United States: CFTC Reproposes Rules Limiting Speculative Futures And Swaps Positions, Finalizes Aggregation Rules

The CFTC voted unanimously to repropose position limits rules, which would place limits on speculative futures and swaps positions. In a separate vote, the CFTC approved final aggregation rules. 

If adopted, the proposed rules would:

• limit speculative positions in 25 core physical commodity futures contracts and their "economically equivalent" futures, options and swaps;
• provide requirements and acceptable practices to Designated Contract Markets ("DCMs") and Swap Execution Facilities ("SEFs") for (i) setting position limits for the 25 referenced contracts and (ii) exchange position limits or accountability rules in all other listed contracts;
• permit the exchange recognition of non-enumerated bona fide hedging positions and certain enumerated anticipatory hedge positions, and the granting of spread exemptions;
• update reporting requirements under Part 19 of the CFTC Rules; and
• delay any requirement, for DCMs and SEFs that lack access to sufficient swap position information, to establish position limits on swaps that are subject to a federal position limit.

The CFTC also is reproposing the definition of bona fide hedging position, as well as exemptions for bona fide hedging positions in physical commodities.

Under the CFTC proposal, spot month limits would be set at initial levels based on 25 percent of estimated of deliverable supply, as submitted by a DCM and verified by the CFTC, or at lower levels, as recommended by a DCM. Non-spot month limits would be set at initial levels based on a percentage formula applied to open interest in futures and swaps.

This last reproposal is a response to comments on a proposal that was published in December 2013, and on a supplemental proposal that was published in June 2016.

In his supporting statement, CFTC Chair Timothy Massad voiced his approval of the reproposal:

CFTC Commissioner Christopher J. Giancarlo added that the proposal provides the "basis for the implementation of a final position limits rule" that he is willing to support.

The aggregation rules amend  CFTC Rules Part 150 ("Limits on Positions") with respect to the policy for aggregation under the position limits regime for futures and option contracts on nine agricultural commodities. The CFTC's current account aggregation standards, which generally require the aggregation of positions held in accounts for any person controlling or holding ten percent or more of the ownership of such accounts, would permit additional exemptions from aggregation where:

• the sharing of information would violate or create the reasonable risk of violating federal, state or foreign jurisdiction laws or regulations;
• ownership interest is greater than ten percent in an entity whose trading is controlled independently and a notice filing has been submitted to the CFTC; and
• ownership results from broker-dealer activities in the person's normal course of business as a dealer.

Commentary/Bob Zwirb

By reaffirming its past position that it need not find the proposed limits to be necessary, and would make such a finding only "[o]ut of an abundance of caution," the CFTC leaves the impression that when it evaluates the evidence, it is really just going through the motions. That impression is confirmed on page 59 of the preamble to the reproposal, where the CFTC quotes a commenter as complaining that "[t]he necessity finding . . . proffered by the Commission – which consists of a discussion of two historical events and a cursory review of existing studies and reports on position limits related issues – falls short of a comprehensive analysis and justification for the proposed position limits." The CFTC responds to this important accusation with a simple denial: "We disagree with the commenter's opinion that the Commission's analysis is not comprehensive or falls short of justifying the reproposed rule."

As it has done in the past, the CFTC continues to rely on two lone episodes of manipulation and a tally of studies on speculation, position limits, etc. to support its rationale. Although the CFTC spends more time evaluating such studies in the reproposal than it has previously, it still treats them all as worthy of consideration. One of the problems with that approach is this: the economic studies that are considered here range from empirically rigorous to junk science; from academically respectable to polemical tracts by interested parties with no known expertise (such as Better Markets). Indeed, a number of the studies have nothing to do with speculation or position limits or even the futures and derivatives markets. Most alarming is the CFTC's conclusion that the limits are warranted because there is "no broad academic consensus" for or against such limits. Leaving aside the fact that even this conclusion was contradicted by the findings of the CFTC's own Energy and Environmental Markets Committee just last February (findings that were withdrawn after Senator Elizabeth Warren applied pressure), the CFTC apparently has decided to forge ahead with the reproposal, empirical evidence be damned.

Before imposing a highly complex, burdensome and costly rule that encompasses over 900 pages of text, a government agency should consider whether the rule is necessary for the proper functioning of the markets.

Commentary/Steven Lofchie

This proposal is meant to serve political and not regulatory purposes. If energy prices spike (as they often do in the ordinary course), proponents of the proposal will assert that the rule would have kept prices down if it had been adopted. Beyond that specific use, the proposal will be ignored (and rightly so).

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