The CFTC, by a 3-2 vote, has approved its final rule on position limits under the Dodd-Frank Act. Although the text of the rule has not been released, the Commission’s statements on the rule indicate that it did not stray very far from its January 26, 2011 proposed rule.
The final rule establishes speculative position limits for 28 physical commodity futures contracts, along with all futures, options, and swaps that are “economically equivalent” to such contracts. The 28 “Core Referenced Futures Contracts” include, by commodity category:
- 4 energy contracts:
- NYMEX Henry Hub Natural Gas (NG);
- NYMEX Light Sweet Crude Oil (CL);
- NYMEX New York Harbor Gasoline Blendstock (RB); and
- NYMEX New York Harbor Heating Oil (HO);
- 9 “legacy” agricultural contracts;
- 10 non-“legacy” agricultural contracts; and
- 5 metals contracts.
Spot-month limits will be set at 25% of estimated deliverable supply, to be applied separately to positions in physical-delivery and cash-settled contracts. Unlike the proposed rule, only the cash-settled NYMEX Henry Hub Natural Gas contract will be subject to an increased spot-month position limit, applicable to cash-settled positions and aggregate positions, of five times the limit for the physical delivery contract. Spot-month position limits will be effective 60 days after the term “swap” is further defined under the Dodd-Frank Act, and the Commission estimates the limits will affect 85 traders in energy contracts, 84 in legacy agricultural contracts, 50 in non-legacy agricultural contracts, and 12 in metal contracts.
Non-Spot Month Limits
Non-spot month limits will be set at 10 percent of open interest (based on futures and cleared and uncleared swaps) in the first 25,000 contracts and 2.5 percent thereafter. Except for the 9 legacy agricultural contracts, for which non-spot month position limits will be effective 60 days after the term “swap” is further defined under the Dodd-Frank Act, non-spot-month position limits will be made effective by Commission order after the Commission has received one year of open interest data. The Commission estimates that the limits will affect 10 traders in energy contracts, 84 in legacy agricultural contracts, 80 in non-legacy agricultural contracts, and 25 in metal contracts.
Visibility Levels and Reporting for Non-spot Month Energy and Metals Contracts
In addition, the final rule requires quarterly position visibility reporting for traders exceeding non-spot month visibility levels in energy and metals referenced contracts. The levels for energy contracts in the January 26, 2011 proposed rule were 22,500 CL contracts, 7,800 RB contracts, 21,000 NG contracts, and 9,900 HO contracts.
Bona Fide Hedge and Other Exemptions
Bona fide hedge transactions are excluded from an entity’s position for purposes of the position limits. The Commission states that the exemption has been broadened in the final rulemaking to include certain anticipated merchandising transactions, royalties, and service contracts to reflect concerns of commercial firms. Nonetheless, Commissioner O’Malia, as part of his lengthy dissent, lamented what he perceived as a lack of flexibility in the bona fide hedge rules, stating that the Commission’s provisions are too narrow to adequately encompass certain long-standing risk management practices such as anticipatory hedging and do not allow hedgers to expeditiously seek exemptions for hedge transactions not enumerated in the rules.