May 26, 2016 / 9:36 PM / 3 years ago

U.S. futures regulator adds hedging exemptions to position limit proposal

WASHINGTON (Reuters) - The U.S. futures contract market regulator moved closer on Thursday to finishing its rule on limiting positions that traders can hold in commodity markets, which is intended to head off oil and gas hedging abuse, by responding to industry concerns about “bona fide hedges.”

The three-member Commodity Futures Trading Commission unanimously approved a supplement to its 2013 proposal on position limits to “ensure that commercial end-users can continue to engage in bona fide hedging efficiently for risk management and price discovery,” said Chairman Timothy Massad in a statement.

“We appreciate the importance and complexity of the issues surrounding the position limits rule. No current commissioner was in office when these rules were proposed, and therefore we have taken the time to listen to market participants and consider the proposals very carefully,” he added.

The rule is required by the 2010 Dodd-Frank Wall Street reform law which called for the CFTC to set limits for futures, options and physical commodity swaps contracts as a way to prevent fraud and manipulation as well as excessive speculation.

Leading up to the law’s passage, numerous Congressional investigations uncovered that rampant speculation had caused market volatility and price spikes for physical commodities such as oil and natural gas, according to the rule proposal posted in 2013.

Pressure for a final rule has lifted recently as energy prices have plummeted. Meanwhile, Republican lawmakers have grown concerned that farmers and ranchers cannot use derivatives to hedge their risk.

The supplement approved on Thursday would create a new process for exchanges to recognize certain positions as “bona fide hedges” used to manage risk, and also would “exempt from federal position limits certain spread positions.” All exemptions would be subject to CFTC review, according to a summary.

Commissioner J. Christopher Giancarlo said the supplement would lead to a final rule that takes into “account certain practical realities associated with administering a workable position limits regime.”

Primarily, Giancarlo said that exchanges are in the best position to grant the exemptions.

“The supplemental proposal leverages exchange expertise and resources to enable exemptions to be granted in an efficient and timely manner without sacrificing market integrity,” he said.

Last week, Massad told a Reuters summit the commission plans on finalizing the position limits rule this year.

Reporting by Lisa Lambert

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