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Speculative Position Limits
The Commodity Futures Trading Commission is currently considering whether changes are needed in the regulatory regime that governs the application of speculative position limits to the energy futures markets. In mid-2009 the agency held several days of hearings to gather public input on potential changes to the position limit regime. On January 14, 2010, the CFTC held a public meeting to discuss a proposed rule establishing a new position limit regime for energy futures and options markets. After the enactment of the Dodd-Frank Act, the CFTC withdrew this proposed rule and in January 2011 the agency issued a different proposal that would apply to over-the-counter commodity swaps as well as listed futures and options, as mandated by Section 737 of Dodd-Frank. To help FIA members and the public understand CFTC policy in this area, the FIA has listed below several information resources, including statements, testimony, position papers and current rules. The FIA also encourages members and the public to visit the CME Group’s web page on the role of speculation in futures markets, which contains a number of articles and other resources on this topic. FIA Statement on Position Limits Rule (Oct. 18, 2011) John Damgard, president of the Futures Industry Association, issued the following statement on Oct. 18, 2011 in response to the approval of the final position limits rule by the Commodity Futures Trading Commission: "It is quite troubling to see that three out of the five CFTC commissioners have such serious reservations about this rule. Commissioner Dunn even went so far as to say that he has not seen 'any reliable economic analysis' to support the contention that position limits are necessary or effective in preventing excessive speculation. At best, position limits are a cure for a disease that does not exist, according to Commissioner Dunn. At worst, they may harm the very markets they are intended to protect. I could not agree more with his comments." "Of particular concern to us is the potential adverse effect on commercial entities that use derivatives to hedge price risk. The comments by the CFTC commissioners at today's meeting appear to indicate that the rule will make it more difficult if not impossible for these entities to use legitimate and well-established methods for hedging their risks." CFTC Approves Final Rules on Position Limits (Oct. 18, 2011) The Commodity Futures Trading Commission on Oct. 18 approved its final rule on speculative position limits by a vote of 3 to 2, with Republican Commissioners Jill Sommers and Scott O'Malia dissenting. Both commissioners asserted that the rule goes too far in reducing the ability of commercial entities to enter into hedging transactions. O'Malia also issued a 16-page statement of dissent. "I have always believed that there was a right way and a wrong way for us to move forward on position limits," said Sommers. "Unfortunately I believe we have chosen to go way beyond what is in the statute and have created a very complicated regulation that has the potential to irreparably harm these markets."Democratic Commissioner Michael Dunn voted in favor despite grave concerns about its value and effectiveness. He called the debate over position limits a "sideshow" that has diverted the agency's resources away from actions to prevent another financial crisis. He questioned the rationale for the rule and warned the implementation of position limits will not lead to lower prices for heating oil and gasoline, as proponents have suggested, and may actually lead to higher prices for food and fuel.
"Congress has tasked the CFTC with preventing excessive speculation by imposing position limits. The law is clear, and I will follow the law," Dunn said. "I am still left with the conclusion that no one has presented to this agency any reliable economic analysis to support either the contention that excessive speculation is affecting the markets we regulate or that position limits will prevent excessive speculation." The final rule will establish CFTC-administered limits on speculative positions in 28 "core" commodity futures contracts and "economically equivalent" futures, options, and swaps. The limits will be established in two phases. Spot-month limits will be based on 25% of the deliverable supply and will be effective 60 days after the effective date of a final rule further defining the term "swap." That definition is being drafted jointly with the Securities and Exchange Commission and is tentatively scheduled for release by the end of this year.In the second phase, the CFTC will set limits for positions in all non-spot contract months combined or in a single contract month after it has received one year of open interest data on futures, cleared swaps and uncleared swaps. That data will be collected under the agency's recently finalized large-trader reporting rules. These limits will be based on 10% of the contract's first 25,000 of open interest and 2.5% thereafter. They will be reset biennially based on two years of data on open interest in futures, cleared swaps and uncleared swaps. The CFTC expects to have 12 months of open interest data by the end of August 2012, CFTC staff said. The CFTC will then review the data and issue an order defining the position limits and giving the industry two months to comply. In practical terms, it appears that the all months combined/single month limits therefore will take effect in late 2012 or early 2013. CFTC staff said the final rule contains exemptions for bona fide hedging transactions, including