Chairman Timothy Massad and Commissioner J. Christopher Giancarlo of the Commodity Futures Trading Commission (the “CFTC”) delivered speeches at the Energy Risk Summit in Houston this week, providing a roadmap for the CFTC’s current and upcoming rulemaking as well as a policy perspective on the CFTC’s proposed position limit rules.

In remarks to the conference on May 12, Chairman Massad addressed a number of proposed CFTC rules pertinent to commercial end users, including CFTC proposals to clarify the status of contracts with embedded volumetric optionality for purposes of the swap rules and to reduce reporting requirements for trade options and illiquid swaps.  Massad also discussed the need to complete any outstanding rulemaking required under the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Massad indicated that the position limit rules were a priority, but that the CFTC needed to carefully evaluate hedging strategies and estimates of the “deliverable supply of a commodity” when considering the final form of such rules.  Massad also identified the posting and collection of margin on uncleared swaps, as well as swap dealer dollar-amount thresholds (the de minimis threshold) as targets for potential rulemaking in the near-term.  Specifically, Massad noted that the CFTC would be undertaking a study related to the potential change in the swap dealer de minimis threshold.  This is a significant issue for energy companies because if this threshold is lowered, additional energy companies may have to register as swap dealers.

Massad also discussed the CFTC’s perspective on recent enforcement actions, specifically with respect to benchmarks and automated trading.  Massad stressed the need for benchmark integrity, but noted that the U.S. system does not provide a government-sponsored supervisory regime for benchmarks as in Europe.  In addition, in response to the recent CFTC-Department of Justice action against an individual in connection with the 2010 Flash Crash, the CFTC is evaluating the need for additional regulation regarding automated trading.

Commissioner Giancarlo used his keynote address to the conference to deliver a strong critique of the CFTC’s position limits proposals.  In his address, Giancarlo stressed the need for quantitative, data-driven investigations to justify any proposed rules in this area, stating at one point that:

“[T]he only way to [determine whether position limits are necessary or appropriate] is to draw upon current and accurate data and confirm that any final rule will facilitate price discovery, maintain liquidity and not unduly disrupt markets that by all accounts are functioning fairly well . . . .”

In this vein, Giancarlo pointed out the lack of data showing that movements in commodity prices such as oil prices are necessarily the results of excessive speculation.  Giancarlo also alluded to liquidity challenges that are making it increasingly costly and harder to hedge that, according to the CME and ICE, are due to widening bid-ask spreads in certain commodity markets.  If anything, according to Giancarlo, there is not enough speculation in certain commodities markets.  Giancarlo proposed (1) the adoption of position accountability as a potential substitute for bright-line position limits and (2) a definition of “deliverable supply” that would more accurately reflect the deliverable supply for a regulated commodity like natural gas or electricity.  With respect to position accountability, Giancarlo noted that exchanges currently require position accountability reporting, and such reporting already reduces the potential for overly risky positions.

Giancarlo also took issue with the CFTC’s proposed exemption from position limits for bona fide hedging.  The proposed rules, if adopted, would unduly hamper legitimate hedging strategies such as those undertaken in connection with storage transactions and merchandising transactions, as well as cross-commodity hedging (e.g. using ultra-low sulfur diesel futures contracts to hedge jet fuel prices).

The recent speeches by Chairman Massad and Commissioner Giancarlo demonstrate that energy market participants must continue to follow developments at the CFTC, particularly those related to position limits and establishing best practices related to enforcement cases.