The Commodity Futures Trading Commission proposed modifications and additions to its 2013 proposed regulations and guidance related to speculative position limits in order to potentially authorize derivatives exchanges to recognize certain derivatives positions as constituting valid non-enumerated 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 too. These new powers would be available to designated contract markets and swap execution facilities that satisfy certain minimum requirements related to their listing of a relevant derivatives contract. All exemptions from position limits granted by exchanges would be subject to CFTC review. In addition, the CFTC recommended temporarily delaying its previously proposed requirement that derivatives exchanges establish and monitor speculative position limits on swaps. The Commission made this proposal because, practically, derivatives exchanges do not necessarily have access to information to satisfy this obligation at this time. (Click here for further details regarding the CFTC’s proposal 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.)
My View: Although the proposed amendments to the CFTC’s 2013 position limits regulations and guidance are a big leap in the right direction by permitting exchanges to make assessments regarding purported hedging strategies of entities trading on their facilities, there are potential burdens that hopefully will be alleviated in the final rules. Among other things, it appears that an entity granted a non-enumerated hedge exemption would have to report to the relevant exchange when it established its hedge and its offsetting cash position. Likewise, in connection with anticipatory hedge exemptions granted by an exchange, it appears that a trader similarly would have to file reports that detail its anticipatory hedge position with the CFTC and a copy to the exchange. These may be onerous requirements if too much detail or frequency is mandated. If an exchange-granted hedge exemption is later overturned by the CFTC, a trader would be afforded a “commercially reasonable amount of time” to liquidate its futures position – but the Commission says that ordinarily would be less than one day. This appears to be a very unreasonably short time period. Under the proposed amendments, exchanges would be required to maintain complete books and records of all applications for non-enumerated hedge exemptions. This would include records of all written and oral communications between the exchange and an applicant. It seems a bit of overkill to require exchanges to keep records of oral communications. Again, however, the proposed amendments are a big step forward by mostly restoring the status quo of permitting exchanges to process hedging exemptions to position limits in the first place. Not exactlyBack to the Future; more like Future from the Back!