The CFTC has finalized rules instituting position limits on futures and swaps contracts. These rules were created under the authority of section 737 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final regulations cover 28 physical commodity futures and swaps and all economically equivalent contracts, and will be implemented in two phases.
In this final rule-making, the Commission has established speculative position limits for 28-physical commodity futures contracts, including:
- Nine “legacy” agricultural contracts (CBOT Corn, CBOT Oats, CBOT Soybeans, CBOT Soybean Meal, CBOT Soybean Oil, CBOT Wheat, ICE Futures U.S. Cotton No. 2, KCBT Hard Winter Wheat, MGEX Hard Red Spring Wheat).
- Ten “non-legacy” agricultural contracts (CME Class III Milk, CME Feeder Cattle, CME Lean Hog, CME Live Cattle, CBOT Rough Rice, ICE Futures U.S. Cocoa, ICE Futures U.S. Coffee, ICE Futures FCOJ-A, ICE Futures U.S. Sugar No. 11, ICE Futures U.S. No. 16).
- Four energy contracts (NYMEX Hub Natural Gas, NYMEX Sweet Light Crude, NYMEX NYH Gasoline Blendstock, NYMEX NYH Heating Oil).
- Five metals contracts (COMEX Copper, COMEX Gold, COMEX Silver, NYMEX Palladium, NYMEX Platinum).
The position limits are divided into two types: spot-month, and non-spot-month. The spot-month position limits will be set at 25% of deliverable supply. These are to be applied separately for physically-delivered contracts and cash-settled contracts in the same commodity. The Commission has specifically excepted NYMEX HH Natural Gas contracts. Cash-settled position and aggregate limits will be set at five-times the limits for the physical-delivery HH Gas contracts. These limits go into effect sixty days after the CFTC finalizes the further definition of “swaps”. Initially, limits will be based on levels currently used at each DCM. Agricultural contracts will be adjusted biennially, while energy and metals contracts will be adjusted annually.
Non-spot-moth position limits will be set using the 10/2.5% formula. A single trader can hold 10% of the contract’s first 25,000 of open interest, and 2.5% thereafter. The limits will be reset biennially based on two year open interest data. Open interest will be calculated as futures open interest + cleared swaps open interest + uncleared swaps open interest. These limits will go into effect for the nine “legacy” contracts listed above sixty days after the CFTC finalizes the further definition of “swap” at levels specified in the rule. For all other contracts, the limits will be made effective by Commission order after the collection of one year of interest data. These will be adjusted biennially.
Exemptions have been established for hedging operations and positions established in good faith before the initial limits effective date. The rule-making also preserves the independent account controller exemption. The Commission has included a visibility reporting regime in the rules to help it conduct a thorough market surveillance program.
The path to finalization was fraught with partisanship, squeaking by at 3 votes to 2. But Reuters Legal anticipates that position limits will not come into effect without a fight. Their market analyst predicts that industry groups may bring legal action in the conservative D.C. Circuit Court. The technical legal issue will center around the CFTC’s authority to impose position limits preemptively: “Does the commission need to show excessive speculation has caused sudden or unreasonable fluctuations or unwarranted changes in commodity prices and position limits are the only means of ‘diminishing, eliminating or preventing’ the burden on interstate commerce? Or has Congress given the commission an explicit instruction to impose them preemptively?” Alternately, position limits opponents may use another strategy that has worked against Dodd-Frank. The Chamber of Commerce was able to strike down one Dodd-Frank rule written by the SEC by arguing that the agency inadequately assessed the rule’s cost-benefit ratio.
