United States: Position Limits Rumors Become Reality: CFTC Adopts Final Position Limits Rule Under Dodd-Frank

Last Updated: October 25 2011
Article by Bryan T. Shipp

Most Read Contributor in United States, December 2018

On October 18, 2011, the Commodity Futures Trading Commission ("Commission") adopted, by a vote of 3 to 2, a final rule regarding position limits for certain physical commodity derivatives ("Final Rule") pursuant to the Commodity Exchange Act ("CEA"), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act").1

Although the text of the Final Rule is not yet available, the Commission has stated its intent to phase-in position limits in two parts following effectiveness of the Commission's final rulemaking regarding the further definition of "swap."

  • Phase one: Spot-month position limits will be effective sixty days following effectiveness of the Commission's final rule further defining the term "swap" under the Dodd-Frank Act. This means that the first phase of position limits imposed by the Final Rule is likely not to become effective until at least mid-April 2012.2
  • Phase two: Non-spot-month position limits will not be implemented until after the Commission has received one year of swaps open interest data regarding the relevant contracts, likely not until sometime in 2013 or later.3

The Commissioners expressed a wide range of opinions for and against adoption of the Final Rule, in particular with respect to the effects on commodities markets of imposing position limits on contracts not previously subject to limits. Chairman Gensler expressed strong support for the Final Rule, but noted that the rule is in no way intended or able to control pricing. Despite voting in favor of the Final Rule, Commissioner Dunn suggested that there was little economic evidence that speculation in previously unregulated contracts caused higher market prices for underlying commodities, and suggested that position limits may impair price discovery and the ability of commercial entities to adequately hedge their business risks. Commissioner Chilton expressed some dissatisfaction with the Final Rule, but indicated his belief that it is consistent with the intent of Congress in the Dodd-Frank Act of imposing position limits on swaps and previously unregulated futures contracts.

Commissioner Sommers, voting against adoption of the Final Rule, noted that many commenters expressed a strong desire for the Commission to impose position limits and appeared to believe, wrongly, that position limits are a "panacea" for rising commodity prices. Commissioner Sommers stressed the importance of the continued availability of bona fide hedging exemptions for market participants who need to hedge their commercial activities.

Commissioner O'Malia also voted against adoption of the Final Rule and issued a 15-page written dissent.4 According to Commissioner O'Malia, the central purpose of setting position limits should be to facilitate the Commission's market surveillance obligations. Commissioner O'Malia stressed that Section 737 of the Dodd-Frank Act accords the Commission discretion in determining whether position limits are necessary to prevent "excessive speculation" and, consistent with Section 4a(a)(1) of the CEA, the Commission is required to (and to avoid unintended consequences, should) make a finding that position limits are "necessary and effective in relation to the identifiable burdens of excessive speculation on interstate commerce."5

I. Requirements of the Dodd-Frank Act With Respect to Position Limits

Section 4a(a)(1) of the CEA, as amended by Section 737 of the Dodd-Frank Act, requires the Commission to extend position limits beyond futures and option contracts to (i) swaps traded on a designated contract market ("DCM") or swap execution facility ("SEF"), and (ii) swaps not traded on a DCM or SEF that perform or affect a "significant price discovery function" ("SPDCs") with respect to regulated markets.

In addition, new section 4a(a)(5) of the CEA requires the Commission to establish aggregate position limits for swaps that are economically equivalent to futures and options on futures contracts subject to Commission-set position limits. Similarly, new section 4a(a)(6) of the CEA requires the Commission to apply position limits on an aggregate basis to contracts based on the same underlying commodity across: (1) DCMs; (2) with respect to foreign boards of trade ("FBOTs"), contracts that are price-linked to a DCM or SEF contract and made available from within the United States via direct access; and (3) SPDCs.

II. Scope of the Final Rule

A. Covered Contracts

The Final Rule establishes position limits for 28 physical commodity futures contracts ("Core Referenced Futures Contracts") as well as futures, options and swaps that are economically equivalent to those contracts (collectively "Referenced Contracts").6

The 28 Core Referenced Futures Contracts include the following contracts, by commodity category:

  1. Nine "legacy" agricultural contracts: (1) CBOT Corn (C); (2) CBOT Oats (O); (3) CBOT Soybeans (S); (4) CBOT Soybean Meal (SM); (5) CBOT Soybean Oil (BO); (6) CBOT Wheat (W); (7) ICE Futures U.S. Cotton No.2 (CT); (8) KCBT Hard Winter Wheat (KW); and (9) MGEX Hard Red Spring Wheat (MWE).
  2. Ten non-"legacy" agricultural contracts: (1) CME Class III Milk (DA); (2) CME Feeder Cattle (FC); (3) CME Lean Hog (LH); (4) CME Live Cattle (LC); (5) CBOT Rough Rice (RR); (6) ICE Futures U.S. Cocoa (CC); (7) ICE Futures U.S. Coffee C (KC); (8) ICE Futures U.S. FCOJ-A(OJ); (9) ICE Futures U.S. Sugar No. 11 (SB); and (10) ICE Futures U.S. Sugar No. 16 (SF).
  3. Four energy contracts: (1) NYMEX Henry Hub Natural Gas (NG); (2) NYMEX Light Sweet Crude Oil (CL); (3) NYMEX New York Harbor Gasoline Blendstock (RB); and (4) NYMEX New York Harbor Heating Oil (HO).
  4. Five metal contracts: (1) COMEX Copper (HG); (2) COMEX Gold (GC); (3) COMEX Silver (SI), (4) NYMEX Palladium (PA); and (5) NYMEX Platinum (PL).

