Position Limits Regulation
|FINAL RULE: Position Limits for Futures and Swaps 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.|
|Interim and Final Rule||Effective Date||Compliance Date (Spot Month)|
|November 18, 2011||January 17, 2012||October 12, 2012 VACATED BY COURT ORDER|
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. 
At its October 18, 2011 open meeting, the CFTC issued its final rules on position limits for futures and swaps. 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 Commodity Exchange Act (CEA) authorized the Commodity Futures Trading Commission to impose limits on the size of speculative positions in futures markets. Core Principle 5, of Section 5(d) of the CEA, requires designated contract markets to adopt speculative position limits or position accountability for speculators, where necessary and appropriate, to reduce the potential threat of market manipulation or congestion, especially during trading in the delivery month. Hedge positions as defined by the CFTC and exchanges, are generally exempt from position-limit requirements, but they are not exempt from CFTC and exchange reporting requirements.
Section 737 of the Dodd-Frank Act mandated that the CFTC "limit the amount of positions, other than bona fide hedging positions, that may be held by any person with respect to physical commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of a designated contract market (DCM), as appropriate." 
At an open meeting on December 16, 2010, the CFTC proposed a rule regarding the setting of position limits for derivatives participants, but the meeting adjourned with no vote. The discussion continued at the CFTC open meeting on January 13, 2011 where the proposal passed 4-1. 
Position Limits Regulation Timeline
- In early 2010, The Commodity Futures Trading Commission held discussions on energy position limits. CFTC Chairman Gary Gensler said the agency is considering setting limits on energy contracts to limit disproportionate energy speculation. If the rule is put into place, it will apply to trading on regulated futures exchanges, derivatives transaction execution and electronic trading facilities. 
- In a late-July 2010 interview with Reuters, CFTC Commissioner Bart Chilton said a new speculative position limit regime will also apply to metals and soft agricultural commodities, in addition to the energy market limits proposed in January. The regulator will use new authority granted in the Dodd-Frank Act to apply curbs to "all commodities of finite supply," Chilton said.
- In November 2010, CFTC's Gensler said the regulator would take up the issue of position limits at its December 1, 2010 meeting.
- In December, 2010, the CFTC began deliberation of position limits for derivatives at its December 16, 2010 open meeting. The issue was tabled until the following meeting, which was held on January 13, 2011.
- In January 2011, the CFTC issued a proposed rule to establish position limits on futures contracts and some swaps in agriculture, energy and metals markets. In a speech from CFTC Chairman Gary Gensler in February 2011, he stated that "The proposed rule covers 28 commodities and includes one position limits regime for the spot month and another for single-month and all-months combined. Under the proposal, spot month limits would be set based on deliverable supply. Single-month and all-months-combined limits would be set using a formula based on data to be collected on the total size of the swaps and futures market."
- At its July 7, 2011 open meeting, the CFTC issued its final rule on position reports for physical commodity swaps. This rule is designed, in part, to assist the commission as it contemplates final rules on position limits.
- In September and October 2011, the CFTC canceled two meetings in which it had planned to finalize position limits rules. It was widely speculated that the commission did not have the necessary votes to pass the regulation, and that the extra time was needed to deliberate over the final details. On September 19, 2011, a draft of the final rules on position limits was leaked to the press.
- On October 11, 2011, the CFTC announced that the position limits final rules would be considered at an open meeting October 18, 2011.
- At its open meeting October 18, 2011, the commission approved final rules on position limits. The effective date for spot month positions and non-spot "legacy contracts" (grains and oilseeds with existing position limits) will be sixty days after the term “swap” is further defined under the Dodd-Frank Act. Other non-spot months will have position limits phased in subsequent to a one-year study by the commission of open interest in those markets.
- On December 12, 2011, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) made a motion before the CFTC for a stay of the effective date of the position limits rules pending judicial review. On January 3, 2012, the commission denied the motion. To view the ISDA/SIFMA position, and the commission's denial, click HERE.
- After the CFTC denied the motion for a stay of the effective date, ISDA and SIFMA filed a motion with the U.S. Court of Appeals on January 9, 2012, arguing that the CFTC used "flawed analysis," failed to consider costs and benefits, and that a majority of commissioners believed it to be unnecessary, but that one commissioner held a "mistaken view that Congress required it." The case was dismissed by the appeals court, who said it first required a lower court ruling. On February 7, 2012, ISDA and SIFMA refiled the suit in U.S. District court, requesting a delay of the rule while the rule is being challenged.
- On February 15, 2012, the CFTC Office of the Inspector General released the results of an investigation into alleged impropriety by commission staff during the position limits rulemaking process. The IG found no evidence to support the claims.
- On May 18, 2012, the CFTC proposed a modification to the aggregation provisions that would allow "any person with a greater than 10 percent ownership or equity interest in an entity to disaggregate the owned entity’s positions, provided there are protections and firewalls in place to ensure trading decisions are made independently of one another."
