CFTC Issues Proposed Position Limits Rule for Derivatives (Pre-Fed. Reg.)
Commentary by Bob Zwirb
The CFTC has published new proposed regulations regarding speculative position limits. The proposed rules are intended to establish position limits for 28 exempt and agricultural commodity futures and option contracts, and physical commodity swaps that are "economically equivalent" to such contracts. The CFTC also proposed to update some relevant definitions, revise exemptions for speculative position limits and update reporting requirements. In addition, the CFTC proposed to update certain rules, guidance and acceptable practices for compliance with Designated Contract Market ("DCM") core principle 5 and Swap Execution Facility ("SEF") core principle 6 with respect to exchange-set speculative position limits and position accountability levels.
See: Text of Proposed Rule Change.
Related news: Key Differences between the Recent CFTC Position Limits Proposal and the Previously Vacated Final Position Limits Rule (with Delta Strategy Group Summary) (November 18, 2013); CFTC Approves Position Limits Proposal (with Lofchie and Zwirb Comments and Delta Strategy Group Summary) (November 5, 2013) Cadwalader Memo on Proposed Position Limits and Aggregation Rules (with Lofchie Comment) (November 6, 2013) Streetwise Professor Craig Pirrong on Position Limits (with Lofchie Comment) (November 11, 2013) CFTC Publishes Proposed Rules for Aggregation of Positions (Fed. Reg. Version) (November 15, 2013) CFTC Votes to Dismiss Appeal of 2011 Position Limits Rule (October 29, 2013).
Commentary
Aside from the CFTC's weak rationale for these proposed limits and the failure to demonstrate that they are appropriate and necessary, which we have discussed at some length in a previous commentary (see CFTC Approves Position Limits Proposal (with Lofchie and Zwirb Comments and Delta Strategy Group Summary) (November 5, 2013)), the proposed rule would (i) transplant a formula developed for legacy agricultural commodities and apply it to non-agricultural commodities such as metals and energy, (ii) unduly narrow the existing bona fide hedge exemption for commercial end users, and (iii) substitute government-mandated limits in many cases for those already set by exchanges. As with so many Dodd-Frank rules, this one is being done in a very prescriptive, complex fashion that makes compliance a challenge and in many instances leaves issues up to the Commission's discretion. All this for something that had nothing to do with the financial crisis of 2008.