certain types of anticipated merchandising transactions, royalties, and service contracts. The final rule uses account aggregation standards that are "consistent" with the CFTC's current position limits aggregation policy, the CFTC staff said. The final rule includes the agency's long-standing independent account controller exemption but only for customer positions. Under current CFTC regulations, exchanges require aggregation for non-agricultural commodities based solely on common control, not based on common ownership. The final rule establishes a quarterly position visibility reporting regime for traders exceeding a certain threshold in energy and metal contracts. The purpose is to assist the CFTC in its surveillance program by giving it "additional visibility" into the physical and swaps portfolios of the largest traders, the CFTC explained. The final rule does not include the "class limits" that were included in the proposed rule issued in January. In other words, a market participant holding both futures and swaps based on the same commodity will be required to comply with limits on the net position, taking into account any offsets between the two types of derivatives. When the spot-month position limits are implemented, the CFTC estimated that approximately 84 traders in legacy agricultural contracts (contracts already subject to CFTC position limits), 50 traders in non-legacy agricultural contracts, 85 traders in energy contracts, and 12 traders in metal contracts would hold or control positions that could exceed these limits. For non-spot-month position limits, the CFTC estimated that approximately 84 traders in legacy agricultural contracts, 80 traders in non-legacy agricultural contracts, 10 traders in energy contracts, and 25 traders in metal contracts would hold or control positions that could exceed these limits. Click Here for CFTC Statements, Fact Sheets and Other Documents
By Jonathan Flynn, Cadwalader, Wickersham & Taft An analysis of the CFTC position limits proposal and the issues it raises for market participants. EDHEC Analyzes Investing in Commodity Markets (August 2011) The EDHEC Risk Institute, a European think-tank, released a study on the implications of commodity investing for portfolio risk and market regulation. The study, which is based on data provided by CME Group, examines the performance and risk characteristics of long-only commodity index investments favored by passive investors and of long/short commodity strategies of the kind implemented by hedge fund managers, and confirms that correlations with equity and bond investments are relatively low, especially for long/short commodity strategies. The study also examines the “financialization” of commodity markets from 1992 to 2011 and finds very little to no evidence to suggest that investment flows have destabilized commodity prices. FIA Asks CFTC to Re-Issue Position Limit Proposal to Clarify Aggregation Policy (May 25, 2011) The FIA submitted a letter to the Commodity Futures Trading Commission on May 25 recommending that the agency re-issue its proposed speculative position limit rules to clarify how the agency intends to aggregate positions within a firm. The FIA submitted the letter after learning that the agency plans to aggregate positions on a firm-wide basis regardless of whether the positions are under common control or common ownership. This would include all positions held within a firm including asset management subsidiaries that operate separately from other divisions of the firm. The FIA stated that the public must be able to review this policy, which was not discussed in the proposed rules as published. Further, the FIA said the planned aggregation policy goes beyond the law, is unprecedented and would stifle legitimate use of the of the markets by investors and end-users. “In our view, compulsory firm-wide aggregation in such circumstances would not advance any regulatory policy or purpose and the consequences to the markets and the industry of imposing such an onerous standard would be harmful and vast,” the FIA wrote. President Obama Forms Task Force to "Root out" Fraud and Manipulation in Energy Markets (April 21, 2011) President Obama stepped up the administration’s response to rising gasoline prices, announcing the formation of an inter-agency working group headed by the Justice Department to crack down on price gouging and other illegal activity in the oil markets. Speaking at a public event in Nevada on April 21, Obama said he has directed Attorney General Eric Holder to put together a team of officials "to root out any cases of fraud or manipulation in the oil markets that might affect gas prices, and that includes the role of traders and speculators." Holder subsequently issued a statement saying that the working group, which includes the Commodity Futures Trading Commission, would foster increased cooperation between investigators and government officials in the enforcement of state and federal laws against collusion, manipulation and other forms of wrongdoing. "It will also allow us to evaluate significant market developments, including the activities of speculators and index traders, so we can anticipate and aggressively pursue cases of suspected illegal activity," Holder said. IOSCO Updates G-20 Leaders on Commodity Market Oversight Projects (April 15, 2011) The International Organization of Securities Commissions submitted a report to the leaders of the Group of 20 nations summarizing the status of several projects underway to improve the regulation and supervision of commodity markets. The report, which was released on April 15, outlined work