B. "Economically Equivalent" Contracts

According to the Commission, a swap, futures or option contract is "economically equivalent" to a Core Referenced Futures Contract when:

  1. it is a "look-alike" contract (i.e., it settles off of the Core Referenced Futures Contract or contracts that are based on the same commodity for the same delivery location as the Core Referenced Futures Contract);
  2. it is a contract with a reference price based on only the combination of at least one Referenced Contract price and one or more prices in the same or substantially the same commodity as that underlying the relevant Core Referenced Futures Contract, provided that such a contract is not a locational basis swap;
  3. it is an inter-commodity spread contract with two reference price components, one or both of which are based on Referenced Contracts; or
  4. it is priced at a fixed differential to a Core Referenced Futures Contract.

C. Pre-Existing Positions

The Final Rule is expected to clarify that futures, options and swaps positions entered into in goodfaith prior to the effective date of the Final Rule will not cause an entity to be in violation of the new limits based solely on those positions.7 To the extent an entity's pre-existing futures, options or swaps positions would cause it to exceed the limit, the entity would not be permitted to further increase its position. However, an entity that established a net position below the limit prior to the enactment of the Final Rule would be permitted to increase its position, but only to the extent of its aggregate position, including the pre-existing positions.

D. Class Limits

The proposed rule regarding position limits ("Proposed Rule")8 would have imposed separate limits on two "classes" of contracts – one class would have been comprised of all futures and option contracts executed pursuant to the rules of a DCM, and the second class would have been comprised of all swaps. Position limits would have been applied to each of the classes individually, as well as in the aggregate. It appears that the Final Rule will eliminate class limits outside of the spot-month, thus, allowing for the netting of swaps and futures positions in the non-spot-months.

III. Calculation of Applicable Position Limits in Spot- and Non-Spot-Months

The Final Rule sets forth two types of position limits: spot-month position limits and non-spotmonth position limits. Spot-month position limits apply in the period immediately before delivery obligations are incurred for physical delivery contracts or a period immediately before contracts are liquidated by the clearinghouse based on a reference price for cash-settled contracts. The spotmonth period is specific to each Referenced Contract, need not correspond to a month-long period, and may extend through the period when delivery obligations are incurred.

A. Spot-Month Limits

Generally, the Commission has indicated that spot-month position limits for Referenced Contracts will be set at 25% of estimated deliverable supply. These limits will be applied separately for the following positions in the same commodity: (1) futures contracts that may be physically delivered, and (2) futures contracts and swaps that are cash-settled. For example, a trader's position in all cash-settled futures and swaps Referenced Contracts will be combined to determine whether the trader's position in cash-settled Referenced Contracts is below the limits.

In the original Proposed Rule, the Commission provided for a "conditional spot-month limit" of 5x the limit in any cash settled contract assuming two conditions were met (1) an entity was completely out of the physical delivery contract and (2) the entity owned less than 25% of the estimated deliverable supply of the cash commodity.

In a significant change from the Proposed Rule, the Commission has indicated that the Final Rule will not extend the conditional spot-month limit to all cash settled contracts, but rather will only allow the larger limit for the cash-settled NYMEX Henry Hub Natural Gas contract (extending across positions in both physical-delivery and cash-settled natural gas contracts), which would be set at five-times the limit that applies to the physical-delivery NYMEX Henry Hub Natural Gas contract.

Under the Final Rule, spot-month limits will be based on the spot-month position limit levels in effect at DCMs at the time spot-month limits become effective under the Final Rule. Thereafter, the spot-month limits will be adjusted biennially for agricultural contracts and annually for energy and metal contracts. These subsequent limits will be based on the Commission's determination of deliverable supply (developed in consultation with DCMs). The Commission indicated that a DCM also can petition the Commission to adjust the limits at any time.

B. Non-Spot-Month Limits

The Commission has indicated that non-spot-month position limits will apply to positions a trader may have in all contract months combined or in a single contract month. For each Referenced Contract, non-spot-month limits will be set at 10 percent of open interest in the first 25,000 contracts and 2.5 percent thereafter. Open interest used in determining non-spot-month position limits will be based on futures open interest, cleared swaps open interest, and uncleared swaps open interest. Non-spot-month limits will be reviewed biennially based on current open interest data. Generally, initial non-spot-month position limits will be phased-in by Commission order following receipt by the Commission of one year of open interest data pursuant to the large trader reporting rule for physical commodity swaps.

