On November 5, 2013, the Commodity Futures Trading Commission (the “CFTC”) proposed two sets of rules relating to position limits. By a vote of 3-1, with Commissioner Scott D. O’Malia dissenting, the CFTC Commissioners approved the proposal of regulations setting speculative position limits for derivatives (the “Proposed Position Limits Rule”)1 including a position limits regime for 28 core physical commodity futures contracts (“Core Referenced Futures Contracts”) traded pursuant to the rules of a designated contract market (“DCM”) and their “economically equivalent” futures, options and swaps (collectively with the Core Referenced Futures Contracts, “Referenced Contracts”). The Commissioners also voted unanimously to propose amendments to the CFTC’s existing account aggregation standards, including amendments to the independent account controller exemption from aggregation (the “Proposed Aggregation Rule”).2 The Proposed Position Limits Rule will be open for comment for 60 days after it is published in the Federal Register, which has not yet occurred as of the date of this Sidley Update and the Proposed Aggregation Rule will be open for public comment through January 14, 2014.
Executive Summary This Sidley Update provides an overview of the issues raised in the 2013 CFTC proposal of regulations setting speculative position limits for derivatives (the “Proposed Position Limits Rule”) and 2013 CFTC roposal of amendments to the existing account aggregation standards (the “Proposed Aggregation Rule”). The Proposed Position Limits Rule and the Proposed Aggregation Rule are the second iteration of proposed position limits for futures and swaps, after the CFTC’s final rules enacted October 18, 2011, were vacated by the United States District Court for the District of Columbia on September 28, 2012. Under the Proposed Position Limits rules the CFTC proposes to:
- set spot-month and non-spot month position limits applicable to 28 Core Referenced Futures Contracts and their economically equivalent futures, options and swaps, and
- revise the exemptions from speculative position limits, including the bona fide hedging exemption, and extend and update reporting requirements for persons claiming exemption from these limits.
The Proposed Position Limit Rules would also establish exemptions from position limits for (i) certain market participants in financial distress scenarios; (ii) swaps entered into before the enactment of Dodd-Frank or entered into during the transition period between the enactment of Dodd-Frank and the finalization of the rules; (iii) persons engaged in risk-reducing practices common to the market but not enumerated in the rules. As under the current position limits regime, under the Proposed Aggregation Rules, unless a particular exemption applies, a person would be required to aggregate all positions in accounts in which a person, directly or indirectly, hold an ownership or equity interest of 10% or greater, as well as positions in accounts over which the person controls trading. The Proposed Aggregation Rules would establish exemptions from aggregation for:
- accounts controlled by an “independent account controller;”
- a person with an ownership or equity interest in an owned entity of at least 10% but not greater than 50%, provided that prescribed firewalls are established between the entities;
- passive investors;
- information sharing;
- registered broker-dealers; and
- higher-tier entities.
In addition, the Proposed Aggregation Rule would include new relief for a person with an ownership or equity interest exceeding 50% in another non-consolidated entity.
The long-term fate of these proposals is unclear and the final rules may differ substantially from these proposed rules. Given the central importance of position limits to market participants, we expect that many market participants will actively participate in the comment process.
If you have any questions regarding this update, or would like assistance preparing a comment letter, please contact one of the Sidley lawyers listed at the end of this update.
Excessive speculation in commodity markets has long been viewed by some in Congress and by the CFTC as creating the potential for market abuses and price distortions. In light of these concerns, §4a(4) of the Commodity Exchange Act (the “CEA”) provides the CFTC with broad authority to set position limits. The current position limits regime is set forth in Part 150 (the “Existing Rule”) of the CFTC’s regulations and includes three components: (i) the limits themselves, which restrict the number of speculative positions that a person may hold in the spot-month, each individual month and all months combined, (ii) exemptions for positions that constitute bona fide hedging transactions and certain other types of transactions and (iii) rules to determine which accounts and positions a person must aggregate for the purpose of determining compliance with the limits.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) expanded the CFTC’s authority to set position limits beyond futures and option contracts to include: (i) swaps traded on a DCM or swap execution facility (“SEF”), (ii) swaps that are economically equivalent to futures and option contracts that are traded on a DCM and for which there are existing position limits and (iii) swaps not traded on a DCM or SEF that perform or affect a significant price discovery function with respect to regulated entities.
