Statement of Commissioner J. Christopher Giancarlo Regarding Trade Options Rule
April 30, 2015
I support the Commission’s proposed amendments to the interim final trade options rule. These are common sense reforms that will alleviate certain recordkeeping and reporting burdens that § 32.3 currently imposes on end-users that use trade options to manage commercial risk. The deletion of the reference in § 32.3(c)(2) to part 151 position limits is also appropriate in light of the fact that part 151 was vacated by the court in Int’l Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, 887 F. Supp. 2d 259 (D.D.C. 2012).
I strongly disagree, however, with the Commission’s statement that it preliminarily believes that any future application of position limits would be best addressed in the context of the pending position limits rulemaking. Simply put, position limits for trade options are not “necessary to diminish, eliminate, or prevent” excessive speculation. § 4a(a)(1) of the Commodity Exchange Act (CEA). The final trade options rule should make clear that trade options are exempt from position limits.
As the Commission recognized in promulgating the interim final rule establishing the trade options exemption, “position limits apply only to speculative positions…. Trade options, which are commonly used as hedging instruments or in connection with some commercial function, would normally qualify as hedges, exempt from the speculative position limit rules.” Commodity Options, 77 FR 25320, 25328 n.50 (Apr. 27, 2012).
By definition, the offeree to a trade option “must be a producer, commercial user of, or a merchant handling the commodity that is the subject of the commodity option transaction, or the products or by-products thereof,” and must restrict the use of trade options “solely for purposes related to its business as such.” § 32.3(a)(2). Moreover, the “option must be intended to be physically settled, so that, if exercised, [it] would result in the sale of an exempt or agricultural commodity for immediate or deferred shipment or delivery.” § 32.3(a)(3). Given these parameters, the risk that trade options could be used to engage in speculation, much less excessive speculation, is so remote as to be virtually non-existent.
Applying a position limits regime to trade options and requiring commercial end-users to seek bona fide hedge treatment for those transactions, which was floated as a possibility in the pending proposed position limits rule, would not be an acceptable outcome. See Position Limits for Derivatives, 78 FR 75680, 75711 (Dec. 12, 2013). As commenters to the proposed position limits rule have pointed out, there is no regulatory benefit to imposing position limits on instruments that inherently are not speculative in nature, and doing so “will distort commodity markets and impede economically efficient behavior” by discouraging the use of trade options. Natural Gas Supply Association Comment Letter dated Aug. 4, 2014 at 13. A comment letter filed by the Edison Electric Institute and the Electric Power Supply Association (Joint Associations) cites persuasive examples of how application of the proposed position limits rule would eliminate the ability of market participants to enter into multi-month and multi-year trade options. See Joint Associations Comment Letter dated Feb. 7, 2014 at 6-7; see also American Gas Association Comment Letter dated Feb. 10, 2014 at 5 (the lack of a contractual upper limit in the way that natural gas options are structured make position limit reporting impossible).
The Commission has the authority in § 4a(a)(7) of the CEA to exempt “any person or class of persons, any swap or class of swaps, any contract of sale of a commodity for future delivery or class of such contracts, any option or class of options, or any transaction or class of transactions from any requirement it may establish … with respect to position limits.”
As long as the specter of position limits hangs over trade options, market participants that have used these instruments for decades as a cost effective means of ensuring a reliable supply of a physical commodity and to hedge commercial risk will be reluctant to use them. As I have said before, commercial end-users, including commercial end-users of everyday trade options, were not the cause of the financial crisis and the federal government should stop treating them like they were.
I urge my fellow Commissioners to eliminate this regulatory uncertainty sooner, rather than later, by exercising our § 4a(a)(7) authority in connection with this trade options rulemaking. I encourage further public comment on the issue.
Last Updated: April 30, 2015