovery by reducing market volume and increasing price volatility in the most sensitive trading moments in the delivery month."
"Our data shows that, since conditional limits favoring financial markets were implemented [in February 2010], volume in the NYMEX physically delivered Natural Gas contract during the settlement period on the last trading day declined by 16% and relative volatility increased by approximately 25%," CME wrote.
That analysis was withdrawn by the CME earlier this month, according to an ICE official.
Chris Grams, a CME spokesman, had not yet seen the paper when contacted Friday and did not have an immediate comment.
In its analysis, ICE alleges that CME based its arguments on bad data.
"CME's analysis contains errors, selectively uses and discards data, confuses correlation and causation, relies on misleading metrics to make a point, and even highlights facts that contradict its own conclusions," ICE wrote.
In its paper, ICE argued that the conditional limit should be preserved, since removing or reducing it "would disrupt present market practice for the sole purpose of enhancing CME's competitive position," and could eliminate "the ability of hedgers to cost-effectively take swaps to final settlement as necessary to perfect their hedges."
Lee Underwood, an ICE spokesman, declined to comment on the paper.
On the morning of August 5, CFTC Chairman Gary Gensler and seven high-level CFTC staffers met with five CME officials, including CEO Craig Donohue and Executive Chairman Terry Duffy, and discussed position limits, according to CFTC records.
A separate meeting on position limits was held that afternoon between ICE CEO Jeffrey Sprecher, Gensler and Eric Juzenas, Gensler's senior counsel, according to CFTC records.