in three main areas: recommendations on contract design and market surveillance; an assessment of the impact of price reporting agencies on crude oil price discovery; and the creation of a trade repository for commodity derivatives. CFTC, FTC Agree to Share Information on Energy Investigations (April 12, 2011) The Commodity Futures Trading Commission and the Federal Trade Commission have signed an agreement to share non-public information on investigations into the oil and gasoline markets, the two agencies announced on April 12. The agencies said the agreement will help the FTC enforce its petroleum market manipulation rule, which prohibits fraudulent manipulation of U.S. petroleum markets, and will help the CFTC in exercising its authority to pursue manipulation in the oil markets. “With gasoline prices on the rise, we are committed to doing all we can to ensure that petroleum markets are competitive,” said FTC Chairman Jon Leibowitz. “Competition works to keep prices lower, and this MOU improves the ability of the FTC and CFTC to take action if and when we find market manipulation. I’d like to thank our CFTC partners for helping to improve the already excellent communication between our two agencies.” Analysis of CFTC Proposed Position Limits on Commodity Index Fund Trading (March 25, 2011) By Professor Clifford V. Rossi, Robert H. Smith School of Business, University of Maryland FIA Recommends Changes in CFTC Position Limit Proposal (March 25, 2011) The FIA on March 25 submitted a detailed response to the Commodity Futures Trading Commission’s proposed rulemaking on speculative position limits. Although the FIA continues to oppose implementation of hard limits and continues to challenge the view that speculative investments have caused an increase in commodity prices, the FIA set out a number of specific recommendations for revising the proposed rule, such as a different methodology for setting spot month limits, a broader definition of bona fide hedging transactions, an exemption process for liquidity providers, and the re-institution of the independent account controller exemption from mandatory aggregation. The FIA also expressed its appreciation for the CFTC’s decision to adopt a two-phase approach to the imposition of position limits, with the first phase applying only to spot months and the second phase delayed until after the CFTC collects position data on physical commodity swaps, and its appreciation for the CFTC’s decision to eliminate a proposal to “crowd out” a trader’s ability to take speculative positions once that trader relies on a hedge exemption. The FIA cautioned, however, that the CFTC has not yet provided sufficient empirical evidence to support this rulemaking and therefore asked the CFTC to withdraw the rule until after it has collected and analyzed the data necessary to determine that position limits are necessary and appropriate as required by the law.
Why Speculation Is Essential to the Global Marketplace (March 1, 2011) Speculation is vital if the markets are to keep functioning, John Hofmeister says in a video interview by CME Group. Hofmeister is former president of Shell Oil Company and the founder and chief executive officer of Citizens for Affordable Energy, a non-profit association based in Washington. He argues that speculation is needed in order for energy markets to function efficiently, just as oil is necessary to lubricate machines. He also comments on the imbalance between increasing demand from Asia and other parts of the world on the one hand, and the difficulties that oil producers face in attempting to meet that demand. “If we don’t have speculators,” he said, “markets dry up – and then we won’t have enough of what we need sometime in the future.” CFTC Approves Proposed Rules on Position Limits (Jan. 13, 2011) The Commodity Futures Trading Commission held a public meeting on Jan. 13 to consider its ninth series of rulemakings related to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. By a vote of 4-1, the agency approved for public comment a proposed rule establishing a new regime of speculative position limits for physical commodity derivatives, as mandated by Section 737 of Dodd-Frank. The proposed rule will be out for public comment for 60 days.
FIA Submits Pre-Rulemaking Comment on Dodd-Frank Position Limits (Oct. 1, 2010) The Futures Industry Association on Oct. 1, 2010 submitted a letter to the Commodity Futures Trading Commission on the application of speculative position limits on listed and over-the-counter derivatives involving exempt and agricultural commodities. The FIA submitted the letter ahead of the CFTC’s proposed rulemaking, which is expected sometime this fall. Under the Dodd-Frank law, the CFTC must finalize a position limit rule for energy and metals contracts by January 17 and for agricultural contracts by April 17. The FIA recommended that the limits be set on an interim rather than permanent basis and that they be flexible. The FIA also recommended that any interim position limits apply only to net positions in economically equivalent contracts and “be set at a level that will not reduce market liquidity or cause migration of the price discovery function to foreign markets.” In addition, the FIA recommended that the CFTC consider proposing an interim rule that aggregates positions only in commonly controlled accounts. The FIA stressed the need for the agency to provide guidance on the definition of a bona fide hedge position and requested that it issue guidance on the process for granting exemptions for these and other types of positions that perform similar risk-reducing functions.
