Trade Associations Urge CFTC to Revise Position Limits Reproposal

Bob Zwirb Commentary by Bob Zwirb

The MFA, SIFMA Asset Management Group and the Alternative Investment Management Association (collectively, the "Associations") recommended that the CFTC "examine carefully all relevant data and consider available alternatives in determining whether there are demonstrable concerns over excessive speculation" in revising its reproposed position limits rulemaking (the "Reproposal").

In a letter to the CFTC, the Associations urged the Commission to:

  • "[i]dentify a clear standard of 'excessive speculation' and incorporate that standard in its required necessity findings";

  • "[b]efore imposing position limits on a core referenced futures contract, make a necessity finding specific to such core referenced futures contract and explain why position limits, and the levels at which they are fixed, are appropriate for each such contract"; and

  • "reduce compliance burdens and operational challenges" in the final aggregation rule.

To the extent that the CFTC "makes a necessity finding and determines that position limits are appropriate for a specific core referenced futures contract," the Associations requested that the Commission:

  • ensure that position limits are appropriately tailored to a contract by providing individual consideration of the "contract's economic characteristics and the market dynamics of the underlying commodity";

  • "[m]ake an independent finding that limits on other than spot month contracts are needed to prevent excessive speculation";

  • grant the authority to administer position limits and accountability levels to exchanges;

  • "[e]xclude economically equivalent contracts from position limits at this time to provide more time for the Commission to obtain and carefully analyze [certain] higher quality data";

  • "permit market participants to hold cash-settled contracts five times the limit of the physical-delivery contract regardless of whether positions are held in the underlying physical-delivery contracts";

  • "provide a market participant with the opportunity to be heard by the Commission or its staff" before taking action to modify exchange-granted, non-enumerated bona fide hedging exemptions; and

  • "permit a risk management exemption involving swap exposure, including commodity index swaps."

Commentary

Bob Zwirb
Bob Zwirb

The CFTC's multi-year effort to impose a federal position limits regime on the financial derivatives markets has been marred by a number of unfortunate developments, including (i) the CFTC's failure to make an empirically respectable case for imposing such a regime, (ii) its insistence that it need not demonstrate the necessity for such regulation in the first place, (iii) its failure to engage in a rigorous cost-benefit analysis for any of its proposals, (iv) its withdrawal of a report by its expert Energy and Environmental Markets Advisory Committee and, most of all, (v) its persistent rejection of the findings of its own staff economists on the beneficial role that speculators and speculation play during times of high market volatility. Those developments illustrate why the Associations' call for the Commission to lay out the "economic basis for justifying" such a regime represents an important challenge, given the CFTC's conduct over the past several years.

While there are many good and reasonable suggestions in the Associations' letter, perhaps two of the best are these: (1) that such a federal regulatory regime – assuming one is necessary in the first place – should be "minimally disruptive, practical, and not overly complicated to administer by market participants," and (2) that the exchanges – rather than the CFTC – should be allowed to administer the position limit regime and not just the process for reviewing applications for non-enumerated hedge exemptions, as currently proposed.

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