On October 15, the Commodity Futures Trading Commission (CFTC or the Commission) adopted final rules imposing speculative position limits in derivative contracts referencing 25 agricultural, metals and energy commodities (the Final Rules). These limits are the culmination of almost a decade of work from the Commission and its staff, including revising the rules after a federal court vacated its last attempt to expand speculative position limits in 2012.
The Final Rules are intended to “prevent excessive speculation” and broadly apply to positions in futures, options and economically equivalent swaps referencing the covered commodities (Covered Contracts). The Final Rules approach the exemption for bona fide hedges flexibly, to “accommodate potential future, unpredictable developments in commercial hedging practices.” This is in contrast to previous rule proposals, which were both more prescriptive and restrictive. The Final Rules also exempt certain recognized spread transactions.
Although the Final Rules have a relatively distant compliance date (January 1, 2022, for futures contracts in the 16 commodities not subject currently to federal limits and January 1, 2023, for economically equivalent swaps), market participants should familiarize themselves with the Final Rules and their exemptions because many participants and intermediaries will likely find it necessary to establish internal control procedures, which may require systems development in advance of the Final Rules’ compliance date. The Commission has long prioritized enforcement actions based on violations of existing federal and exchange-set position limits, and we expect this focus to continue with the adoption of this broadened speculative position limits regime.
I. Relevant Background
Since its adoption in 1936, Section 4a of the of the Commodity Exchange Act has authorized the Commission to impose speculative position limits.1 Section 737 of the 2008 Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 4a to expand the Commission’s authority to impose speculative positions limits “as necessary.” The CFTC first attempted to adopt rules under this new authority in 2011.2 However, these rules were largely vacated by a federal court in 2012, after the court found the Commission had not appropriately determined that the position limits adopted were necessary to advance the statute’s goals
In the eight years following this setback, the CFTC proposed several iterations of revised speculative position limit rules that were designed to address the issues in the original 2011 rules. The first of the revised rules were noticed for comment in December 2013. In response to comments from market participants and other commenters, the Commission issued a supplemental proposal in June 2016, followed by a complete re-proposal in December of that year. In February 2020, the Commission issued a further revised proposal, which specifically found that the proposed position limits were necessary to prevent excessive speculation. The Final Rules adopt the February 2020 proposal with few material changes.
