The final draft of the CFTC’s position limits rule contains key changes relaxing some provisions most hated by large institutions, according to a report by Reuters. However, the Commission has not yielded ground on sections snagging massive passives, nor will the changes convince all institutions not to move their trading activity overseas.
The two most significant changes appear in the areas of aggregation policy and class limits. In the first draft of the proposed rule, the CFTC initially proposed aggregating positions for entities with common owners, without considering if they share trading strategies or control. Now, Reuters says that the CFTC will not force commonly-owned entities to aggregate, provided that all accounts are independently controlled, and that there are thick firewalls set up between trading desks. “To the extent that such accounts and programs are traded independently and for different purposes, such trading may enhance market liquidity for bona fide hedgers and promote efficient price discovery,” said the CFTC. This exemption however, will not be extended to index funds.
The second major alteration affects class limits. At first the CFTC said it would use class limits, applying the limits to exchange-traded futures, related over-the-counter swaps, and across both of those classes combined. Now, class limits have been relaxed. Traders exceeding a particular limit would be allowed to use opposing positions that fall underneath the swaps position to reduce their net position. However, it is likely that the provision will be revised in the future: “While class limits can be an effective tool to address undue market power in a particular segment of the derivatives market, the commission has determined that such limits should not be imposed without additional data and analysis.”
The rule is scheduled for a vote on October 4th, and may be changed further before it comes before the Commissioners. Position limits have always been a politically decisive issue at the CFTC, and this tendency was only exacerbated by the sharp rise in food and oil prices this year, which many politicians have blamed on speculation. Furthermore, the rule attracted scrutiny again last week when two frustrated CFTC staff members filed complaints with the Commission’s Inspector General. The anonymous letters and emails alleged that the rule-making process was rife with intrigue and that the final rule was unworkable.