Streetwise Professor Craig Pirrong on Position Limits

In his November 10th blog post, economist Craig Pirrong discussed the new CFTC position limits proposal.  His commentary, linked below, notes that the new proposal has more sensible aggregation standards and permits the set-off of futures positions against swaps.  That said, he closes by observing that the proposed rule is “unbelievably long,” amounting to 533 pages and 846 footnotes, with “land mines” throughout.

Lofchie Comment:  Professor Craig Pirrong’s economic analysis of Position Limits may be briefly summarized as follows: (i) better than the original proposal, but (ii) still pretty bad and (iii) not supported by strong economic analysis.

When the CFTC’s new proposal was first put forth, we commented that the economic analysis seemed fairly weak.  (Essentially, the CFTC’s analysis consisted of “counting” the studies that could be said to deal with the issue of position limits.  On the basis of its finding that one-third of the studies supported position limits, one-third of the studies were neutral and one-third of the studies found that they would be harmful, the CFTC said that the imposition of position limits could be justified.)  Professor Pirrong provides a more detailed criticism, from an economic perspective, of the lack of economic analysis supporting the rule proposal.

Given that the CFTC’s prior position limits rule was challenged in court, it is very difficult to see why this one will not be as well.  Certainly, the CFTC’s cost-benefit analysis is not sufficiently strong to discourage any plaintiff.  This will leave the incoming Chairman with a very difficult choice: (i) spend lots of time and money reviewing comments on this rule proposal and then put forth a rule proposal that is certain to be challenged, and which has a very weak basis of economic analysis to support it, or (ii) start the whole process again on the basis of a more robust economic analysis.

In some sense, the CFTC’s intellectual position seems weakened even further by the two major changes that it did make between the original rule and this proposal.   After all, if the CFTC was wrong in (i) prohibiting set-off between futures and swaps originally and (ii) requiring aggregation between entities that had very low common ownership, those were pretty substantial mistakes in the original rule.

See:Assume the Position,” Streetwise Professor.
Related news: CFTC Approves Position Limits Proposal (November 6, 2013); CFTC Votes to Dismiss Appeal of 2011 Position Limits Rule (October 30, 2013); CFTC to Court: Position Limits Appeal Will Be Dropped if New Rule Reached on Nov. 5 (October 29, 2013); Blog Post Quotes Commissioner Wetjen on Position Limits (October 24, 2013); CFTC Commissioner O’Malia Blasts Cross-Border Guidance and Potential Position Limits Rule (September 27, 2013).