United States: CFTC Unanimously Approves Supplemental Proposal On Position Limits

Last Updated: June 6 2016
Article by Jonathan H. Flynn, Neal E. Kumar, Michael Selig, Anthony M. Mansfield and Paul J. Pantano, Jr.

Most Read Contributor in United States, August 2018

On May 26, 2016, the Commodity Futures Trading Commission ("CFTC") unanimously approved a proposed supplement ("Supplemental Proposal") to its December 2013 proposal to establish position limits on futures and economically equivalent swaps.1 The primary focus of the Supplemental Proposal is the definition of bona fide hedging positions exempt from speculative position limits. The CFTC proposes to expand the definition of bona fide hedging to recognize commercial hedging strategies as bona fide hedging. Separately, the Supplemental Proposal relieves designated contract markets ("DCM") and swap execution facilities ("SEF") of the requirement to establish speculative position limits in certain limited circumstances. The Supplemental Proposal includes a 30-day public comment period that will begin once the proposal is published in the Federal Register, which we expect to occur in early June 2016.

Chairman Massad described the Supplemental Proposal as an important measure to "ensure that commercial end-users can continue to engage in bona fide hedging efficiently for risk management and price discovery."2 Commissioner Giancarlo, who has expressed a keen interest in the matter as sponsor of the Energy & Environmental Markets Advisory Committee, also supports the Supplemental Proposal as a means to "leverage[] exchange expertise and resources to enable exemptions to be granted in an efficient and timely manner without sacrificing market integrity."3

Non-Enumerated Hedging

The key aspect to the Supplemental Proposal is the flexibility to recognize non-enumerated hedging strategies as bona fide hedging. Under the 2013 Position Limits Proposal, the CFTC limited the definition of bona fide hedging to an exhaustive list of enumerated hedging strategies. If a hedging strategy was not on the enumerated list, it did not qualify as a bona fide hedge. Many commenters argued that this rigid structure excluded legitimate hedges commonly used by commercial enterprises and would prevent the development of new hedging strategies.

The Supplemental Proposal authorizes the exchanges to establish rules allowing market participants to apply for non-enumerated hedge exemptions. Market participants can apply for non enumerated hedge exemptions not only from exchange limits, but also from CFTC-set limits. The exemption is available for one year, after which a market participant must renew it. Under the Supplemental Proposal, the CFTC retains the ability to review any non-enumerated hedge exemption application either before an exchange makes a determination or after an exchange grants an exemption. However, if the CFTC revokes an exemption granted by the exchange, the recipient of the exemption has an opportunity to reduce its position below the applicable limit to prevent a violation. As a matter of practice, the CFTC expects the exchanges to review applications in the first instance with the CFTC potentially reviewing the exchange process after the fact. If an exchange recognizes a non-enumerated hedge exemption, the CFTC requires that the exchange post a summary of the general hedging strategy to its website (without revealing the identity of the hedger).

The Supplemental Proposal includes guidance regarding the general definition of bona fide hedging for the exchanges to follow in granting non-enumerated hedge exemptions. This guidance essentially mirrors the statutory definition of bona fide hedging in Section 4c(2) of the Commodity Exchange Act, as amended by the Dodd Frank Act ("CEA"). Finally, the CFTC proposes to limit the authority to review a non-enumerated hedge exemption application to exchanges: (1) on which a derivative contract is "actively traded;" and (2) with at least one year of experience administering exchange-set position limits.

Elimination of Certain Restrictions to Bona Fide Hedging

The 2013 Position Limits Proposal included a requirement that a market participant establish and liquidate a bona fide hedge in an "orderly manner." The CFTC proposes to eliminate this obligation in the Supplemental Proposal, explaining that it is not aware of a denial of a bona fide hedge due to a lack of orderly trading on the exchange. Indeed, the CFTC conceded that a commercial entity engaging in disruptive trading would be acting contrary to its economic interests. However, the CFTC also noted that market participants would remain subject to other provisions within the CEA, such as restrictions on disruptive trading and manipulation.

The CFTC further proposes to eliminate the requirement from the 2013 Position Limits Proposal that the risks offset by a commodity derivative contract be "incidental" to the position holder's commercial operations. However, bona fide hedging positions would still need to be "economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise." The CFTC confirmed that it continues to read this "economically appropriate" test to refer to price risk only, and does not include other risks such as execution, logistics, or credit risk. Finally, the Supplemental Proposal authorizes the exchanges to recognize anticipatory hedge exemptions, although it is unclear how the filing requirements specified in the 2013 Position Limits Proposal for anticipatory hedging interact with or supplement the newly proposed exchange application requirements for anticipatory hedging.

Spread Exemptions

The Supplemental Proposal authorizes the exchanges to establish rules governing spread exemptions from federal and exchange-set position limits. For example, an exchange may grant exemptions for calendar spreads, quality differential spreads, processing spreads (e.g. energy "crack" spreads), and product/by-product spreads.

However, the Supplemental Proposal does not change the 2013 Position Limits Proposal prohibiting risk management exemptions. Market participants still cannot rely on an exemption to hedge exposure to commodity index contracts (e.g., exposure to the Goldman Sachs Diversified Commodity Index) with a component of the commodity index (e.g., a futures contract component of the index).

Delay for Exchange-Set Position Limits for Swaps

The CFTC proposes to "temporarily" delay the requirement for an exchange to establish position limits on swaps where the exchange "lack[s] access to sufficient swap position information." Based upon the language in the preamble of the Supplemental Proposal, the CFTC does not expect DCMs or SEFs to have sufficient swap position information to monitor swap positions against a limit. This likely means that there will not be position limits on SEFs in the near future, and that DCM-set position limits will be limited to futures contracts.

CFTC to Use its Swaps Large Trader Reporting Data

The CFTC noted improvements in the swap position data that it receives pursuant to its Part 20 swaps large trader reporting regulation. In light of these improvements, the CFTC plans to use this data to calculate the initial levels of federal non-spot month position limits. In the 2013 Proposed Position Limits Rule, the CFTC proposed to establish non-spot month position limits for futures and economically equivalent swaps based upon a percentage of the total open interest for the particular derivative contract. However, the initial limits proposed in the 2013 Proposed Position Limits Rule did not include swap open interest data due to concerns about the accuracy of swap data the CFTC receives under Part 20. The decision in the Supplemental Proposal to include Part 20 swaps data in the open interest calculation may raise the size of the non-spot month limits in any CFTC final rule.


The Supplemental Proposal is a significant step in the right direction for commercial hedgers. The CFTC recognized that its 2013 Position Limits Proposal was overly prescriptive and intends that the Supplemental Proposal provide more flexibility to accommodate hedging. The Supplemental Proposal also places the flexibility in the hands of the experts – i.e., the exchanges with years of experience administering limits and understanding the nature of hedging activity. That said, the Supplemental Proposal retains a role for the CFTC to review the decisions of the exchanges.

In light of the expanded role for the exchanges, one area that the CFTC does not address is the extensive CFTC filing requirements for market participants relying on a bona fide hedge exemption. Given the application requirements discussed in the Supplemental Proposal, the Commission should consider streamlining the various forms from the 2013 Position Limits Proposal to prevent redundant, burdensome, and unnecessary filing requirements.


1. The Supplemental Proposal is available here; see also Position Limits for Derivatives, 78 Fed. Reg. 75680 (Dec. 12, 2013) (the "2013 Position Limits Proposal").

2. Chairman Massad's full statement is available here.

3. Commissioner Giancarlo's full statement is available here.

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
Troutman Sanders LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Troutman Sanders LLP
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