Washington Watch: Continued Focus on Speculative Position Limits (June 2010) An update on CFTC initiatives related to speculative position limits, including the January 2010 proposal for a new federal scheme of position limits for energy commodities and the March 2010 public meeting on position limits in the metals markets, and a summary of the comments received from banks, brokers, airlines, utilities, natural gas companies, pension funds and other market participants.
Futures Trading And Oil Price Movements (June 2010) For more information about this publication, please see links below.
CFTC Issues Statement on Intraday Position Limits (May 7, 2010) The Commodity Futures Trading Commission on May 7, 2010 issued an advisory reminding market participants of their obligations to comply with speculative position limits on an intraday basis, rather than only on an end-of-day basis. “A trader whose position exceeds the applicable speculative position limit at any time during the day is in violation of the Commodity Exchange Act and CFTC regulations, even if the position is subsequently reduced to a level within the applicable limit by the close of the market for that day,” the CFTC said. “Accordingly, intraday speculative position limit violations have been and continue to be subject to Commission enforcement action as violations of the Act.” Statements from CFTC Meeting to Examine Futures and Options Trading in the Metals Markets (March 25, 2010)
FIA files a major comment letter in opposition to the adoption by the Commodity Futures Trading Commission of its proposed speculative position limits on energy commodities (March 18, 2010) FIA Responds to the CFTC’s Proposed Position Limits Rule (Jan. 14, 2010) Text of CFTC Proposed Rule on Position Limits (Jan. 14, 2010) CFTC Position Limit Proposal Fact Sheet (January 14, 2010) CFTC Position Limit Proposal Q and A (January 14, 2010) CFTC Chairman Gary Gensler Closing Statement (Jan. 14, 2010) CFTC Chairman Gary Gensler Opening Statement on Position Limit Proposal (Jan. 14, 2010) Dunn, O'Malia and Sommers Statements (Jan. 14, 2010) Statement of Steve Sherrod, CFTC Acting Director of Surveillance (Jan. 14, 2010) Tables and Graphs Showing Impact of CFTC Position Limit Proposal (Jan. 14, 2010) CFTC Commissioner Bart Chilton Statement on Position Limit Proposal (Jan. 14, 2010) CFTC General Counsel Dan Berkovitz Statement (Jan. 14, 2010) UK Treasury and FSA Position Paper on OTC Derivatives Reform (Chapter 9 covers position limits) (Dec. 2009) “Position Limits Start to Bite”, Futures Industry, (November 2009) “CFTC Examines Position Limits”, Futures Industry, (September 2009) CME White Paper on Excessive Speculation and Position Limits in Energy Derivatives Markets (Sept. 16, 2009) CME Advisory Notice on Position Limits (Sept. 11, 2009) Testimony and Statements from CFTC Hearings on Speculative Position Limits in Energy Futures, Day 3 (Aug. 5, 2009) FIA Testimony to CFTC on Price Discovery, Position Limits and Hedge Exemptions (Aug. 5, 2009) CFTC Chairman Gary Gensler Statement on Position Limits (July 29, 2009) Testimony and Statements from CFTC Hearings on Speculative Position Limits in Energy Futures, Day 2 (July 29, 2009) Brief Legislative History of Position Limits and the Hedge Exemption (July 28, 2009) Testimony and Statements from CFTC Hearings on Speculative Position Limits in Energy Futures, Day 1. (July 28, 2009) ICE Statement Regarding CFTC Position Limit Initiatives (July 9, 2009) Current Position Limits and Position Accountability Levels at ICE Futures U.S. (Feb. 10, 2009) ResourcesIFM Position Limit Databank CME Rules on Position Limits and Exemptions CME Procedures for Position Limit Violations Current Position Limits, Position Accountability Levels and Reportable Position Levels at CME Group Exchanges |
