The CFTC approved by a 3-1 vote a revised proposed rulemaking to establish a federal position limit regime for exchange-traded commodity futures contracts on 28 physical commodities and economically equivalent swaps. The vote came a little more than a year following a federal district court’s vacation of a nearly identical rulemaking on the ground that, prior to imposing them, the CFTC had failed to make a finding that position limits were in the public interest. ISDA v. CFTC, 887 F. Supp. 2d 259 (D.D.C. Sep. 28, 2012) (ruling that CFTC had no “clear and unambiguous mandate” to set position limits under the Dodd-Frank Act). At the same time, the CFTC approved issuing a second proposed rulemaking for aggregation of accounts under its Part 150 rules. In connection with the proposed rulemaking, the CFTC announced that it will withdraw its appeal of the adverse federal court ruling.
Position Limit Proposal
The proposed limits would apply to 19 agricultural futures contracts, including ten not covered by the CFTC’s current position limits for certain agricultural commodities, as well as to four energy contracts traded on the NYMEX exchange and five metals contracts that trade on either NYMEX or COMEX. As with the previous rulemaking, the proposed rules set forth two types of limits: spot-months and non-spot-months position limits, with spot-month limits set at 25% of estimated deliverable supply and applied separately for positions in the physical-delivery referenced contracts and cash-settled contracts combined. The proposal also incorporates a “conditional” spot-month limit for cash-settled contracts, under which a market participant can hold speculative positions up to five times the spot-month limit for cash-settled contracts, provided that it does not hold positions in the physical delivery contract. To rely on the proposed conditional limit, a market participant must make a daily filing of its cash-market positions with the CFTC.
Non-spot-month limits would be set at 10% of open interest in the first 25,000 contracts and 2.5% thereafter based on open interest data in futures and swaps that are significant price discovery contracts. Subsequent levels would be reset at least every two years based on open interest data in futures, cleared swaps and uncleared swaps.
The proposed rulemaking includes enumerated bona fide hedging transactions eligible for the bona fide hedge exemption request, and allows market participants to seek non-enumerated hedge exemptions by filing of a petition under CEA Section 4a(a)(7). At the same time, the proposal would eliminate CFTC Rules 1.3(z) and 1.47, which currently define bona fide hedge transactions and allow participants to seek exemptions for non-enumerated hedges.
Commissioner Scott O’Malia dissented from the proposed rule, arguing that the Commission had failed (1) to perform a perform a rigorous and objective fact-based analysis in order to determine whether position limits will effectively prevent or deter excessive speculation, (2) to provide enough flexibility for commercial end-users to engage in necessary hedging activities, and (3) to establish a useful process for end-users to seek hedging exemptions. He criticized the Commission for “rel[ying] on a new legal strategy – but not new data – in order to circumvent the spirit of the district court’s decision.”
Aggregation Proposal
The aggregation proposal would amend current rules that require a person to aggregate all contract positions in accounts in which such person directly or indirectly holds positions or controls trading or which are held by one or more other persons acting pursuant to an expressed or implied agreement or understanding. Under the new proposal, a market participant with a 10% or greater ownership interest in an entity could disaggregate the contract positions of the owned entity, provided there is independence of trading between the entities and the ownership interest is not greater than 50 percent. In the event that a market participant’s ownership interest is greater than 50 percent, the CFTC proposed an exemption if the entities are not consolidated and the owned entity either: (1) only holds bona fide hedge positions; or (2) does not hold positions in excess of 20 percent of the speculative limit.
Lofchie Comment: The comment by the Chairman of the CFTC that a “jump ball” provides an argument for more regulation is indicative of a regulatory “philosophy” that is exactly backwards; if the CFTC cannot make a solid case as to why regulation is beneficial, then it should not regulate. The notion that the government adopts a rule (particularly a complicated and expensive one) because there is a 50% chance that the rule will do less harm than good is so strange as to be eccentric. That the Chairman who has been recently quoting Adam Smith’s (“invisible hand”) philosophy in defense of Dodd-Frank can believe that a tie argues in favor of more regulation perhaps adds to the irony.
Even this assumes that the intellectual case in favor of position limits is 50-50.
Click here for a summary of the meeting and proposal by Delta Strategy Group.
See: CFTC Press Release; CFTC Proposed Regulations on Position Limits for Derivatives Fact Sheet.
See also: Commissioner Gensler’s Opening Statement; Commissioner Chilton’s Statement; Commissioner O’Malia’s Statement of Dissent; Commissioner Wetjen’s Statement; CME Group’s Statement on Position Limits Proposal.
Related news: 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); ISDA and SIFMA v. CFTC Court Date Set for Oral Arguments on Position Limits (August 26, 2013).