Washington (Platts)--29Jun2012/449 pm EDT/2049 GMT

A trade group representing more than 500 natural gas and oil companies is pressing the US Commodity Futures Trading Commission to further relax its controversial position limits rule beyond a proposed change to the rule the agency unveiled last month.

The CFTC on May 18 proposed changing its position limits rule by requiring companies to count the positions of an affiliate against the overall limits only if it owns more than 50% of that affiliate. The commission had originally set this ownership threshold at 10%.

But in a letter sent to the CFTC on Friday, the American Petroleum Institute called this 50% limit an "arbitrary benchmark" and said the limit should be raised beyond 50% as long as a company can show it does not control that affiliate. Just because a company may own more than 50% of another company, it does not mean it has any control of that company's trading operations, API argued.

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"Although ownership and control have been used interchangeably as proxies for the ability of an entity to engage in market manipulation or disruption, ownership by itself is meaningless without the ability to direct or influence the management of the owned entity," Kyle Isakower, API's vice president for regulatory and economic policy, wrote in the letter.

API argued that there are many situations where ownership may exceed 50%, but there is no risk of coordinated trading strategies. Joint ventures between commercial energy companies, for example, may have agreements to not share certain position data and wholly owned subsidiaries located outside the US may operate entirely independently.

The CFTC's proposal requires affiliated entities to show they have no knowledge of each other's trading decisions, but API argued that this should not apply to "non-trading personnel," such as accountants or compliance officers. In addition, API said the requirement for affiliates to have separately developed and independent trading systems would "impose significant compliance costs," and said a requirement for affiliates to maintain independence by establishing separate physical address should be relaxed to establishing simply separate trading floors, which could be housed in the same physical address.

When the CFTC unveiled the proposal to raise the aggregation limits to 50% from 10%, Commissioner Jill Sommers, a Republican who voted against the original position limits rule approved in October 2011, wondered if a "one-size-fits-all answer," was feasible.

"In the absence of knowledge of, and control over, trading of an owned entity, is there a real difference between owning 49% and owning 50%? I don't think there is," Sommers said.

Lawyers for the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association have argued in court papers that the CFTC's change to its original position limits rule was a concession by the agency that the rule was flawed. ISDA and SIFMA are suing the CFTC in federal court to have the position limits rule overturned.

--Brian Scheid, brian_scheid@platts.com
--Edited by Lisa Miller, lisa_miller@platts.com

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