Page 10 - Oil and Energy January 2013
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10 • OIL
&
ENERGY
CONTACTS (left to right):
Michael Trunzo, President & CEO: michael
Jim Collura, NEFI Vice President for Government Affairs: jim
Mark S. Morgan, Esq., New England Fuel Institute Regulatory Counsel:
Washington Report
A service of
SM
A combination of deregulation at the CFTC coupled with
passage of the Commodity Futures Modernization Act (CFMA) of
2000 and insufficient CFTC funding allowed for trading activity
to move to under-regulated off-shore trading platforms, free
from speculative position limits. Before passage of the CFMA,
commercial hedgers comprised about 60 to 90 percent of the
open interest for commodities. Today, 60 to 90 percent is purely
speculative/financial trading. This level of speculation is excessive
and undermines risk mitigation and price discovery mechanisms,
exacerbates market volatility and unhinges markets from supply
and demand fundamentals.
For the first time, Dodd-Frank requires all swaps, whether
cleared or uncleared, to be reported to swap data repositories.
This is an important step to help the CFTC capture the trillions
of dollars traded in the opaque swaps market.
Commodity futures markets were established as a tool for true
physical hedgers to manage risk – they weren’t set up strictly for
investment banks to dominate the marketplace. This is a subject
we believe gets lost in the discussion from both parties. Hedge
funds, sovereign wealth funds and other institutional investors
continue to heavily invest in derivatives contracts for crude oil
and refined petroleum products, and enjoy little or no controls,
such as tough limits on speculative positions. Investment-only
speculators that engage in a “buy and hold strategy” serve no
purpose in the commodity markets other than to diminish its
role as a tool for managing risk and discovering a fair market
price for physical hedgers such as petroleum marketers, airlines
and farmers. Without sufficient oversight and aggregate position
limits from Title VII, commodity end-users such as petroleum
marketers, airlines, farmers and trucking companies will continue
to be held to the whims of Wall Street speculators.
Legitimate physical commodity hedgers should be protected
from these regulations. PMAA, NEFI and FMA members
believe that the CFTC struck the right balance between distin-
guishing commodity end-users and those in the market purely to
speculate. This is not to say that we are opposed to speculation.
We need speculation in the marketplace for physical end-users
to manage risk, but excessive speculation distorts the market and
creates tremendous volatility.
* * *
It is unfortunate that the U.S. District Court vacated the new
position limits rule, albeit on narrow grounds, and sent it back
to the CFTC for further consideration. However, the District
Court did not question the CFTC’s authority to address exces-
sive speculation. The court merely concluded that the statute
was ambiguous on the question of whether the agency must
set speculative position limits and that the agency failed to
address this ambiguity. We believe the court’s reasoning is
flawed and that the Congressional mandate to impose position
limits was unambiguous for a number of compelling reasons,
not the least of which is that Congress required position limits
to be imposed “within 180 days” for energy and “within
270 days” for agricultural commodities, and that a study be
conducted and presented to Congress on the final rule’s effect
on markets.
* * *
Finally, it’s unfortunate that the partisan tone has only ampli-
fied regarding position limits. As recently as the 110th Congress,
nearly 70 House Republicans voted to approve legislation
(H.R.6604) that would have established across-the-board posi-
tion limits and even provided the CFTC with 100 new employees
to carry out the its mission. Of these Republicans, 44 still serve
in the House of Representatives.
* * *
Given that the over-the-counter (OTC) derivatives market
has grown exponentially over the last 10 years, a small down
payment for the CFTC to ensure that these markets are reflec-
tive of supply and demand fundamentals is critical. Currently,
the U.S. OTC market totals $300 trillion with another $300
trillion traded worldwide. The CFTC’s $205 million budget is
inadequate to provide comprehensive oversight especially since
the agency is operating below early 1990s funding levels when
the OTC market was in its infant stages.
PMAA and NEFI support a $308 million appropriation for
future fiscal years and oppose any number that falls short of
meeting this request.
It’s critical that regulators get the futures/swaps market under
control for the benefit of the physical end-user and consumer.
Therefore, we urge this subcommittee to allow the CFTC to
do its job and implement pending rulemakings without further
delay. Reliable futures markets are crucial to the entire petro-
leum industry and consumers.
EDITOR’S NOTE:
Eric DeGesero, Executive Vice President of the Fuel Merchants Association of New Jersey (FMA), recently
testified in Congress before the House Financial Services Committee’s Subcommittee on Capital Markets and Government. He
prepared his remarks on the commodities marketplace in cooperation with NEFI and the Petroleum Marketers Association of
America. Below are excerpts from DeGesero’s written testimony.
DeGesero Testifies on Markets Before Congressional Committee
