CFTC Final Rule: Position Limits for Futures and Swaps

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Gavel.png FINAL RULE: approved at CFTC Open Meeting, October 18, 2011. However, on September 28, 2012, a U.S. Federal Court threw out the CFTC position limits rules, forcing the commission to consider redrafting the rules. For more information, visit the Position Limits Timeline.
Dodd-Frank Timeline, Position Limits for Derivatives
Interim and Final Rule VACATED BY COURT ORDER Re-proposed Rule Issue Comment Deadline (reopened July 3, 2014)
November 18, 2011 September 28, 2012 November 5, 2013 August 4, 2014

The final rule establishes speculative position limits for 28 physical commodity futures contracts, and futures and swaps that are "economically equivalent" to those contracts. These include:

  • Grain and livestock futures (corn, wheat, oats, rice, the soy complex, milk, coffee, sugar, cocoa, cattle and hogs);
  • Energy (crude oil, heating oil, natural gas and gasoline; and
  • Metals (gold, silver, copper, platinum and palladium.

There are separate limits set for spot month (generally, 25 percent of deliverable supply), and non-spot-month (generally, 10 percent of open interest in the first 25,000 contracts and 2.5 percent thereafter). Open interest used in determining non-spot-month position limits will be based on futures open interest, cleared swaps open interest, and uncleared swaps open interest.

The cash-settled NYMEX Henry Hub Natural Gas contracts will be subject to a cash-settled spot-month position limit and an aggregate limit (extending across positions in both physical-delivery and cash-settled natural gas contracts) set at five-times the limit that applies to the physical-delivery NYMEX Henry Hub Natural Gas contract.

Economically Equivalent Definition

  • a “look-alike” contract, meaning it settles off of its referenced futures contract or contracts that are based on the same commodity for the same delivery location;
  • a contract with a reference price based on only the combination of at least one physical commodity price and one or more prices in the same or substantially the same commodity as the relevant underlying futures contract, provided that such a contract is not a locational basis swap;
  • an intercommodity spread contract with two reference price components; or
  • it is priced at a fixed differential to an underlying futures contract.

Implementation Timeline

The final rules call for a two-tiered implementation of position limits:

  • Spot-month limits will be effective sixty days after the term “swap” is further defined under the Dodd-Frank Act. The limits adopted at that time will be based on the spot-month position limit levels currently in place at DCMs, and be reviewed biennially, with a determination based upon deliverable supply.
  • Non-spot month limits for corn, wheat, rice, oats, cotton, and the soy complex, will become effective sixty days after the term “swap” is further defined under the Dodd-Frank Act. The effective date for all others will be determined after the commission monitors open interest for one year.

Exemptions for bona fide hedgers have been broadened to include certain anticipated merchandising transactions, royalties, and service contracts in the final rulemaking to reflect concerns by commercial firms.

Related Documents: Fact Sheet, Q&A, Federal Registry Entry

References

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