On October 18, 2011 the CFTC adopted Part 151 of its regulations (the “2011 Position Limits Rule”). Part 151 was intended to implement what the CFTC viewed as its statutory mandate under the Dodd-Frank Act, and imposed position limits for the Referenced Contracts. On May 30, 2012, the CFTC proposed amending the 2011 Position Limits Rule, to, among other things, add or modify certain aggregation exemptions (the “2012 Proposed Amendments”).
In September 2012 (before the rules were scheduled to go into effect on October 12, 2012), Judge Robert L. Wilkins of the United States District Court for the District of Columbia vacated the 2011 Position Limits Rule in a case brought against the CFTC by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA). The Court held that in adopting the 2011 Position Limits Rule, the CFTC did not comply with revised §6a(a) of the CEA, which Judge Wilkins held “clearly and unambiguously requires the Commission to make a finding of necessity prior to imposing position limits.” The Court held that the CFTC wrongly concluded that the CEA mandated the agency to set new position limits without first making a finding of necessity. The Court vacated the 2011 Position Limits Rule, left in place the existing position limits as already enforced by the CFTC and DCMs, and remanded the matter back to the CFTC for further proceedings consistent with the Court’s opinion. In vacating and remanding the 2011 Position Limits Rule, Judge Wilkins nevertheless upheld the CFTC’s revisions to Part 150.2, which increased the CFTC’s existing position limits for the nine legacy agricultural contracts.
On October 29, 2013, the Commissioners voted to drop the CFTC’s appeal of the Court’s ruling in favor of proceeding with the new Proposed Position Limits Rule and Proposed Aggregation Rule. Commissioner O’Malia issued a statement in connection with the Proposed Position Limits Rule that he believed the CFTC “should never have pursued an appeal in the first place … the clear lesson was that it needed to go back to the drawing board and propose a new rule with the proper statutory and empirical foundation.” Although the CFTC did pursue such a new rule, Commissioner O’Malia did not vote in favor of proposing that rule.
Position Limits for Physical Commodity Futures and Swaps
Spot Month Position LimitsThe CFTC’s spot-month limits are determined as a function of deliverable supply. Under the Proposed Position Limits Rule, each DCM would be required to report to the CFTC an estimate of the spot-month deliverable supply in each commodity underlying one of the Core Referenced Futures Contracts no less frequently than every two calendar years. This timing differs from the 2011 Position Limits Rule, which required annual submissions by the DCMs.
The CFTC initially would adopt the existing DCM-set spot-month limits as its own position limits. Subsequently, the Proposed Position Limits Rule would call for the CFTC to set spot-month position limits at 25% of the deliverable supply for the commodity underlying the relevant Core Referenced Futures Contract, as estimated by the DCMs. The CFTC would thereafter revisit the levels no less frequently than every two calendar years. This methodology differs from the 2011 Position Limits Rule, which reserved for the CFTC the discretion to use its own estimate of deliverable supply, instead of the DCM’s estimates when setting spot month position limits.
The spot-month limits for cash-settled contracts would be set at the same levels as the limits for physical delivery contracts. However, the Proposed Position Limits Rules would incorporate a conditional spot-month limit exception that would permit a trader to acquire positions of a size up to five times the spot-month limit if the trader’s positions were exclusively in cash-settled contracts. As spot-month limits for cash-settled contracts would be set at no more than 25% of the estimated deliverable supply, this proposal would allow a trader to own positions in cash-settled contracts in the spot-month of no more than 125% of the estimated deliverable supply. A trader availing itself of the conditional month spot limit exemption under the Proposed Position Limits Rule would instead be subject to enhanced reporting requirements.
As under the 2011 Position Limits Rule, the proposed limits would be enforced on an aggregate basis across all economically equivalent contracts (i.e., futures, options and swaps) based on the same underlying commodity. The Proposed Position Limits Rule applies spot-month position limits separately for physically-delivered contracts and cash-settled contracts. Therefore, under most circumstances, a trader could hold up to the spot month limit in both the physical-delivery contracts and the cash-settled contracts, but would not be allowed to net its positions across physical-delivery and cash-settled contracts to the extent that the trader was net long in one bucket and net short in the other bucket.
Single-Month and All-Months-Combined Limits
Unlike spot-month limits, which are set as a function of deliverable supply, the formula for the non-spot-month position limits under the Proposed Position Limits Rule would be based on total open interest for all Referenced Contracts in a commodity. The position limit level would be set at 10% of the largest annual average open interest for the first 25,000 contracts and 2.5% of the open interest thereafter. The Proposed Position Limits Rule would not create separate classes of contracts for non-spot month limits, as was the case under the 2011 Position Limits Rule, which imposed one limit for futures and options on futures, and a separate limit for swaps. Each trader would be allowed to net its positions across futures, options on futures and swaps for the purpose of determining compliance with position limits.
