CFTC Commissioner Dan Berkovitz said the CFTC should address energy derivatives market developments through policies and regulations that facilitate competition. Among other agency priorities, the Commissioner supports plans to provide "meaningful position limits" to stop excessive speculation.

In an address before the Energy Risk 2019 Summit, Mr. Berkovitz stated that he is a sponsor of the CFTC's Energy and Environmental Markets Advisory Committee ("EEMAC") which advises the agency on emerging developments in the energy derivatives markets. In a meeting last month, the EEMAC considered:

  • hedging the price of crude on the U.S. Gulf Coast (ICE and CME introduced futures contracts for the delivery of West Texas Intermediate ("WTI") crude oil in Houston);

  • futures exchanges offering green contracts (e.g., carbon allowance, renewable energy and low-sulfur gasoil);
  • an increasing volume of U.S. crude oil exports and use of WTI futures; and
  • less speculative interest in the back end of the futures curve, possibly due to the "abundant oil supply."

Mr. Berkovitz urged the CFTC to address the trend of increased concentration and less dispersion of risk due to fewer competitors. To facilitate competition in the derivatives markets, Mr. Berkovitz:

  • advocated for keeping the swap-dealer registration threshold at $8 billion;
  • voted against the swap execution facility ("SEF") proposal, which he argued would increase levels of concentration by "eviscerat[ing]" the Dodd-Frank SEF requirement to provide market participants with "impartial access to the market";
  • encouraged the CFTC to work cooperatively with prudential regulators to ensure strong capital markets and encourage clearing and other risk-management services for end users; and
  • supported position limits to stop excessive speculation in commodity markets.

Mr. Berkovitz noted that the benefits of speculative position limits are "well established" and would prevent corners, squeezes and other forms of price manipulation.

Commentary / Steven Lofchie

The evidence for the benefits of position limits in the energy market is not well established. See, e.g., CFTC Energy and Environmental Markets Advisory Committee (EEMAC) Report on Position Limits [withdrawn]. Notably, when energy prices crashed, no speculators went bankrupt - which would seem very strongly to suggest that there were no speculators previously hoarding oil. Further, if energy prices go very high, energy producers are able to pump/produce more. The ability of speculators to effect prices of energy seems dwarfed by the power of sovereign nations to respond to price movements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.