- On August 13, 2012, the final swap product definitions rules. This set in motion the compliance calendar for several Dodd-Frank-related, rules including position limits. The compliance date for spot-month position limits was set at October 12, 2012. The compliance date for non-spot month position limits will be set after a period of data collection.
- On September 28, 2012, a federal judge ruled in favor of ISDA and SIFMA, that the position limits rule should not be imposed because the CFTC did not first take steps to determine whether such limits were "reasonable and appropriate. For more on the court decision, click HERE.
- On November 15, 2012, the CFTC appealed the September 28 court decision.
Position Limits Proposed Rule, January 26, 2011
On December 16, 2010, the CFTC held an open meeting, the Eighth Series of Proposed Rules under the Dodd-Frank Act. Among the topics at this meeting was a rule proposal regarding the setting of position limits for derivatives participants. After considerable discussion, the December 16 meeting adjourned without a vote having been taken on position limits. The discussion continued at the commission's January 13, 2011 meeting, and a proposed rule passed 4-1, with Commissioner Sommers voting against the proposal.
Significant requirements in the proposal include:
- Position limits are to be placed on 28 core physical-delivery contracts and their “economically equivalent” derivatives, in two phases: a transition period affecting spot months and based on deliverable supplies; and a second period affecting contracts outside the spot month.
- Spot-month position limit levels set 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.
- Non-spot-month position limit for each referenced contract to be set using the 10, 2.5 percent formula: 10 percent of open interest in that contract below the first 25,000 contracts and 2.5 percent thereafter. For more information, see the Non-spot-Month Position Limits table.
- Non-spot-month position limits to consist of aggregate single-month and all-months-combined limits that would apply across classes, as well as single-month and all-months-combined position limits separately for (1) DCM futures and options and (2) all swaps.
- Exemptions for bona fide hedging transactions (based on the Dodd-Frank Act’s new requirements for such transactions) and for positions that are established in good faith prior to the effective date of specific limits adopted pursuant to the proposed regulations.
The period for public comment closed on March 28, 2011, but was extended the commission continued to accept comments until the final rule was issued at the October 18, 2011 open meeting. The commission received over 15,000 letters on the position limits issue.
Originally presented on January 14, 2010:
- Opening Statement by Chairman Gary Gensler
- Statement by Dan Berkovitz, Office of General Counsel, CFTC
- Presentation and Statement by Steve Sherrod, Division of Market Oversight, CFTC
- Motion to accept staff report and publish proposed rule
- Questions and Answer Session
- Statement by Commissioner Scott O’Malia
- Statement by Commissioner Bart Chilton
- Statement by Commissioner Jill Sommers
- Statement by Commissioner Michael V. Dunn
- Closing Statement by Chairman Gary Gensler
- Vote on Rule Making
- ↑ Judge throws out CFTC's position limits rule. Reuters. Retrieved on October 2, 2012.
- ↑ Speculative Limits. CFTC. Retrieved on December 17, 2008.
- ↑ Final Regulations on Position Limits for Futures and Swaps. CFTC. Retrieved on October 18, 2011.
- ↑ Guide Futures and Options, pg 228. The Institute for Financial Markets. Retrieved on July 29,2009.
- ↑ CFTC To Meet On Energy Position Limits on January 14. MarketWatch. Retrieved on February 25, 2010.
- ↑ CFTC's Chilton sees broader position limit rule. Reuters. Retrieved on July 30, 2010.
- ↑ CFTC sets sweeping rule timelines as clock ticks. Reuters. Retrieved on November 18, 2010.
- ↑ Testimony of CFTC Chairman Gary Gensler Before The House Committee on Financial Services. Mondovisione. Retrieved on March 2, 2011.
- ↑ CFTC sets out new market manipulation rules. Finextra. Retrieved on July 8, 2011.
- ↑ Exclusive: CFTC lacks votes on position-limit plan. Reuters, via Yahoo News. Retrieved on September 30, 2011.
- ↑ Factbox: CFTC draft outlines final position-limit rule. Reuters. Retrieved on September 30, 2011.
- ↑ CFTC to Hold Open Meeting to Consider Two Final Rules and One Proposed Amendment. CFTC Press Room. Retrieved on October 14, 2011.
- ↑ Wall Street Groups Seek Delay of CFTC Position Limits Rule. Business Week. Retrieved on January 23, 2012.
- ↑ Wall Street Groups Seek to Delay CFTC Rule Limiting Speculation. Bloomberg. Retrieved on February 8, 2012.
- ↑ CFTC Approves Notice of Proposed Rulemaking Regarding Regulations on Aggregation for Position Limits for Futures and Swaps. CFTC. Retrieved on May 21, 2012.
- ↑ CFTC Rule Restraining Speculation Rejected by U.S. Judge. Bloomberg. Retrieved on September 28, 2012.
- ↑ US futures regulators appeal position limits decision. CNBC. Retrieved on November 15, 2012.
- ↑ Open Meeting on Eighth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 2, 2011.
- ↑ Meeting on Energy Position Limits and Hedge Exemptions. CFTC. Retrieved on January 14, 2010.