For setting the levels of the initial non-spot month limits, the Proposed Position Limits Rule would use the historical open interest data for calendar years 2011 and 2012 in futures, options on futures and swaps that were significant price discovery contracts and were traded on exempt commercial markets. Subsequent levels would be set by the CFTC on the basis of estimates of average open interest in Referenced Contracts provided by the DCMs and SEFs.
Under the Proposed Position Limits Rule, certain Referenced Contract positions acquired by a person in good faith prior to the effective date of the final limits would be conditionally exempted from the non-spot-month speculative position limits, provided that if any such position is increased after the effective date, such position would thereafter be attributed to the person for purposes of applying non-spot-month limits.
The existing and proposed position limits for the 28 Core Reference Futures Contracts are set forth in the Appendix hereto.
Exemptions from Position Limits
Bona Fide Hedging ExemptionThe Proposed Position Limits Rule would retain the existing exemption from position limits to the extent that they constitute bona fide hedging positions. While leaving much of the substance of the CFTC regulation that currently defines “bona fide hedging transactions or positions” intact, the Proposed Position Limits Rule would replace that CFTC regulation with a new definition of a “bona fide hedging position.” The proposed definition would expand the types of positions that would qualify as bona fide hedges to include certain unfilled anticipated requirements for resale by a utility, royalties and service contracts.
The proposed definition of “bona fide hedging position” sets forth two general requirements: (1) the purpose of the position must be to offset price risks incidental to commercial, cash operations (the “incidental test”) and (2) the position must be established and liquidated in an orderly manner in accordance with sound commercial practices (the “orderly trading requirement”). These requirements are generally consistent with the current requirements for a bona fide hedge.
Although the CFTC is not proposing to set position limits in contracts on “excluded commodities” (generally, intangible contracts such as interest rates and exchange rates), one or more DCMs or SEFs may set limits with respect to contracts listed on such DCM or SEF. Under the Proposed Position Limits Rule, the DCMs and SEFs would also be required to provide bona fide hedging exemptions that conform to the CFTC’s bona fide hedging exemptions. For a position in a commodity derivatives in an “excluded commodity” to qualify as a bona fide hedge, the Proposed Position Limits Rule would require that, in addition to meeting the incidental test and orderly trading requirement, the position must be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise (the “economically appropriate” test) and must be either (1) a position specifically enumerated in the definition of bona fide hedging position or (2) recognized as a bona fide hedging position or risk management position by a DCM or SEF. The current definition includes this same “economically appropriate” test. The enumerated hedging positions in the Proposed Position Limits Rule are similar, but not identical to, the enumerated hedges in the current rules and those included in the now-vacated 2011 Position Limits Rule.
For contracts on physical commodities, the proposed definition would recognize as a bona fide hedge a position that: (i) represents a substitute for transactions made or to be made or positions taken or to be taken, at a later time in a physical marketing channel (the “temporary substitute test”); (ii) meets the economically appropriate test; and (iii) arises from the potential change in value of assets, liabilities or services (the “change in value requirement”), provided that the position is enumerated in the definition or qualify as an offset to a pass-through swap. The bona fide hedging exemption would not be applicable to risk-reducing positions that are held during the spot month or during the last 5 trading days of an expiring futures contract. The foregoing is identical to the approach taken under the vacated 2011 Position Limits Rule.
Whether any particular transaction qualifies for the bona fide hedging position exemption remains a highly fact-specific determination, and this brief overview is intended only as a summary of some of the potential considerations under the Proposed Position Limits Rule.
Financial Distress Exemption The Proposed Position Limits Rule would also provide an exemption from position limits for certain market participants in financial distress scenarios that may require an entity to assume in short order the positions of another entity. These scenarios include a customer default at a futures commission merchant (“FCM”) or a potential bankruptcy. This exemption would codify the CFTC’s historical practice of temporarily lifting position limits in such instances.
Exemption for Pre-Dodd-Frank Enactment Swaps and Transition Period Swaps
The Proposed Position Limits Rule would provide an exemption from Federal position limits for (1) swaps entered into prior to the July 21, 2010 enactment of the Dodd-Frank Act, the terms of which have not yet expired, and (2) swaps entered into in the period beginning July 22, 2010 and ending 60 days after the publication of final position limits rules in the Federal Register. For the purpose of complying with any non-spot-month position limit, the Commission would allow these pre-enactment and transition swaps to be used to net down positions acquired more than 60 days after publication of final rules in the Federal Register.
