Position Limits Regulation - Report - EEMAC’s 2015 Review and Consideration of the CFTC ’s Proposed Rule on Position Limits, February 2016

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February 2016

On February 25, 2016, the CFTC's Energy and Environmental Markets Advisory Committee (EEMAC) met to discuss, among other things, to discuss its report to the commission on the CFTC Proposed Rule: Position Limits for Derivatives, November 2013, which mandates new federal position limits for futures, options and swaps beyond the decades-old federal position limits for agricultural commodities and existing position limits set by U.S. futures exchanges.[1] The EEMAC report, which the committee approved by an 8-1 vote, sees the position limits rule as proposed is unnecessary, could harm liquidity and would create numerous practical challenges.

Background

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. [2]

Summary of the Report

The EEMAC broadly agrees on three primary market observations:

  • There is little to no evidence that the CFTC’s Proposed Rule mandating new federal position limits is sufficiently “necessary” to satisfy the explicit requirement under the Commodity Exchange Act. In the absence of evidence of necessity, it is unlikely that any final federal speculative position limit rule could pass a cost/benefit test.
  • There are already concerns with a sharp reduction of trading liquidity in the relevant physical and derivative markets, adversely affecting the ability of end users to hedge. The Proposed Rule, if implemented without substantial changes, would exacerbate the adverse effects on hedging and undermine the ability of energy derivatives markets to perform their economic functions of risk transfer and price discovery while avoiding unwarranted fluctuations in prices due to excessive speculation.
  • Implementation of a new federal speculative position limits regime will create abundant practical challenges. These challenges can be reduced — but not eliminated — by drawing upon existing resources and expertise within the exchanges and through modifications to the Proposed Rule (such as use of accountability levels rather than hard limits).

Related Document: The EEMAC Report as Sumbitted to the CFTC

References

  1. CFTC’s Energy and Environmental Markets Advisory Committee Releases Agenda for Upcoming Public Meeting. CFTC. Retrieved on February 25, 2016.
  2. Judge throws out CFTC's position limits rule. Reuters. Retrieved on October 2, 2012.

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