The Commodity Futures Trading Commission (CFTC) today published in the Federal Register for public comment proposed amendments to its speculative position limit rules. The proposed rules would be the first expansion of CFTC-set speculative position limits to products beyond agricultural commodities. The proposed speculative position limits would apply to four energy commodities: (1) Henry Hub natural gas; (2) light sweet crude oil (West Texas Intermediate); (3) New York Harbor No. 2 heating oil; and (4) New York Harbor gasoline blendstock.

Major Features:

Significant provisions of the proposed rules include: (1) for the first time, application of speculative position limits across markets listing contracts on the same commodity in addition to each market separately; (2) the methodology for setting limit levels, which is largely based on current regulations; (3) no longer permitting disaggregation of positions by commodity pool operators, commodity trading advisors and others that have authorized an independent account controller to control all trading decisions for an account; and (4) a new exemption for swap dealers. These provisions are highlighted below.  

How Would CFTC Limits Be Applied?

Under the proposal, the CFTC would set hard position limits that would be applied separately to positions traded on each regulated futures market that lists contracts in an energy commodity (the New York Mercantile Exchange and the IntercontinentalExchange), and for the first time, across those markets. CFTC limits would not take the place of, and would be in addition to, exchange-set position limits or position accountability rules.  

What Would Be the Methodology for Setting the Level of a Position Limit?

As proposed, position limits would be set at decreasing levels for all months combined, each single futures month and the spot month. The all-months-combined aggregate limits across markets would be at 10 percent of the first 25,000 contracts in an energy commodity plus 2.5 percent of the remaining open interest in the energy commodity. The single-month limit aggregated across markets would be set at two-thirds of the all-months-combined level. For the spot month, the limit for physically delivered contracts would be 25 percent of deliverable supply. As proposed, traders in the spot month that hold only cash-settled contracts, and who meet special reporting requirements, would have a spot-month limit five times the spot-month limit for physically delivered contracts.

Speculative position limits that apply separately to the individual futures markets would have an alternative, more generous formula applicable to the all-months-combined and single-month levels. In addition, position limits on the individual markets would be determined by contracts within the same “class,” which would be determined by the contract’s method of delivery (physically delivered or cash-settled) and, in the spot month, the date of contract expiration. The class limit for all-monthscombined would be 30 percent of open interest on the particular market and the single-month limit would be two-thirds of the all-months-combined limit, with both limits being capped at the aggregate position limit level.

What Is the Proposed Change in Method of Aggregating Positions?

In a notable departure from current regulations, as proposed, mutual funds, commodity pool operators, commodity trading advisors and futures commission merchants would not be permitted to disaggregate the positions traded on their behalf by an independent account controller. Currently, with respect to CFTC speculative position limits in agricultural contracts, such professionally managed collective investment vehicles may disaggregate positions traded on their behalf by independent account controllers. In contrast, as proposed, energy position limits would be applied to all positions in which any person has a direct or indirect ownership or equity interest of 10 percent or greater. However, an exemption is proposed for a limited partner or shareholder having less than a 25 percent ownership interest of a commodity pool. Such a limited partner or shareholder need not aggregate the pool’s position with the limited partner’s or shareholder’s other trading positions.  

Swap Dealer Exemption

The CFTC is proposing a new exemption for swap dealers in connection with the positions that a swap dealer holds to offset the risk associated with its swap agreements. The exemption, which applies only for positions outside of the spot month, would be for twice the applicable limits. Swap dealers would be required to apply annually to the CFTC for the exemption and demonstrate the net risk management needs of its customers. The names of swap dealers receiving the exemption would be made public after six months. Swap dealers granted the exemption would be required to file monthly reports with the CFTC and the applicable futures market, summarizing on a daily basis its proprietary and customer swap positions and dealing and trading activity.

Issues Raised by Commissioners in Proposing the Rules

The CFTC voted to propose these rules in a rare public meeting held on January 14, 2010. During the meeting, various Commissioners raised a number of questions, concerns and issues with the rules as proposed.

Commissioners Sommers, Dunn and O’Malia observed that the lack of CFTC authority in the OTC markets would likely undermine the intent of the proposed rule, as energy traders could avoid any established position limits by migrating to the OTC markets from regulated futures exchanges, and also expressed concern that trading might migrate to offshore energy futures markets that do not have comparable speculative position limits. Commissioner O’Malia also questioned the utility and effectiveness of position limits in general. In addition, he questioned the impact that the proposed speculative position limits might have on passive, long-only investors.

Next Steps

Chairman Gensler announced that the CFTC plans to hold a meeting in March to determine whether similar position limits should be established for precious metals and soft agricultural commodities, noting that position limits should be applied consistently to all markets and trading platforms.  

How Do I Comment?

Public comments are due by April 26, 2010, and may be submitted electronically to Reference should be made to ‘‘Proposed Federal Speculative Position Limits for Referenced Energy Contracts and Associated Regulations.’’