Futures Industry Pushes Back on Position Limits

Terry Flanagan

The futures industry is pushing back against the U.S. Commodity Futures Trading Commission’s proposed rules on position limits for futures and swaps. It’s concerned that the proposed non-spot month limits likely will have unintended harmful consequences on the derivatives markets, including reduced liquidity for bonafide hedgers and impairment of efficient price discovery.

“The Commission should address spot month and non-spot month positions in phases. The Commission should limit the first phase of the position limits proposal to establishing spot month limits if it finds that such limits are necessary,” Walt Lukken, president and CEO of the Futures Industry Association, said in a comment letter posted Tuesday, the last day of the comment period. “The Commission then should address non-spot month positions in a second and separate rulemaking proceeding.”

The CFTC reopened the comment period to provide market participants with sufficient time to respond to questions raised and points made at a Feb. 26 meeting of its Energy and Environmental Markets Advisory Committee, which considered, among other matters, exemptions for bona fide hedging positions.

The rules, which were proposed in 2013, establish speculative position limits for 28 exempt and agricultural commodity futures and options contracts and physical commodity swaps and amend existing regulations for aggregation under its position limits regime.

Under the rules, 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, and may separately hold positions in cash-settled contracts up to that limit.

IntercontinentalExchange said in a comment letter that spot month limits should be based upon updated estimates of deliverable supply. In its current form, the CFTC proposes to adopt an expanded version of the DCM position limit regime and set position limits up to 25% of deliverable capacity for physically delivered contacts. This limit would be applied to exchanges on an aggregate basis, but financial and physically settled contracts will have separate limits.

ICE supports setting position limits at 25% of the most current estimate of deliverable supply and using alternative estimates for deliverable supply which reflect current market circumstances.

“Over the past decade, the domestic energy infrastructure has grown substantially; therefore, it follows that deliverable supply estimates should also increase,” ICE said in its comment letter. “ICE believes that the Commission should adjust the proposed rule to accommodate for these increased levels of market participation.”

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