13 July 2009


Justin Schack

VP Market Structure Analysis

Joe Gawronski


Rosenblatt Securities Inc.
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Statement by Chairman Gary Gensler on Speculative Position Limits and Enhanced Transparency Initiatives
—CFTC Statement 

Today, I am announcing that the Commission will be conducting a series of hearings during the months of July and August. … Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline and other energy products. 

Our Take: Overreaction to the prospect of additional energy-trading regulation may provide a long-awaited entry point into ICE and CME for investors. The situation is not without risk, however, as there are several differences between now and last summer, when regulators decided against imposing speculative position limits. Oil and gasoline prices had already peaked by the time last year’s efforts built momentum, and the CFTC and congressional Republicans held firm against intervention. Now, energy prices are trending upward despite woeful macroeconomic fundamentals and Democrats have far greater power in Washington. Consequently, politicians may be more successful in passing populist measures that “strike back at the evil speculators” despite empirical studies justifying inaction (a situation that is eerily similar to the debate over restoring the “uptick rule” in US equities, by the way). Increased position limits would undoubtedly hurt both ICE and CME, which derive more than half and about a quarter, respectively, of revenues from energy trading. And ICE may be more negatively affected even though the UK’s FSA, rather than the CFTC, regulates much of its energy business. Consider UK Prime Minister Gordon Brown and French President Nicolas Sarkozy’s July 8th Wall Street Journal op-ed calling for curbs on oil market volatility, including potential measures to dampen futures speculation. The CFTC and FSA also have a record of cooperation with respect to regulating ICE, illustrated by their June 2008 agreement on trading limits for ICE Futures Europe’s WTI oil contract. Furthermore, US regulators are likely to push for global coordination on this issue so position limits don’t push volumes offshore. Continued headline risk certainly could weigh on the stocks, but the recent selloff in ICE and CME seems more severe than the potential negative impact of additional regulation warrants.

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