CFTC Trading Limits Regulation

U.S. Commodity Futures Trading Commission trading limits?

IntercontinentalExchange Inc. and CME Group Inc. shares plunged on Wednesday following news that the U.S. Commodity Futures Trading Commission is planning to propose huge trading limits on oil, natural gas and maybe other commodities.

CFTC Chairman Gary Gensler said Tuesday the CFTC will hold hearings this summer to consider imposing position limits for "all commodities of finite supply." The agency will also review whether swap dealers, index traders and exchange-traded fund managers should be allowed to get around those limits through special hedge exemptions.

Raymond James analyst Patrick O'Shaughnessy said that the news has been dragging down shares as investors are scared about how far the government could go with regulation.

"ICE is being hit by a double whammy," O'Shaughnessy said. "There are concerns about earnings, and you have multiple compression taking place because people are concerned about what the government could do next.

"It's changing the rules in the middle of the game."

Investors are similarly concerned about CME, he said.

While O'Shaughnessy said the initial market selloff seems to be an overreaction, J.P. Morgan analyst Kenneth B. Worthington said he views the reaction as "logical," given the recent runup in ICE shares, its valuation and the beginning of the seasonally slow summer.

"While concerns with regard to Gensler's actions will likely cap valuation for both ICE and CME near term, we believe regulatory fears are overblown," Worthington said in a note. "We expect ICE stock could head lower but suggest investors buy on the dip this summer."

He added that he doesn't think ICE trading will be hurt by regulations and said Gensler's investigation into position limits, hedge exemptions and transparency could be good for "market "integrity." However, Worthington said if "regulation gets restrictive, the new CFTC chairman risks lower liquidity and higher volatility in commodities markets."

O'Shaughnessy said the CFTC has jurisdiction over ICE's West Texas crude and natural gas products, which is about a quarter of its revenue. If the trading limits go through, he said, they could lower ICE's revenue by about 3% to 4%.

But O'Shaughnessy said the larger concern is whether London could take similar actions -- which could lower revenue by an additional 4% to 5% -- and whether the U.S. government could take further steps.

In a worst case scenario, CME -- which is completely regulated by the CFTC -- would lose about 3% to 4% of its revenue from the changes, he said.

U.S. Commodity Futures Trading Commission