The Commodity Futures Trading Commission and the Chicago Board of Trade brought and settled enforcement actions against Elephas Investment Management Limited, a Hong Kong-based hedge fund, for violating the spot month speculative federal position limit for wheat futures on one day in 2017. (Click here to access CFTC Rule 150.2.) To settle this matter, Elephas agreed to pay a fine of US $160,000 to the CFTC, and US $50,000 to the CBOT. Elephas also agreed to pay the CBOT US $166,590 – an amount CBOT claimed the firm saved in reduced losses.

According to the CBOT, on November 29, 2017, Elephas held a futures equivalent net long position of 1,680 December Soft Red Wheat Futures Contracts – in excess of 1,080 contracts over the spot month position limit of 600 contracts. After Elephas was required to take delivery of a large portion of its December long positions and was assigned 1,185 wheat certificates, the firm rolled its remaining spot month futures contracts and entered into short positions to re-tender its certificates – effectively liquidating all its spot positions, including its violative positions. It did this by selling 1680 lots of a December 2017/March 2018 wheat futures spread. The CBOT and CFTC claimed these transactions contributed to a reduction of a loss of US $168,590 the company otherwise would have incurred as a result of violating position limits

Unrelatedly, Craig Cowell agreed to a permanent suspension from all access to ICE Futures U.S. markets to resolve an enforcement action brought against him by the exchange. IFUS charged that from October 2016 through November 2017, Mr. Cowell engaged in a pattern of placing what appeared to be a smaller order on one side of the market (using an iceberg order) while placing visibly larger orders on the opposite side of the market. The larger orders gave the appearance of false market depth and helped the execution of Mr. Cowell’s smaller orders. Mr. Cowell cancelled his larger orders as soon as his small order was executed. As a result, claimed IFUS, Mr. Cowell did not appear to have entered orders with the intent of execution. Mr. Cowell principally engaged in his purported spoofing conduct in Coffee C, Sugar No. 11 and Cocoa futures contracts.

Mr. Cowell previously was summarily suspended from access to all IFUS markets for the same offense in August 2018. (Click here for details in the article “COMEX and NYMEX Non-Member Settles Disciplinary Actions for Allegedly Operating Trading System Designed to Mislead Market Participants by Spoofing” in the August 12, 2018 edition of Bridging the Week.)

Legal Weeds/My View:In November 2013, the CFTC proposed new rules related to derivatives speculative position limits, addressing absolute levels for 28 so-called “core referenced futures contracts” involving various agricultural commodities, energy products and metals. These limits were proposed to apply on a futures equivalent basis across all referenced contracts (e.g., related futures, options and swaps). The proposed rules also addressed what constituted bona fide hedging positions. The recommended rules were meant to replace final position limits rules adopted by the CFTC in 2011 that were vacated by a US District Court during September 2012. (Click here for details regarding the CFTC’s 2013 proposed position limit rules in the article “CFTC Proposes Revised Position Limit Rules” published on November 12, 2013 by Katten Muchin Rosenman LLP.)

In May 2016, the CFTC proposed some modifications and additions to its 2013 proposed regulations and guidance related to speculative position limits in order to potentially authorize relevant derivatives exchanges to recognize certain derivatives positions as constituting non-enumerated bona fide hedges or enumerated anticipatory hedges. The CFTC also proposed to grant derivatives exchanges authority to recognize certain spread positions as justifying an exemption from speculative position limits. (Click here for background in the article “CFTC Proposes to Authorize Exchanges to Grant Physical Commodity Users Non-Enumerated Hedging Exemptions and Other Relief Related to Speculative Position Limits” in the May 27, 2016 edition of Between Bridges.)

In December 2016, the CFTC re-proposed its position limits rules. Compared to its November 2013 proposed rules, the Commission’s most recent proposals: (1) reduced the number of core referenced contracts subject to express oversight by the Commission for position limits purposes from 28 to 25; (2) revised spot month, single and all-months position limits on the 25 referenced contracts; (3) defined bona fide hedging to more closely parallel the definition in existing law and to address many concerns raised in response to the CFTC’s 2013 proposal; and (4) authorized persons to apply for non-enumerated hedging exemptions from qualified exchanges, even for referenced contracts. (Click here for details in the article “CFTC Adopts Final Rules Related to Aggregation of Positions and Owned Entity Exemption; Re-Proposes Position Limits Rules” in the December 11, 2016 edition of Bridging the Week.)

In March 2019, J. Christopher Giancarlo, Chairman of the CFTC, announced that prior to leaving the Commission this summer, he intended to propose a new “workable” position limits rule that, among other things, would address anticipatory hedging. He offered no other contents of the proposed new rule other than to suggest it “must be responsive to the public comments and ensure that regulatory barriers do not stand in the way of long-standing hedging practices of American farmers, ranchers, producers and manufacturers, who depend on our markets.” (Click here to access Mr. Giancarlo’s speech before FIA.) It now appears that no new proposed position limits rule will be issued by the CFTC prior to Mr. Giancarlo’s departure on July 15. 

The CFTC has struggled mightily for about a decade to develop a “just right” position limits regime to reflect what different persons regard as less than precise requirements under the Dodd Frank Wall Street Reform and Consumer Protection Act. If anything, this delay should reinforce the old adage, “if it ain’t broke, don’t fix it.” The current balance between the CFTC and exchanges in overseeing an effective position limits regime has now worked for a very long time. Extend and adapt this regime to swaps, extend the regime to a few more commodities, and let’s move on.

In any case, the challenge to get it right now passes to new CFTC chairman, Heath Tarbert. Welcome aboard!