CFTC Proposes New Position Limits Rule

Terry Flanagan

The Commodity Futures Trading Commission on Tuesday voted to propose rules for aggregation of accounts and position limits in accordance with the Dodd-Frank Act.

Two years ago, the Commission had passed final rules on position limits for futures and swaps, but in September 2012, a district court issued an order in a lawsuit filed by the International Swaps and Derivatives Association and Sifma that generally vacated those final rules and remanded the matter to the Commission. The Commission is now re-proposing position limits for futures and swaps.

“We believe those rules as originally written could adversely affect liquidity and increase price volatility in the commodities and broader derivatives markets for end-users and all market participants. We are committed to working on behalf of our members in the U.S. and around the world with the CFTC to develop a regulatory framework that works to ensure safe, efficient markets,” said Robert Pickel, CEO of Isda, and Kenneth E. Bentsen, president of Sifma, in a joint statement.

Spot-month position limits will apply separately to physically-settled and cash-settled contracts: a trader may hold positions during the spot-month in physically-settled contracts in an amount up to the spot-month limit (which is set at 25% of deliverable supply), and may separately hold positions in cash-settled contracts up to that limit.

The Commission estimates approximately 400 traders may be affected by the proposed limits. This estimate of traders with positions that may exceed spot-month or non-spot-month position limits does not take into account the number of traders that would be eligible for bona fide hedging, pre-existing position, or other exemptions.

Commissioner Scott O’Malia said that new bona fide hedging exemptions in the reproposed rule—which include unfilled anticipated requirements for resale by a utility, royalties, and service contracts—were inadequate. “This position limits proposal is just the latest in this disturbing trend of narrowly interpreting the statute to foreclose viable risk management functions that did not contribute to the financial crisis. This trend is nowhere more apparent than in how narrowly the proposal defines the concept of bona fide hedging,” he said.

O’Malia noted that the vacated position limits rule explicitly recognized certain anticipatory hedging transactions as falling within the statutory definition of bona fide hedging, and provided exemptions for such transactions given the condition that the trader was “reasonably certain” of engaging in the anticipated activity.

“In this proposal, the Commission has changed its mind and has scaled back exemptions for anticipatory hedging,” he said. “In all, the Commission has rejected half of the common hedging scenarios described by a working group of end-users in their petition for exemption.”

Proposed amendments to the Commission’s current account aggregation standards are substantially in the vacated rule The amendments would permit additional exemptions from aggregation where sharing of information would violate or create reasonable risk of violating Federal, state or foreign jurisdiction law or regulation, and ownership interest is no greater than 50 percent in an entity whose trading is independently controlled.

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