MFA Tells CFTC That Its Position Limits Are Too Limiting
Commentary by Bob Zwirb
MFA submitted comments in response to the CFTC's reopened comment period regarding the proposed rulemaking on position limits for derivatives.
The CFTC reopened the comment period to provide commenters with the opportunity to discuss (i) issues addressed at the CFTC Energy and Environmental Markets Committee ("EEMAC") meeting held on February 26, 2015, and (ii) the new provisions in Table 11a of the position limits proposal, which shows counts of unique persons over certain percentages of the proposed position limit levels based on counts from January 2013 to December 2014.
MFA raised concerns that the data in Table 11a indicates that the CFTC's proposed position limits are "too low," and stated that the data and methodology used for setting position limits by the CFTC may be "incomplete and/or flawed." MFA recommended that the CFTC use accurate and complete data to set position limits and review its methodology for establishing them.
MFA also expressed its concern that the CFTC seems determined to impose position limits even though it has not found them to be necessary with respect to energy commodities. It encouraged the CFTC to conduct further analysis on the necessity of position limits before imposing them. MFA suggested that the CFTC adopt position limits through a two-phase approach: (i) by adopting spot-month limits, finalizing the definition of bona fide hedging and relying on exchange position accountability levels for non-spot month contracts, and then (ii) by adopting position accountability levels for non-spot month contracts to "provide greater flexibility to market participants and regulators and reduce the costs of compliance."
See: MFA Comment Letter.
Related news: CFTC Corrects Comment Deadline Regarding Its Position Limits for Derivatives and Aggregation of Positions Proposals (Fed. Reg.) (March 25, 2015); CFTC Reopens Comment Periods on Position Limits for Derivatives and the Aggregation of Positions (Fed. Reg.) (February 25, 2015); CFTC Reopens Comment Periods for Position Limits and Aggregation Proposals (with Lofchie Music Selections) (February 24, 2015); CFTC Reopens Comment Period for Proposed Position Limits Rule (Fed. Reg.) (December 4, 2014); CFTC Reopens Comment Period for Proposed Position Limits Rule (with Lofchie and Zwirb Comments) (December 1, 2014).
Commentary
Recently, certain current and former members of the CFTC have expressed their impatience with the pace of the position limits rulemaking. Last week, for example, former Commissioner Bart Chilton was quoted as saying that the Commission had got "tangled up in the minutiae" of a position-limits rule and that it was "unfathomable" to him "that it's taking so long to get this finished." The MFA comment letter, which lays out serious flaws in the data and methodology used for setting such limits, demonstrates why patience may be a virtue in this case, and why a deep dive into the "minutiae" is necessary. Otherwise, moving ahead would seem to be "unfathomable" if the data flaws are as serious as MFA contends.
Aside from the data problem, which MFA states is too "insufficient to permit a meaningful analysis of the impact of the proposed position limits regime on market participants," there is also the problem of applying to the energy markets the formulae used to set position limits for the agricultural markets. As MFA observes, there is "a meaningful distinction between these markets" – a distinction that the CFTC proposal appears not to recognize – which will "severely constrain [the] liquidity in longer-dated contracts" favored by the energy market as opposed to the near months favored by the agricultural market.
However, if one wants to focus on the bigger picture instead of the "minutiae," the MFA letter has plenty to provide, e.g., in its observations that the CFTC has yet to "offer[] empirical support for the propositions that hard position limits are necessary, have reduced undue price volatility in agricultural commodities or will reduce volatility in energy markets," and that "[i]f anything, certain markets may suffer from insufficient speculation rather than too much speculation."