Other Exemptions for Non-Enumerated Risk-Reducing Practices
The Proposed Position Limits Rule would allow for a person that engages in risk-reducing practices commonly used in the market that the person believes may not be included in the list of enumerated bona fide hedging transactions to apply to the CFTC for an exemption from otherwise applicable position limits. If the practice in question does not fall within the non-exhaustive list of examples defined under the Proposed Position Limits Rule, the person would either (a) request an interpretative letter from the CFTC concerning the applicability of the bona fide hedging position exemption or (b) seek exemptive relief from the CFTC.
Proposed Recordkeeping Requirements
The Proposed Position Limits Rule would require persons claiming exemptions to maintain complete books and records concerning all details of their related cash, forward, futures, options and swap positions and transactions and to make those books and records available to the CFTC upon request.
Position Limits Set by DCMs and SEFs
The Proposed Position Limits Rule requires DCMs and SEFs to adopt position limits requirements that are no greater than the CFTC’s limits for Referenced Contracts. However, instead of adopting position limits requirements, DCMs and SEFs may adopt position accountability requirements for excluded commodities as well as for physical commodities that are not subject to the CFTC’s position limits, subject to also being required to adopt spot-month limits. The Proposed Position Limits Rule requires DCMs and SEFs to adopt bona fide hedging exemptions, aggregation requirements and, for excluded commodities, risk management exemptions.
Aggregation of PositionsThe Existing Rules generally require that, unless a particular exemption applies, a person must aggregate all positions in accounts in which a person, directly or indirectly, holds an ownership or equity interest of 10% or greater as well as positions in accounts over which the person controls trading. Although the proposed revisions to the aggregation requirements do not in themselves generally pose new challenges to owners of owned entities, the expansion of position limits to include swaps that are economically equivalent to Core Reference Futures Contracts would create serious challenges. Owned entities’ positions in swaps would now have to include economically equivalent swaps when assessing the owner’s compliance with position limits. The challenges would only grow as position limits and aggregation requirements may be expanded in the future to swaps beyond those that are economically equivalent to Core Reference Futures Contracts under the rules of DCMs and SEFs, such as interest rate swaps, currency swaps and credit default swaps. Funds-of-funds, private equity firms, financial institutions, and non-financial businesses that operate across subsidiaries and/or make minority investments that meet or exceed the 10% aggregation threshold may have to revisit their compliance programs to ensure that they identify any transactions in which their owned entities engage that are subject to position limits, and that these transactions will not cause the owner to exceed applicable limits on an aggregate basis.
The Proposed Aggregation Rule would continue to require aggregation based on ownership or control. The Proposed Aggregation Rule, like the 2011 Position Limits Rule, would also require aggregation where a person holds or controls the trading of positions in more than one account or pool with substantially identical trading strategies, whether or not any of the exemptions to aggregation apply. This additional basis for aggregation will affect, among others, interest holders in passively-managed index funds that trade Reference Contracts, if the funds follow substantially identical trading strategies. Notably, aggregation in these circumstances would be required whether or not the interest equals or exceeds 10%. Aggregation in these circumstances would not be conditioned on a person’s knowledge that substantially identical trading strategies are being followed and the full position of each account or pool following the trading strategy, not merely a pro rata portion of the position, would need to be aggregated. As a result, this new basis for aggregation may lead to harsh results. For example, a retail investor with a position in more than one commodity index fund may violate position limits if those funds follow substantially identical trading strategies and, in combination, have positions in excess of applicable limits, notwithstanding that the retail investor does not know that the funds are following substantially identical trading strategies and that such investor holds insignificant interests in both funds.
Exemptions from AggregationIndependent Account Controller ExceptionThe Proposed Aggregation Rule would retain the independent account controller exception (the “IAC Exception”) adopted in the 2011 Position Limits Rule, largely as it was proposed to be amended by the 2012 Proposed Amendments. The IAC Exemption would provide an “eligible entity” with an exemption from aggregation of the eligible entity’s customer accounts that are managed and controlled by independent account controllers. The definition of eligible entity in the Proposed Aggregation Rule would incorporate the proposed changes from the 2012 Proposed Amendments to include the managing member of a limited liability company. The Proposed Aggregation Rule also proposes for the first time to treat the manager of an employee benefit plan as an IAC.
