CFTC Proposed Rule: Position Limits for Derivatives, November 2013
|Interim and Final Rule||VACATED BY COURT ORDER||Re-proposed Rule Issue||Comment Deadline (reopen February 26, 2015)|
|November 18, 2011||September 28, 2012||November 5, 2013||March 28, 2015|
On November 5, 2013, the CFTC approved a proposed rule that would impose position limits on 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.
This rule is a re-proposal of a position limits rule that was approved by the commission in 2011, but was vacated by a court order in September 2012.<ref>CFTC in fresh bid to impose position limits. Financial Times. Retrieved on November 13, 2013.</ref>
The CFTC expects the position limits rules will affect about 400 firms, and are set high enough that only a few mutual funds or exchange-traded funds will be affected, according to John T. Hyland, chief investment officer of United States Commodity Funds, which manages $2.5 billion through 12 exchange-traded funds.<ref>Traders Face Curbs on Speculation With CFTC Vote on New Limits. Bloomberg. Retrieved on November 13, 2013.</ref>
The rulemaking was approved by a vote of 3-1, with Commissioner Scott O'Malia voting against. The rule appeared in the Federal Register on December 12, 2013, and the initial deadline for public comment was February 10, 2014, but the comment period was reopened three times in 2014. Comments may be filed HERE.
Also approved at the November 5 meeting was a proposed rule on aggregation of positions, which the commission deems necessary in order to prevent affiliated companies from sidestepping position limits rules by distributing positions among affiliates.<ref>Statement of Support by Chairman Gary Gensler: Aggregation Provisions for Limits on Speculative Positions. CFTC. Retrieved on November 5, 2013.</ref> The aggregation rule entered the Federal Register on November 15, 2013.
Position limits are intended to protect futures markets from excessive speculation that could cause unreasonable or unwarranted price fluctuations and are sometimes referred to as "speculative position limits", or "speculative limits". The Commodity Exchange Act (CEA) authorized the CFTC to impose limits on the size of speculative positions in futures markets.
The CFTC issued its final rules on position limits in October 2011. Compliance for spot month positions was to become effective on October 12, 2012, but in September 2012, a U.S. District Court vacated the rule and remanded it back to the CFTC. Though the commission initially filed an appeal of the ruling, it opted instead to withdraw the appeal and redraft a proposed rule, which was approved on November 5, 2013. The proposal entered the Federal Register on December 12, 2013, but the comment period has been reopened three times in 2014.
Summary of the Proposed Rule
- Spot month: Position limits would be set at 25 percent of estimated deliverable supply, applied separately for physically-settled and cash-settled futures and swaps.
- Non-spot month: Position limits would be set at 10 percent of open interest in the first 25,000 contracts and 2.5 percent thereafter. The initial levels will be set using open interest data in existing futures and swaps. The level will be reset at least every two years. Non-spot-month position limits would be calculated from the open interest totals for futures, cleared swaps and uncleared swaps.
- Exemptions: for bona fide hedging positions in physical commodities will be based on the Dodd-Frank Act’s new requirements for such positions, and the proposed rules add new exemptions for "unfilled anticipated requirements for resale by a utility," royalties, and service contracts.
Positions that are established "in good faith" prior to the effective date of the initial limits established by the regulations would also be exempt from limits.
Criteria for determining economic equivalence to a futures contract:
- look-alike contracts, meaning it settles off of the core referenced futures contract or contracts that are based on the same commodity for the same delivery location
- reference price contracts, based on only the combination of at least one referenced contract price and one or more prices in the same or substantially the same commodity, but is not a "locational basis swap";
- intercommodity spread contracts, with two reference price components, one or both of which are based on referenced contracts; or
- priced at a fixed differential to a core referenced futures contract.
Related Documents: Fact Sheet, Q&A, Federal Register Entry, Position Limits for Derivatives: Certain Proposed Exemptions and Guidance