Position Limits on Heating Oil Contracts Included in Approved Senate Reform Bill
The best hope for position limits aimed at curbing speculators’ influence over the prices of heating oil and other energy commodities was approved by the Senate on Thursday as part of a financial overhaul bill. After months of public comment and internal debate, the Commodity Futures Trading Commission’s (CFTC) January proposal to limit how many energy futures contracts speculators can hold at a given time has been rolled into a sweeping financial reform bill, Bloomberg BusinessWeek reported on Friday.
The passage of the reform bill by the Senate provides some explanation as to why the CFTC has delayed any action on position limits (the public comment period on the proposal ended in late April). The CFTC would prefer that position limits be enacted by Congress in the form of federal law rather than declare their own regulations, which would leave them open to future legal challenges. Greenhouse gas emissions regulation is in a similar state of limbo: the EPA has affirmed its authority to enforce limits on emissions, but is holding off on doing so to give Congress a chance to legislate such limits with a broad energy/environment bill.
With strong public support for a major overhaul of the US financial system and approval of reform legislation from both houses of Congress (the House passed its own version of financial reform last year), enactment of position limits on energy futures appears to be within reach. Former CFTC director Michael Greenberger explained to BusinessWeek:
The chances that position limits will pass now are stronger than they were in January. If [CFTC commissioners] are waiting for a signal from Congress as to what the scope of their power will be long term, this is a pretty powerful signal.
Despite this recent step forward, the effectiveness and appropriateness of position limits and other regulations covering commodities-based derivatives is still the subject of much debate. A prevailing argument against the limits is that regulation of US commodities markets will only drive traders to trade on other international markets that are not governed by such regulations. CFTC chairman Gary Gensler has evidently had that criticism on his mind as he has traveled to London and Brussels, the locations of major international commodities markets, and advocated for harmonization of derivatives oversight. Gensler no doubt found a receptive audience in Europe, after “[t]he European Commission said in October that it would introduce in 2010 ‘ambitious legislation to regulate derivatives,’ including giving regulators the ability to set position limits.”
If the European Commission and US Congress do adopt derivatives regulation, coordinated oversight of the massive and opaque “over-the-counter” markets could begin. Greater oversight of the trading of commodities-based derivatives that includes enforcement of speculative position limits would bring more order and clarity to the trading of energy futures and, proponents claim, result in less volatility in the prices of heating oil, gasoline, and other exchange-traded products.
Even though both houses of Congress have passed their own version of financial reform, final passage of a reform package is anything but assured. The bills will have to be combined before coming to final votes in the House and the Senate. Wall Street lobbyists and other financial interests are working overtime to make sure their interests are represented in the reform package, essentially guaranteeing a contentious battle over the specifics of the legislation.
Despite the political uncertainty attached to the regulation of energy commodities like heating oil, the Senate’s passage of the bill last week was a crucial step toward new regulations intended to provide retailers and consumers with lower and more predictable heating oil prices. If those regulations survive the bitter debates in congressional committees and on the House and Senate floors, dealers and consumers could reasonably hope for more predictable heating oil prices as the next heating season begins.