The CFTC has published a proposed supplement to its December 2013 proposed rule on position limits1 that would, among other things, authorize designated contract markets and swap execution facilities (“exchanges”) to administer a more flexible approach to the bona fide hedge (“BFH”) exemption from position limits, allowing such exchanges to extend BFH recognition to hedges that do not fall within the CFTC’s list of “enumerated” hedges. Under the supplemental proposal, a qualified exchange could establish a process whereby it would, in accordance with rules submitted to the CFTC, accept applications from a person seeking a BFH exemption for a “non-enumerated” hedge. The following summarizes some of the more salient aspects of what such a process would look like under the supplemental proposal:
- Any person intending to exceed one of the CFTC’s position limits based on a non-enumerated BFH exemption would have to apply and receive notice of recognition of such exemption from an exchange in advance of the date such person’s position would exceed the applicable limit.
- The exchange would be required to determine whether to grant such a non-enumerated BFH exemption “in a timely manner” (but evidently not subject to any firm deadline).
- The CFTC could review the person’s application for the non-enumerated BFH exemption at any time (including after it is granted).
- Both the exchange and the CFTC could revoke a granted exemption at any time (in the case of revocation by the CFTC, at least, applicants must be given a commercially reasonable amount of time to liquidate their derivative position or otherwise come into compliance).
- The person making use of the exemption would be required to file a report with the exchange whenever it owned or controlled a position recognized as a non-enumerated BFH, report its offsetting cash positions, and update and maintain the accuracy of any such report.
- The person would have to reapply on at least an annual basis to continue using the same BFH exemption.
In addition, the supplemental proposal would authorize exchanges to recognize enumerated “anticipatory” BFH positions—via a pre-trade application process that: (1) is similar to the process for recognition of non-enumerated BFH positions and (2) appears to function as an alternative to the pre-trade filing process administered by the CFTC under the December 2013 proposed rule. The supplemental proposal also authorizes exchanges to exempt certain “spread positions” from position limits, including calendar spreads, quality differential spreads, processing spreads, and product or by-product differential spreads. Finally, the supplemental proposal would make certain changes to the base definition of a BFH position (removing the so-called “incidental” risk and “orderly manner” liquidation requirements) and would delay application of the “core principle” requiring an exchange to administer its own position limits on swaps (until such time as the exchange has access to “sufficient swap position information”).
In an accompanying statement, CFTC Chairman Timothy Massad stated that the proposed supplement is a “significant step toward finalizing [the] rules on position limits this year.”
Comments on the supplemental proposal must be submitted to the CFTC on or before July 13, 2016.