CFTC Meetings on Position Limit Proposals and the Sugar No. 11 Contract 

May 15, 2014

 Key Issues for the Sugar No. 11 Contract:

Sugar No. 11 should not be subject to Federal position limits because it has no connection with interstate commerce.  Sugar delivered against the contract is not produced in the U.S., and under current U.S. sugar program provisions only a de minimis volume of sugar traded against the No. 11 contract is imported into the U.S.

The proposed position limit rules pose a threat to the price discovery function of the Sugar No. 11 contract, particularly during the last few trading days of the contract.  The proposed rules threaten the general utility of the contract as a hedging vehicle for commercial participants. 

Sugar No. 11 is a market that works—for commercial participants and for Exchange regulators – and the current regulatory regime for this product, which is overseen by the CFTC and incorporates rules subject to CFTC approval, should remain in effect.  

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Overview of Key Sugar No. 11 Contract Terms
        - Sugar No. 11 is the international benchmark for raw sugar trading:
        - ● Prices delivery of raw cane sugar, free-on-board the receiver’s vessel in the country of origin for the sugar--30 deliverable growths and well more than 30 delivery points;
        - ● Four contract months per year, trading out 3 calendar years; 
        - ● Single notice day after last trading day; 
        - ● Delivery period extends over 2.5 months due to the fob contract terms.

Most recent expiry (May 2014 delivery) saw  800,000 MT/16,000 contracts delivered by 9 different deliverers at 7 different ports in Brazil and Central America, with 1 receiver.

Receiver learned the delivery points and delivery volumes in each on May 1, and must charter appropriate vessels for each port to arrive and pick up sugar by July 15.

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Proposed Regulations Conflict with Sugar Commercial Market Practices
        - We believe the proposed Rules’ failure to fully recognize unfixed price commitments as bona fide hedging transactions will interfere with existing Sugar commercial market practices in which commercial market participants routinely commit to purchase/sell sugar at an agreed differential with the final price to be set later on a date chosen by the commercial contract counterparty.

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Regarding these types of unfixed price commitments, the Exchange and commercial participants do not have a good understanding of the reason the Commission does not view them as bona fide hedges except in very limited circumstances (offsetting obligations in different delivery months and not during the last three or five days of trading, depending on product).

Proposed Regulations Conflict with Sugar Commercial Market Practices - Commercial Risk Management Example
        - Contract terms agreed in March 2014—merchant sells 100,000 MT raw sugar to refinery in India to be priced against July 2014 contract minus 65 pts FOB basis, shipment May 1-July15 
        - Timeline: 
        - July 1- 15  loading slot
        - July 10-25 loading 
        - August 15-30 arrive at destination
        - Complete discharging by Sep 30
        - Sold as refined sugar in Q4

Refinery has price risk throughout timeline and may not want to fix the price until months after July contract expires.  Merchant accommodates refinery by permitting the pricing to be rolled to later futures contracts.  Merchant needs to continue to manage risk by carrying futures position against commercial contract until price is fixed.

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Proposed Regulations Conflict with Sugar Commercial Market Practices
        - Restrictions on anticipatory hedges

● Unfilled anticipated requirements and unsold anticipated production are limited in the proposed Rules to 12 months, while many commercial entities typically hedge larger quantities—the fact that futures contracts have a listing cycle of 24 months or more reflects this need.  

One example  - Sugar cane plants have a three-to-six year life cycle and producers need to manage their risk beyond 12 months of production.  

We do not understand the reasons for the 12 month limitation, and we believe that enforcement of this time limitation will force changes in current commercial practice.

● The proposal does not recognize anticipated merchandising, a critical function in commercial markets underlying Exchange contracts.  Again we believe that the non-recognition of legitimate anticipated merchandising will force changes in commercial practices that have been beneficial to market participants and have not created issues or problems in practice.

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Proposed Regulations Conflict with Sugar Commercial Market Practices

Proposed restrictions on the bona fide hedging definition during the last three or five trading days would further and significantly impede risk management programs that rely on the Sugar No. 11 contract.  

● Unlike the other delivery contracts at the Exchange, trading in Sugar No. 11 is active through last trading day.  Given this experience over many years, many commercial contracts in sugar permit the price to remain unfixed as late as last trading day for the contract and many entities wait until close to last trading day to price to minimize flat price risk exposure for the 2.5 month delivery period. 

Average daily trading volume in the expiring contract for the last 3 trading days in 2013 was 27,665 lots.  The average has been 16,952 lots for 2014, thus far.

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Proposed Regulations – Two General Comments

Proposed rules do not provide a process with time limits for the Commission or its staff to act upon requests from market participants for non-enumerated hedge exemptions.  Any guidance on that process or the timeline for consideration of such requests would be beneficial.

Position Accountability levels have been in place for Sugar No. 11 (as well as for Coffee and Cocoa) for many years, and have not led to any issues during that time.  We recommend the continued recognition of accountability levels rather than hard limits for any month and all month positions for the Sugar No. 11 contract, as we do not see any benefits from changing to hard limits for those categories for markets where position accountability has worked well.  Note that the current accountability levels for Sugar No. 11 are well below the levels where position limits would likely be set.

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Summing Up

Sugar No. 11 should not be subject to Federal position limits because it has no connection with interstate commerce.  

The proposed position limit rules pose a threat to the price discovery function of the Sugar No. 11 contract - particularly during the last few trading days of the contract –and thereby threaten the general utility of the contract as a hedging vehicle for commercial participants. 

Sugar No. 11 is a market that works—for commercial participants and for Exchange regulators – and the current regulatory regime for this product, which is overseen by the CFTC and incorporates rules subject to CFTC approval, should remain in effect.  

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