The US Commodity Futures Trading Commission wants to broadly expand the type of derivatives transactions that could be exempt from the agency's forthcoming commodity position limits regime, according to a draft of the final position limits rule obtained by Platts Thursday.
Since the position limits proposed rule was first unveiled in January as part of the agency's Dodd-Frank Wall Street Reform and Consumer Protection Act rulemaking process, several industry lobbying groups and energy trading firms had criticized the proposed exemption from position limits, known as the bona fide hedge exemption, as being too narrowly and restrictively written.
But, according to a copy of the final draft of the bona fide hedge portion of the position limits rule, the CFTC will exempt a number of derivatives transactions from the position limits regime that it may not have exempted from the rule it originally proposed.
"The commission has considered the comments and has expanded the list of enumerated hedge transactions, consistent with the statutory definition of bona fide hedging," the draft states.
For example, transactions that hedge anticipated merchandising activity -- such as a commercial energy company's sale of NYMEX heating oil futures to hedge the anticipated acquisition and eventual resale of a spot cargo of heating oil; or an electricity swap made by a power marketer to hedge against price increases as it awaits approval to purchase fixed-price supply for a utility -- may be exempted. In addition, royalty payments, such as the rights to receive volumetric production payments, and the hedging of service contracts would all be exempted from the position limits under certain circumstances, according to the draft.
The CFTC has never recognized anticipated ownership and merchandising transactions as bona fide hedges, according to the draft, but under the new position limits rule it would.
However, in order to prevent a potential loopholes or create an incentive to hoard capacity, the CFTC is proposing only exempting anticipatory merchandising transactions if certain requirements are met, such as: the hedger owning dedicated capacity; the hedge is in the form of a calendar spread; and the position is not maintained in any physical delivery contract during the last five days of a contract's trading, according to the draft.
In addition, if a hedge transaction is not exempted under the current rules, market participants could petition the CFTC for such an exemption.
The draft of the final rule makes it clear, however, that the CFTC did not concede to all requests from industry to relax the bona fide hedge exemption.
For example, the CFTC will not authorize a risk management exemption, which would allow participants hedging a general swap position risk to stay outside the limits, according to the draft.
In addition, just because a swap may fall under an end-user exemption and not face a clearing requirement under other Dodd-Frank rules, that does not necessarily make the swap a bona fide hedge and, in turn, exempt from position limits, the draft states.
Also, the draft rule claims that exemptions for arbitrage and spread positions are unnecessary.
The CFTC, however, will relax reporting rules on these hedges from daily to monthly reporting requirements, according to the draft.
The CFTC could vote on the position limits rule as soon as October 4, but a CFTC official, speaking on the condition on anonymity, said this week that the rule could be changed before commissioners vote on it and said the vote may be delayed further. CFTC Chairman Gary Gensler had said the CFTC planned to vote on the position limits rule at its September 22 meeting, but that meeting was canceled.
The final version of the position limits rule is expected to largely mirror the proposal unveiled in January and would impose limits on 28 core physical delivery futures contracts, including four energy and five metals contracts, in two separate phases.
According to the draft, however, the final rules will not include class limits for non-spot-month position limits, but retain these class limits within the spot-month.
