In a public meeting held on November 5, 2013, the Commodity Futures Trading Commission (CFTC): (a) voted to re-propose speculative position limits under its regulations for 28 core physical commodity contracts and related futures, options and swaps; (b) voted to modify the aggregation provisions under the CFTC regulations; and (c) confirmed that the CFTC will voluntarily dismiss its appeal of the September 28, 2012 decision of the U.S. District Court for the District of Columbia, which vacated the CFTC’s previous position limits proposal.
The proposed regulations, which the CFTC has indicated will be effective 60 days after publication of a final rule, amend and expand the scope of the CFTC’s existing regulation Part 150 position limits and modifies the existing account aggregation regulations.
The following chart sets forth the 28 commodity contracts affected by the proposed rules.
|Legacy Agricultural Contracts|
|CBOT Corn (C)|
|CBOT Oats (O)|
|CBOT Soybeans (S)|
|CBOT Soybean Meal (SM)|
|CBOT Soybean Oil (BO)|
|CBOT Wheat (W)|
|ICE Futures U.S. Cotton No. 2 (CT)|
|KCBT Hard Winter Wheat (KW)|
|MGEX Hard Red Spring Wheat (MWE)|
|Non-Legacy Agricultural Contracts|
|CME Class III Milk (DA)|
|CME Feeder Cattle (FC)|
|CME Lean Hog (LH)|
|CME Live Cattle (LC)|
|CBOT Rough Rice (RR)|
|ICE Futures U.S. Cocoa (CC)|
|ICE Futures U.S. Coffee C (KC)|
|ICE Futures U.S. FCOJ-A (OJ)|
|ICE Futures U.S. Sugar No. 11 (SB)|
|ICE Futures U.S. Sugar No. 16 (SF)|
|NYMEX Henry Hub Natural Gas (NG)|
|NYMEX Light Sweet Crude Oil (CL)|
|NYMEX RBOB Gasoline (RB)|
|NYMEX NY Harbor ULSD (HO)|
|COMEX Copper (HG)|
|COMEX Gold (GC)|
|COMEX Silver (SI)|
|NYMEX Palladium (PA)|
|NYMEX Platinum (PL)|
There are three basic components to the rules: (1) the actual position limits; (2) aggregation standards; and (3) exemptions.
The proposed rules impose limits on speculative positions for 28 physical commodity futures contracts (“core referenced futures contracts”) and other economically equivalent futures and swaps contracts (“referenced contracts”). The limits cap the number of speculative positions that a person may hold in the spot-month (the period immediately before delivery obligations or before contracts are liquidated), individual month, and all months combined. The CFTC estimates that approximately 400 traders will be affected by the proposed limits.
The limits impose a ceiling on spot-month and non-spot-month positions based on the estimated deliverable supply. The spot-month limit caps the positions a trader may hold in contracts approaching their expiration. A non-spot-month period limit caps positions in the future and extends through the period when the contract is no longer listed for trade. Spot-month limits will be set at 25 percent of estimated deliverable supply. Initially, the proposed limits will be based on the spot-month position limit levels currently in place at designated contract markets (DCMs). Alternatively, initial levels may be based on estimates of deliverable supply submitted by a DCM. Subsequent levels will be adjusted every two years based on the CFTC’s determination of deliverable supply after consulting with DCMs. These limits will be applied separately for positions in the physical-delivery and all cash-settled referenced contracts combined. An exemption to the cash-settled spot-month limit will allow a trader who does not hold any position in the physical-delivery spot-month contract in a given commodity to hold up to five times the level of the cash-settled limit. The non-spot-month position limits apply to positions a trader may have in all contract months combined or in a single contract month. These limits will be set at 10 percent of open interest in the first 25,000 contracts and then 2.5 percent thereafter.
The proposed rules determine which accounts and positions a person must aggregate for the purpose of determining compliance with the position limit levels. The aggregation standards generally require market participants to aggregate positions across accounts and positions that they control. The modifications to the aggregation modification provisions of Part 150 of the regulations are substantially similar to the aggregation modifications proposed to Part 151, except that the modifications address the policy for aggregation under the CFTC’s position limits regime for futures and option contracts on nine agricultural commodities set forth in Part 150.
Exemptions From Aggregation Policy
The Commission’s existing aggregation policy under regulation Part 150 generally requires that unless a particular exemption applies, a person must aggregate all positions for which that person controls the trading decisions with all positions for which that person has a 10 percent or greater ownership interest in an account or position, as well as the positions of two or more persons acting pursuant to an express or implied agreement or understanding.
The proposed rules provide four additional exemptions from aggregation for positions that constitute bona fide hedging transactions and certain other types of transactions: (1) where sharing of information that goes along with aggregation would create a “reasonable risk” of a violation of federal, state or foreign laws; (2) where ownership interest is no greater than 50 percent in an entity whose trading is independently controlled; (3) where ownership interest is greater than 50 percent in a non-consolidated entity whose trading is independently controlled and the applicant certifies that such entity’s positions either qualify as bona fide hedging positions or do not exceed 20 percent of any position limit; and (4) where ownership results from broker-dealer activities in the normal course of business as a dealer.
During the meeting, Chairman Gensler indicated that the definition of bona fide hedging would be narrow as it applied to swap dealers. In his dissent, Commissioner O’Malia expressed concern that the bona fide hedging exemptions would be too narrow. In particular, he opposed the elimination of Rule 1.3(z) (bona fide hedging for excluded commodities) and the reduction of exemptions for anticipatory hedging.
The CFTC also proposed requirements and acceptable practices for DCMs and swap execution facilities (SEFs) serving as trading facilities for the 28 referenced contracts. In addition, the proposed rules set position limits or accountability rules in all other listed contracts, including “excluded commodities” as defined by Section 1a(19) of the Commodity Exchange Act.
Voluntary Dismissal of 2012 Court Decision
The proposed rules are a response to the September 2012 decision of the U.S. District Court for the District of Columbia to vacate the CFTC’s previous position limits proposal under Part 151 of its regulations.1 The lawsuit, which the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association brought, asserted that the CFTC failed to interpret properly the extent of its rulemaking authority under Section 6a(a) of the Commodity Exchange Act, as amended by the Dodd-Frank Act. The District Court found that the Commission incorrectly concluded that Section 6a(a) mandated the Commission to set position limits without regard to whether the Commission would find that such limits were necessary and appropriate. The CFTC then filed an appeal to the court’s decision, during which time the pre-existing rules remained effective.
On October 28, 2013, the CFTC filed a pleading saying it will seek a voluntary dismissal of its appeal if the agency votes to propose the new position limits rules in its meeting on November 5, 2013. As it indicated in the public meeting, the CFTC filed a consensual motion to dismiss on November 6, 2013.
* * * *
Please feel free to reach out to your regular contacts at the firm if you have any questions about the matters addressed in this alert.2 In addition, you are welcome to contact any of the above members of the firm’s Derivatives Task Force.
1 See Int’l Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, 887 F. Supp. 2d 259, 270 (D.D.C. 2012).
2 This summary is based on the fact sheet and frequently asked questions distributed at the November 5, 2013 CFTC meeting and the statements of CFTC Commissioners and staff during the meeting. As of time of this writing, the CFTC has not published the releases.
This article was originally published by Bingham McCutchen LLP.