Washington (Platts)--7Dec2012/511 pm EST/2211 GMT

New speculative position limits set by the IntercontinentalExchange for natural gas swaps converted to cash-settled futures will "reduce market participation" and "harm liquidity and price discovery," BGEM said in comments filed with the US Commodity Futures Trading Commission.

ICE's new limits will adversely affect BGEM's ability to reduce commercial risk through cost-effective hedging, Houston-based BGEM, a unit of BG Group, said in the Thursday filing.

ICE completed moving its cleared over-the-counter products listed on its OTC energy market for trading as futures products on October 15. ICE announced the transition of OTC energy swaps to futures products in July in an attempt to shield many of its customers from new derivatives reform rules, particularly in the US.

In connection with this transition, ICE revised the spot-month position limits for majority of natural gas contracts involved in the move. Under CFTC guidance, ICE set them "at a level that does not exceed 25% of the estimated deliverable supply in the underlying cash market," ICE said in an August filing with the CFTC.

According to BG Group, 25% level is arbitrary and the use of deliverable supply by ICE as a basis for position limits is "not appropriate for cash-settled contracts," because deliverable supply is tied to "the physical limits of the market," which has little relation to cash-settled contracts.

Many position limits for cash-settled futures, such as Columbia Gulf Mainline Basis Swap Future, have been set at the levels "far below" 25% of deliverable supply, making the limits "too low to support a liquid financial market," according to BG.

In addition, BG said ICE's calculation of deliverable supply is "inaccurate" because it relies on data by Bentek Energy, which underestimates deliverable supply across the US, because "there is no current requirement for intrastate storage and pipelines to post deliveries." Bentek Energy is a unit of Platts.

According to the filing, there is no evidence that ICE's new position limits are "necessary" because ICE has not collected the requisite transactional data necessary to make finding that there is a potential of market manipulation.

In addition, the new limits were developed "without considering the true size of the financial natural gas market and did not factor in impacts from the implementation of the new limits on price discovery and liquidity."

ICE declined to comment on BGEM's statements.

CFTC has issued its own position limits rule earlier, which was vacated by Judge Robert Wilkins of the US District Court for the District of Columbia on October 1. The federal district court's decision was appealed by CFTC on November 15.

--Anastasia Gnezditskaia, ana_gnezditskaia@platts.com --Edited by Richard Rubin, richard_rubin@platts.com