Under the IAC Exception, an eligible entity would be able to disaggregate customer positions or accounts managed by an IAC from the eligible entity’s other separately-controlled positions, outside of spot months. An IAC must trade independently of the eligible entity and other IACs trading for the eligible entity subject to an appropriate trading data firewall, and each IAC would need to trade such accounts pursuant to separately developed and independent trading systems.
An eligible entity seeking an IAC exemption would be required to file a notice with the CFTC, as discussed more fully below.
Owned Entity ExceptionThe Proposed Aggregation Rule, similar to the 2012 Proposed Amendments, would provide an exception from the aggregation requirement for a person with an ownership or equity interest in an owned entity of at least 10% but not greater than 50%, provided that prescribed firewalls are established between the entities (the “Owned Entity Exception”). For a person to claim the Owned Entity Exemption, the following conditions would need to be met by that person and any other entities as to which such person must aggregate positions, on the one hand, and the owned entity, on the other hand: (1) neither may have any knowledge of the other’s trading decisions; (2) each must trade pursuant to separately developed and independent trading systems; (3) each must have and enforces written procedures to prelude it from having knowledge of, gaining access to or receiving data about, trades of the other, which include document routing procedures and other security arrangements, including separate physical locations, to maintain the independence of their activities; (4) the person and the owned entity may not share employees that control the trading decisions of either the person or the owned entity; and (5) each must maintain risk management systems that do not allow it to share trades or trading strategies with the other.
A person seeking the Owned Entity Exception would also be required to file a notice with the CFTC.
Majority Investor Relief
The Proposed Aggregation Rule would include new relief for a person with an ownership or equity interest exceeding 50% in another non-consolidated entity (“Majority Investor Relief”). A person would be able to apply to the CFTC for relief from requirements to aggregate its positions with those of the owned entity, provided that the person meets the following conditions:
- the applicant certifies to the CFTC that the owned entity is not required under U.S. generally accepted accounting principles to be, and is not, consolidated on the applicant’s financial statements;
- the person meets conditions (1) through (5) for the Owned Entity Exception identified above, and the applicant demonstrates to the CFTC that it has procedures in place that are reasonably effective to prevent coordinated trading decisions by the applicant, any entity that the applicant must aggregate, and the owned entity;
- each representative, if any, of the applicant on the owned entity’s board of directors, or equivalent governance body, certifies that he or she does not control the trading decisions of the owned entity;
- the applicant certifies to the CFTC that either all of the owned entity’s positions qualify as bona fide hedging transactions or the owned entity’s positions that do not so qualify do not exceed 20% of any position limit currently in effect, and agrees that:
- if the certification becomes untrue for any owned entity of the applicant, the accounts or positions of the owned entity will be aggregated with any other accounts or positions the applicant is required to aggregate; provided that, after a period of three complete calendar months in which the applicant aggregates such accounts or positions and all of the owned entity’s positions qualify as bona fide hedging transactions, the applicant may make this certification again and be permitted to cease aggregation;
- any owned entity of the applicant shall, upon request by the CFTC file information with the CFTC reflecting only the owned entity’s positions and transactions, and not reflecting the inventory of the applicant or any other accounts or positions the applicant is required to aggregate; and
- the applicant must inform the CFTC, and provide the CFTC with any information that the CFTC may request, if any owned entity engages in coordinated activity regarding the trading of the owned entity, the applicant, or any other accounts or positions the applicant is required to aggregate, even if the coordinated activity does not conflict with any of the requirements of the five conditions to the Owned Entity Exception referenced above.
If the CFTC finds, in its discretion, that the applicant has satisfied the foregoing conditions, the applicant would be able to disaggregate the positions of the owned entity, notwithstanding that its interest in the owned entity exceeds 50%. The proposing release notes that the CFTC would not be subject to a deadline in acting on a request for Majority Investor Relief, raising the possibility that such requests could languish at the CFTC. A request for relief would be required to include:
- a description of the circumstances that warrant disaggregation;
- a statement of a senior officer of the entity certifying that the conditions outlined above have been met;
- a demonstration that procedures are in place that are reasonably effective to prevent coordinated trading decisions by the applicant, any entity that the applicant must aggregate, and the owned entity; and
- all certifications required by the conditions described above.
Material changes to the information provided in the application for relief require the applicant to submit a notice to the CFTC.
Note that the requirement described above that the applicant not be required by U.S. GAAP to consolidate the owned entity on its own financial statements may significantly limit the usefulness of the Majority Investor Relief for many parties.
The proposing release notes that a person with an ownership or equity interest in excess of 50% that does not meet the foregoing conditions may nevertheless apply for relief from aggregation, which the CFTC may grant pursuant to authority granted under the CEA.
