CFTC Adopts Final Position Limit Rules for Futures, Options and Swaps on 28 Physical Commodities
Rising oil and gasoline prices in the spring of 2008 brought calls from many in Congress for the Commodity Futures Trading Commission (CFTC) to impose speculative position limits in futures markets to bring down prices. Despite the dearth of data showing that speculators caused higher prices or that limits would affect prices, the CFTC thereafter held public hearings on, and proposed the imposition of, federal limits on speculation in (certain energy) futures, but not swaps, even if those swap transactions were linked to futures prices. Congress then passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) which, among many other things, expanded the CFTC’s position limit authority to include many, but not all, swaps and directed the CFTC to concentrate on speculative position limits on futures and economically equivalent swaps in physical commodities, as found to be necessary and as appropriate. Once granted this new authority, the CFTC abandoned its prior proposal and set out to reconsider the question whether and how to impose speculative limits on futures and swaps on physical commodities.
On January 26, 2011, the CFTC issued a new position limits proposal to establish limits for futures and economically equivalent swaps on 28 agricultural, metals and energy commodities. The CFTC’s proposed rules also set forth exemptions from position limits (including a narrow definition of bona fide hedging) and new provisions for aggregating positions of certain parties for position limit compliance purposes. Of the 15,116 comment letters the CFTC received in response to its proposal, only about 100 provided detailed comments and recommendations, and 55 requested that the CFTC either significantly alter or withdraw its proposal.
The CFTC voted 3-2 on October 18, 2011 to adopt final position limit rules, which were published in the Federal Register today. These final rules will be codified at Part 151 of the CFTC’s regulations. Although the Part 151 rules will become effective on January 17, 2012, market participants will not be required to comply with the CFTC limits imposed under Part 151 until certain compliance dates that will be triggered by other CFTC actions, which are expected to occur sometime in 2012. Prior to these Part 151 compliance dates, market participants must continue to comply with the existing CFTC Part 150 position limit regime and any applicable position limits or accountability levels currently imposed by designated contract markets (DCMs). The current CFTC position limits under Part 150 only apply to futures and option contracts in certain agricultural commodities. DCMs have imposed spot-month position limits for futures and options in other physical commodities. Outside of the spot month, DCMs use position accountability levels to protect markets from abuses.
This client alert summarizes key aspects of the CFTC’s final position limits rulemaking and the main features of its new position limit regime under Part 151.