In a party-line 3-2 vote, the CFTC proposed (see here) applying federal speculative position limits to 25 "core referenced futures contracts," including futures and options linked to those contracts and economically equivalent swaps. The 25 core contracts include 16 related to agriculture, five related to metals, and four related to energy. With the exception of nine of the agriculture products, the federal limits would apply only during the stop month; however, the relevant exchanges (i.e. CBOT, MGEX, ICE, COMEX and NYMEX, depending on the product) would be required to set non-spot month limits in the other contracts.
The position limits would not apply to location basis contracts, commodity index contracts, swap guarantees and certain trade options.
Hedging exemptions would be available for positions that satisfy all three of the following tests: (i) the temporary substitute text; (ii) the economically appropriate test; and (iii) the change in value requirement. The CFTC also stated that it would be open to recognizing hedges that did not meet these requirements. Exemptions from federal position limits would be available for certain types of spread transactions (e.g., calendar spreads). Other exemptions would also be available, including for positions where one company takes over the positions of a second company that is in financial distress. As a general matter, the CFTC has somewhat liberalized the process of seeking an exemption.
CEA Section 4(a)(1) provides that "excessive speculation" may create "unwarranted changes in the price" of commodities, which is an "undue and unnecessary burden on interstate commerce." Under that provision, the CFTC shall establish such rules as it finds are "necessary to diminish, eliminate or prevent such burden."
Formerly, the CFTC had taken the position that CEA Section 4(a)(2)(A) overrode the "necessary" language in Section 4(a)(1), and had directed the CFTC to establish position limits even in the absence of a finding that the limits were necessary. The new proposal requires that the CFTC find that a position limit is necessary before it may be imposed. (See page 230 of the Proposing Release.)
As detailed in the release, the CFTC had previously issued a position limits proposal in 2013, a supplemental proposal in 2016, and a 2016 reproposal. The CFTC states that that comment letters on the former proposals are no longer relevant.
At a CFTC Open Commission Meeting, CFTC Chair Heath Tarbert supported the proposal for protecting Americans against "some of the most nefarious machinations" in the U.S. derivatives market by preventing "excessive speculation." Commissioner Brian Quintenz agreed, stating that the proposal "elegantly balances" the policy interests within the statute by focusing exclusively on spot-month position limits in the proposed set of physically-settled contracts. Commissioner Dawn D. Stump determined the proposal to generally be "workable for both market participants and the [CFTC]." She called for improvements on (i) the list of enumerated hedging transactions and positions, and (ii) the system for reviewing hedging practices outside of the list.
CFTC Commissioner Rostin Behnam disagreed with the proposal, claiming that it "pushes the bounds of reasonable interpretation" by deferring to exchanges and undermining Congress's intent that the CFTC set position limits even in the absence of any finding of necessity. Commissioner Dan M. Berkovitz also dissented, warning that the proposal "ignores" the Dodd-Frank Act and reverses "decades of legal interpretations of the Commodity Exchange Act" by (i) abruptly increasing position limits, (ii) not allowing the CFTC to monitor the increases, and (iii) failing to provide sufficient explanations for other "key approaches" in the proposal.
Comments must be submitted within 90 days after publishing the proposal in the Federal Register.
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