The CFTC approved (see here and here) amending rules concerning (i) speculative position limits and (ii) the execution of package transactions, block trades and the resolution of error trades on swap execution facilities ("SEFs").

The "Position Limits for Derivatives" Proposal

In a 3-2 vote, the CFTC proposed:

  • applying (i) federal speculative position limits to certain referenced contracts, (ii) federal spot-month limits to referenced contracts on each of the 25 core referenced futures contracts and (iii) federal limits outside of the spot month to referenced contracts contingent with the nine legacy agricultural commodities;
  • updating requirements for exchange-set limits and exemptions;
  • allowing hedging transactions or positions to continue to exceed federal limits if the hedge satisfies the "general bona fide hedging definition; and
  • codifying the process for bona fide hedging recognition and implement new enumerated hedges.

Commentary

At a CFTC Open Commission Meeting, CFTC Chair Jay Clayton supported the proposal for protecting Americans against "some of the most nefarious machinations" in the U.S. derivatives market by preventing "excessive speculation." Commissioner Brian Quintenz agreed, stating that the proposal "elegantly balances" the policy interests within the statute by focusing exclusively on spot-month position limits in the proposed set of physically-settled contracts. While Commissioner Dawn D. Stump determined the proposal to generally be "workable for both market participants and the [CFTC]," she called for improvements on (i) the list of enumerated hedging transactions and positions and (ii) the system for reviewing hedging practices outside of the list. CFTC Commissioner Rostin Behnam also disagreed with the proposal, claiming that the proposal "pushes the bounds of reasonable interpretation" by deferring to exchanges and undermining Congress's position limits regime.

Commissioner Dan M. Berkovitz dissented, warning that the proposal "ignores" the Dodd-Frank Act and reverses "decades of legal interpretations of the Commodity Exchange Act" by (i) abruptly increasing position limits (ii) not allowing the CFTC to monitor the increases and (iii) failing to provide sufficient explanations for other "key approaches" in the proposal.

Comments must be submitted within 90 days after publishing the proposal in the Federal Register.

The "Amendments to Certain Swap Execution Facility Requirements and Real-Time Reporting" Proposal

Separately, the CFTC unanimously approved proposing amendments to CFTC Rules Part 36 ("Trade Execution Requirement"), Part 37 ("Swap Execution Facilities") and Part 43 ("Real-Time Public Reporting") to incorporate no-action relief and lessen the operational and compliance burdens for market participant.). The CFTC highlighted several aspects of the proposal, such as:

  • permitting swap components of certain categories under "package transactions" to be carried out on SEF through "flexible means of execution";
  • establishing a principle-based approach for SEF error trade policies that allows for methods of execution other than those currently allowed under CFTC rules; and
  • updating the definition of "block trade" currently requiring the execution of block trades to "occur[] away" from the SEF by enabling the SEF to offer non-Order Book methods of execution so that swap block trades by market participants may be executed on the SEF.

Commentary

Mr. Quintenz emphasized that the proposal is an "important first step" in increasing regulatory clarity and facilitating increased market participation of SEFs. Specifically, Mr. Tarbert highlighted the progress the proposal makes concerning centralized exchange type trading for swaps without hastening the "natural evolutionary process" of the market. While CFTC Commissioner Rostin Behnam concurred with the proposal, he cautioned the CFTC that the proposal may deviate from its original intent for codification. Notably, he pointed out that while the proposal regarding package transactions and block trades is essentially the same as the no-action relief, this is not the case for the proposal concerning error trades.

Comments must be submitted within 60 days after publishing the proposal in the Federal Register.