Managed Funds Association

POSITION LIMITS

CFTC ENERGY AND ENVIRONMENTAL MARKETS

ADVISORY COMMITTEE MEETING, JULY 29, 2015
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Introduction

MFArepresents the global alternative investment industry and its investors

by advocating for sound industry practices and public policies that foster

efficient, transparent, and fair capital markets. MFA, based in Washington,

DC, is an advocacy, education, and communications organization established

to enable hedge fund and managed futures firms in the alternative

investment industry to participate in public policy discourse, share best

practices and learn from peers, and communicate the industry’s contributions

to the global economy. MFA members help pension plans, university

endowments, charitable organizations, qualified individuals and other

institutional investors to diversify their investments, manage risk, and

generate attractive returns. MFA has cultivated a global membership and

actively engages with regulators and policy makers in Asia, Europe, the

Americas, Australia and many other regions where MFA members are market

participants.
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Introduction

MFA Members:

• Are active participants in the derivatives markets and rely on

fair, competitive, transparent and liquid markets;

• Play a vital role in the markets by assuming price risk from

commercial participants on the long and short sides of the

market, reduce market volatility; and

• Provide liquidity that facilitates price discovery and risk transfer

for businesses around the world.

MFA members perform an essential function in the energy

markets, as the above activities benefit hedgers, and all

consumers and producers of energy.
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CFTC Position Limits Proposal

Rulemaking on position limits should be empirically

driven and not a response to popular sentiment or

partial analyses.

• In general, MFA has been concerned that the CFTC has not

made an adequate finding with respect to the necessity of

imposing position limits.

• Nevertheless, if the CFTC determines to proceed with

implementing position limits, MFA recommends that the

CFTC obtain and use more accurate and complete data to

establish limits, and that it adopt position limits/position

accountability measures through a two-phase rulemaking

approach.
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A Two-Phase Rulemaking Approach

MFA Recommendation: The CFTC Should Adopt

Position Limits/Position Accountability Measures

Through a Two-Phase Rulemaking Approach.

Phase One:

1. Adopt spot-month position limits.

2. Adopt definition for a bona fide hedging transaction.

3. Rely on and review data from DCM position

accountability levels for non-spot months.

Phase Two:

1. Adopt position accountability levels for non-spot

months based upon data gathered during Phase One.
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Benefits of a Two-Phase Approach

Benefits of a Two-Phase Rulemaking Approach:

• Provides the CFTC with more time to gather accurate and

reliable data.

• Minimizes unintended consequences, decreases the risk of

market disruption and affords the Commission better data

on which to base non-spot month position accountability

levels/position limits.

• Provides market participants with time to comply with a

comprehensive position limits regime encompassing a

large number of contracts.
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Benefits of a Two-Phase Approach

Concern: The CFTC’s proposed limits are based upon

incomplete data.

• Position limits should be based upon accurate and up-to-date

data on deliverable supply and open interest, and take into

consideration OTC contracts.

• The CFTC won’t have accurate data on the breakdown of

hedging and speculative trading until it finalizes and

implements what constitutes a bona fide hedging transaction. 

• Setting non-spot limits prematurely based upon incomplete

data could reduce liquidity, cause bid-offer spreads to widen,

increase transaction costs, and harm the ability of commercial

market participants to use the futures markets to hedge risk.
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Benefits of a Two-Phase Approach

Concern: The proposed position limits are

miscalibrated and have been set too low.

• Table 11a appears to indicate that markets are functioning

with a high level of legitimate activity near, at or above the

proposed position limit levels.

• The proposed position limits will likely restrict current

legitimate activity.

• The CFTC has not made a finding that there is excessive

speculation at the position limit levels it has proposed.
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Benefits of a Two-Phase Approach

Concern: The open interest traits for the agricultural and energy

markets are different. The CFTC should continue to analyze

market differences and data before imposing non-spot limits.

• Different levels of open interest for agricultural and energy markets

establish a meaningful distinction between these markets. Allmonths-combined position limits in energy contracts could severely

constrain liquidity in longer-dated contracts as open interest in energy

markets may extend out for several months to years.

• The majority of open interest for agricultural commodities is

front-loaded in the first two or three contract months.

• In contrast, for many energy contracts, open interest extends out

for several contract months and years. E.g., open interest in ICE’s

Henry Hub contract extends out to at least 70 months.
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Benefits of a Two-Phase Approach

(Continued...)

• All-months-combined position limits in energy contracts could

severely constrain liquidity in longer-dated contracts, especially if:

• The limits are set in the same manner as for agricultural

contracts; and

• It is the same entities providing speculative liquidity in the longerdated contracts as in short-dated contracts.

• Relying on and analyzing data from DCM position accountability levels

during phase one will allow the CFTC to gather more data on the

energy markets, including market traits and data on OTC positions,

and to obtain deeper insight into market dynamics through dialogue

with market participants as they become near or exceed a position

accountability threshold.