CFTC Refuses Position Limits Delay

Terry Flanagan

Latest salvo fired over controversial proposal.

The Commodity Futures Trading Commission rejected by a 3-2 vote a request for a stay on its position limits rule pending resolution of a lawsuit challenging the rule.
Industry groups say that CFTC rulemaking process is fundamentally flawed.

The CFTC’s interim final rule on position limits, which was published on Nov. 18 and is due to take effect next year, is contingent on the CFTC’s definition of the term “swap” under the Dodd-Frank Act.

The International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (Sifma),  filed a lawsuit challenging the position limits rule, and requested that the Commission stay the effective date of the rule, pending resolution of the lawsuit.

In their lawsuit, ISDA and Sifma contend that the CFTC’s decision-making process in enacting the rule was procedurally flawed.

Among other deficiencies, the CFTC adopted the rule without making findings as to the necessity and appropriateness of the position limits, as required by statute, the suit alleges.  Furthermore, the CFTC failed to conduct any meaningful cost-benefit analysis and lacked a reasoned basis for its rule, according to the lawsuit.

The legal challenge is the first to arise from the Dodd-Frank rulemaking process, and follows similar challenges to other rulemakings under securities laws.

The derivatives industry has attacked the rule through comment letters, and the CFTC has given ground on some issues.

For example, it backed off on a proposal that would have set conditional spot-month limits on derivatives contracts.

A proposed rule issued by the CFTC in January set spot-month position limits at 25 percent of deliverable supply for a given commodity, with a conditional spot-month limit of five times that amount for entities with positions “exclusively” in cash-settled contracts.

But in its interim final rule, the CFTC dropped the requirement that positions be exclusively in cash-settled contracts.

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.

Another issue for dealers is the final rule’s provisions on aggregation of accounts and positions.

The proposed rules would have eliminated the Independent account Controller (IAC) exemption and restricted existing disaggregation provisions. In response to comments, however, the CFTC decided to retain the IAC exemption.

The IAC exemption preserved by the final rule permits disaggregation between proprietary positions and those managed on behalf of clients; the IAC exemption, however, does not permit proprietary positions to be disaggregated from other proprietary positions.

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