Other Exemptions The Proposed Aggregation Rule would substantially retain the passive investor exemption (the “Passive Investor Exemption”) from the 2011 Position Limits Rule, which provided that a limited partner, limited member, or similar type of passive pool participant with an ownership or equity interest meeting or exceeding 10% is not required to aggregate on account of such interest provided that (a) the investor is not the operator of the pool, (b) the investor is not a principal or affiliate of the pool, although even a principal or affiliate may qualify for an exemption from aggregation provided certain conditions (including notice) are met, and (c) if the operator of the pool is exempt from registration under CFTC Regulation 4.13, the ownership or equity interest is not equal to or greater than 25%. Unlike the 2011 Position Limits Rule, to rely on part (b) of the Passive Investor Exemption the pool operator must comply with the notice requirement on behalf of the person or class of persons.
The Proposed Aggregation Rule would also retain exemptions for FCMs, information sharing, underwriters, registered broker-dealers and higher-tier entities substantially similar to those included the 2012 Proposed Amendments. Unlike the 2012 Proposed Amendments, the Proposed Aggregation Rule would make the exemptions applicable to FCMs, information sharing and higher-tier entities subject to the notice requirement.
Under the Proposed Aggregation Rule the CFTC has clarified that exceptions from aggregation are independent of one another. For example, a limited partner with an interest in a pool that exceeds 10% would not have to meet the requirements of the Owned Entity Exception to disaggregate the positions and accounts of the pool if the Passive Investor Exemption was met.
Notice Filing for Exemption
Under the Proposed Aggregation Rule, notice to the CFTC would be required with respect to all exemptions except the general exception for passive investors in pools, that are not principals or affiliates of the pool’s operator, and the proposed exceptions for underwriting and broker-dealer activities. Otherwise, notice would have to be filed to qualify for an exemption, although, as discussed above, Majority Investor Relief would be available only upon a request that the CFTC affirmatively granted, in its discretion. A notice would be effective upon its submission, and have to include a description of all relevant circumstances that warrant disaggregation under the claimed exception as well as a certification from a senior officer that the conditions for the exception were met. In the event of any material change to the information provided in any notice, including, in connection with a request for Majority Investor Relief, a revised notice would have to be promptly filed.
The release proposing the Proposed Aggregation Rule acknowledges that in some cases, it may be impractical to file a notice prior to an exemption’s becoming necessary, such as where a person lacks information regarding a newly-acquired subsidiary’s activities; the CFTC proposes that in such cases, the filing be made as promptly as practicable but cautions that the exemption would not apply retroactively. Accordingly, prior to acquiring an interest in an entity that may result in the acquirer’s exceeding a position limit on an aggregate basis, it may be appropriate to establish the conditions for relief under applicable exceptions including by providing notice to the CFTC.
Recent Position Limits Enforcement Actions
The CFTC’s Division of Enforcement has been aggressively pursuing cases involving violations of speculative position limits. On November 5, 2013, the CFTC filed an enforcement action in federal court in Illinois against a floor trader on the Chicago Mercantile Exchange charging him with exceeding exchange-set speculative position limits in live cattle futures and feeder cattle futures, seeking a civil monetary penalty and a trading ban. That action has not yet been resolved. On December 7, 2011, an affiliate of an FCM and wholly-owned subsidiary of a large banking corporation agreed, without admitting the CFTC’s allegations, to pay a $350,000 monetary penalty to settle a CFTC enforcement complaint charging that it exceeded speculative position limits in cotton futures on the Intercontinental Exchange. The entity allegedly failed to sufficiently reduce its positions even after being notified by the exchange that it was holding excessive positions. There have also been member enforcement actions brought by various futures exchanges against persons who have violated exchange-set speculative position limits.
This Sidley Update provides an overview of the myriad of issues raised in the Proposed Position Limits Rule and Proposed Aggregation Rule. The final rules may differ substantially from these proposed rules, particularly in light of the fact that Chairman Gensler and Commissioner Chilton will be leaving the CFTC in the near future, leaving the CFTC with only two Commissioners for the time being. Given the central importance of position limits to market participants, we expect that many market participants will actively participate in the comment process. Comments on the Proposed Position Limits Rule must be submitted no later than 60 days after it is published in the Federal Register, which has not yet occurred as of the date of this Sidley Update, and comments on the Proposed Aggregation Rule must be submitted by January 14, 2014.
Appendix: Proposed Speculative Position Limits