Invoking its authority under Section 4a(a) of the Commodity Exchange Act of 1936 (CEA), on January 14, 2010, the Commodity Futures Trading Commission (CFTC) in a 4-1 vote issued a proposed rule to establish speculative position limits for certain energy contracts traded on CFTC reporting markets. The proposed rule would establish aggregate and exchange-specific position limits to economically similar contracts that are traded on the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE). Affected contracts and commodities include: Henry Hub Natural Gas, Light Sweet Crude Oil (WTI), New York Harbor No. 2 Heating Oil, and New York Harbor Gasoline Blendstock (RBOB). The CFTC proposes to exempt from the position limits bona fide hedging transactions and certain swap dealer risk management transactions. Comments on the proposed rule are due 90 days after the rule’s publication in the Federal Register, likely in mid- to late April. Currently, the CFTC establishes position limits on speculative trading of only certain agricultural commodities. Otherwise, position limits are established by the exchanges. The proposed rule would extend speculative position limits to energy contracts and commodities, by establishing aggregate and exchange-specific position limits. It will not, however, replace the exchange-established limits.
The aggregate limits will include All-Months-Combined and Single-Month position limits aggregated across contract classes and exchanges:
- The All-Months-Combined Aggregate Position Limits for an affected commodity will be calculated as: 10% of the Aggregated Open Interest Value for the first 25,000 contracts, plus an additional 2.5% for any open interest above that level.
- A Single-Month Aggregate Position Limit will be two-thirds of the All-Months Combined Aggregate Position Limit.
In addition to these aggregate limits, the proposed rule would establish: (a) Single Exchange limits, which will apply to each separate reporting market for contracts of the same class, both on an all-months and a single-month basis; and (b) Spot-Month limits for physically delivered and cash-settled contracts (typically defined by a three-day period during a month)
The proposed rule would exempt from the speculative position limits bona fide hedging transactions and swap dealer risk management transactions.
- A bona fide hedge exemption generally relates to commercial hedgers. Applications for bona fide hedge exemptions will be directed to a reporting market.
- The swap dealer risk management exemption will seek to offset certain financial risk incurred by swap dealers. The swap dealer risk management exemption will be limited to twice any applicable All-Months-Combined or Single-Month Non-Spot Motion Position Limit. Applications for swap dealer exemptions will be directed to the CFTC.
Additionally, the proposed rule would establish reporting requirements for persons who hold positions in referenced contracts or commodities pursuant to the Conditional-Spot-Month position limits or who obtain bona fide hedging or swap dealer risk management exemptions.
The CFTC proposes to treat multiple accounts subject to common ownership or control as if they are held by a single trader. Accounts are typically considered to be under common ownership if one or more traders has a 10% or greater financial interest in the accounts.
The CFTC requested comments on a set of 18 questions related to both the proposed rule and the general topic of speculative position limits.
The CFTC issued the proposed rule by a 4-1 vote (with Commissioner Jill Sommers voting no). Several of the Commissioners voting in support did so with questions about the proposed rule. For example, Commissioner Michael Dunn expressed concern that “the adoption of this proposed regulation, without the corresponding [over-the-counter] regulatory authority and similar undertakings by other nations’ regulators, may result in less transparency in the future markets if those presently trading on exchange move to OTC and other opaque markets to circumvent these proposed position limits.” Commissioner Scott O’Malia “concur[red]” in the issuance of the proposed rule, notwithstanding his reservations on several points, including that “the proposal fails to make a compelling argument that the proposed position limits . . . would dampen price distortions or curb excessive speculation.” In contrast, Commissioner Bart Chilton opined that the proposed position limits “actually err on the high side” and “would be seen by some as higher than appropriate.” Comments received by the Commission, as well as legislative developments on financial market regulation in general (which also addresses position limits), will likely influence any final rule that is issued.