C. Position Visibility Requirements

The Final Rule also imposes quarterly position visibility reporting obligations on traders that exceed a non-spot-month position visibility level in a limited number of energy and metals Referenced Contracts. According to the CFTC, position visibility reports are intended to provide the Commission with additional surveillance capability with respect to the physical and swaps portfolios of the largest traders, as well as a better understanding of trading activity in the physical commodity futures and swaps markets. The Commission has suggested that such visibility would enable the Commission to make ongoing adjustments to the position limit framework to better achieve the statutory objectives of position limits.

IV. Aggregation of Accounts

In a significant change from the Proposed Rule and current regulations, the Commission indicated that it has eliminated from the Final Rule the exemption from aggregation for owned non-financial entities. Under current Commission regulations, exchanges require aggregation for non-agricultural commodities based solely on common control, not based on common ownership. Instead, the Commission elected to retain the existing independent account controller ("IAC") exemption in generally the same form as it currently exists, with certain clarifications to ensure that the use of the IAC exemption is limited to client positions – i.e., it may only be used to the extent a trader is trading professionally for clients.9 Because the IAC exemption applies only to commodity pool operators, commodity trading advisors, banks or trust companies, insurance companies, or their separately organized affiliates, it appears that companies may not be permitted to disaggregate the independently managed and controlled positions of their commercial affiliates.

The Final Rule would require traders to file a notice, effective upon filing, setting forth the circumstances that warrant use of the IAC exemption and a certification that the traders' use of the exemption meets the conditions required by the rule. On Commission special call, traders utilizing the IAC exemption pursuant to a notice filing must provide relevant information to the Commission concerning its use of the IAC exemption.

V. Bona Fide Hedging Transactions

Although the Commission went to great lengths to explain how, compared to the Proposed Rule, it has expanded the definition of bona fide hedging transactions and positions to include anticipated merchandising transactions, royalties, and service contracts, it remains unclear whether the end result will, nevertheless, be a substantially narrower definition of hedging than under current regulations.

In response to numerous comments expressing concern that the list of enumerated hedging transactions might not accommodate all legitimate hedging activity, the Commission agreed to a last minute amendment to add a provision to the Final Rule describing the process by which market participants may request a determination as to whether a transaction or class of transactions qualifies as an enumerated hedge. As described during the meeting, the new provision will resemble current Regulation 1.3(z)(3). In addition, the Commission noted that market participants may formally petition the Commission to amend the current list of enumerated hedges or the conditions therein. Such a petition should set forth the general facts surrounding such class of transactions, the reasons why such transactions conform to the requirements of the general definition of bona fide hedging, and the policy purposes furthered by the recognition of this class of transactions as the basis for enumerated bona fide hedges.


1 Pub. L. No. 111–203, 124 Stat. 1376 (2010).

2 See CFTC Details Dodd-Frank Compliance and Implementation Schedule (Sept. 12, 2011), http://www.energylawresourcecenter.com/blog/2011/09/cftc-details-dodd-frank-compliance-and-implementation-schedule .The Commission has indicated that it intends to take up the final product definitions rulemaking in its November 4, 2011 meeting.

3 Note that section 4a(a)(2)(B) of the CEA establishes a phase-in period for position limits applicable to exempt and agricultural commodities. The Dodd-Frank Act requires the Commission to establish position limits for exempt and agricultural commodities within of 180 and 270 days, respectively, of the date the Dodd-Frank Act became law – i.e., July 21, 2010.

4 See Statement of Dissent, Position Limits for Futures and Swaps, Commissioner Scott D. O'Malia (Oct. 18, 2011), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement101811d .

5 See id.

6 The Commissioners noted at the hearing adopting the Final Rule that the Core Referenced Futures Contracts were selected because of high open interest in the contracts.

7 See CEA Section 4a(b)(2).

8 Position Limits for Derivatives, 75 Fed. Reg. 4752 (Jan. 26, 2011) (Notice of Proposed Rulemaking).

9 The independent account controller exemption is available to affiliated entities that:

"(A) Have, and enforce, written procedures to preclude the affiliated entities from having knowledge of, gaining access to, or receiving data about, trades of the other. Such procedures must include document routing and other procedures or security arrangements, including separate physical locations, which would maintain the independence of their activities; provided, however, That such procedures may provide for the disclosure of information which is reasonably necessary for an eligible entity to maintain the level of control consistent with its fiduciary responsibilities and necessary to fulfill its duty to supervise diligently the trading done on its behalf;

(B) Trade such accounts pursuant to separately-developed and independent trading systems;

(C) Market such trading systems separately; and

(D) Solicit funds for such trading by separate Disclosure Documents that meet the standards of § 4.24 or § 4.34 of this chapter, as applicable, where such Disclosure Documents are required under part 4 of this chapter."

17 C.F.R. 150.3(a)(4)(i).


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions