CFTC on Position Limits Proposed Rules
AT
NOVEMBER 5TH’S COMMODITY FUTURES TRADING COMMISSION (CFTC) Open Meeting, regulators
approved Proposed Regulations on Position Limits for Derivatives by vote of 3-1
and unanimously approved a Notice of Proposed Rulemaking on Aggregation of
Accounts under Part 150.
- Chairman
Gensler along with Commissioners Chilton and Wetjen supported the proposed
rule on Position Limits, while Commissioner O’Malia voted against it.
·
The Position Limits Proposed Rule Includes:
o Limits on speculative
positions in 28 core physical commodity contracts and their “economically
equivalent” futures, options, and swaps;
o Spot-month position
limit levels set generally at 25% of estimated deliverable supply;
o Non-spot month
position limits set using the 10/2.5 percent formula: 10 percent of the
contract’s first 25,000 of open interest and 2.5 percent thereafter; and
o Exemptions for bona
fide hedging positions in physical commodities based on the Dodd-Frank Act’s
new requirements for such positions.
·
CFTC staff says the proposed rule “resolves the
ambiguity” found by the district court ruling which vacated the CFTC’s previous
attempt at a position limits rule.
·
CFTC staff note that of the 130 studies looking at the
effects of speculation on market prices, one-third say excessive speculation
has an impact, one-third say it does not, and the other one-third are
inconclusive.
Opening
Remarks
CFTC
Chairman Gary Gensler, in his opening remarks,
stated that the Commission is charged with protecting the public from fraud,
manipulation, and other abuses and that Congress directed the CFTC to prevent
any single trader “from obtaining too large a share of the market to ensure
that derivatives markets remain fair and competitive.” He also noted that
“position limits have been a tool to curb or prevent excessive speculation that
may burden interstate commerce” since the Commodity Exchange Act was passed in
1936.
Gensler
said position limits promote price discovery by “limiting the size of any one
speculator’s footprint in the market” and by diminishing the “possible burdens
when any individual participant may need to sell or liquidate a position in
times of individual stress.” He said the “strong proposal” put forth by
the Commission is the best way to expedite position limits implementation and
that the proposed rule is consistent with congressional intent.
Commissioner
Bart Chilton, in his remarks,
stated that he “sent a letter to the President expressing my intent to leave
the Agency in the near future,” and said the position limits rule has been the
“signal rule” of his tenure at the CFTC. Chilton said that, in early 2008,
“when I asked Commission staff about the influence of speculation on prices,
some said speculative positions couldn’t impact prices” but that as “numerous
independent studies have confirmed since, it was not true.” Chilton
concluded that “after months of delay” since a federal district court vacated
their previous rule on position limits the Commission “has the right text
before [it].”
Commissioner
Scott O’Malia, in his remarks,
expressed concern with the proposed rules on position limits because the
proposal: 1) fails to utilize current, forward-looking data and other empirical
evidence as a justification for position limits; 2) fails to provide enough
flexibility for commercial end-users to engage in necessary hedging activities;
and 3) fails to establish a useful process for end-users to seek hedging
exemptions. He added that “we will see if we’ve done our homework on this one”
and added that the Commission has been receiving data daily and must be able to
“put it to work.”
Commissioner
Mark Wetjen dispensed with his formal remarks,
to state that he was “surprised by the news” of Chilton’s departure and
commended him for keeping the “proverbial little guy in mind” throughout his
time at the Commission. In his formal remarks for the record, Wetjen
stated that there is a “reasonable statutory basis for the view that Congress
intended position limits to be mandatory” but that the Commission will need to
consider whether aspects of the rule adhere closely enough to congressional
intent by recognizing appropriately-tailored hedging exemptions.
Staff
Presentation – Position Limits for Derivatives
Jonathan
Marcus, Office of General Counsel, stated that the proposed rule “resolves the
ambiguity” found by the district court who vacated the CFTC’s previous rule by
addressing the “standards” in Section 4a(a)(1) referring to whether or not it
is necessary to set limits on speculation. He said the proposal addresses
ambiguities based on the Commission’s previous experience, the legislative
history of Section 4a, and earlier rulemakings. He said that “the most
reasonable interpretation” is that Congress intended a “prophylactic approach”
to establishing mandatory limits for physical commodity derivatives.
Marcus
noted that the phrase “as appropriate,” which was also deemed to be ambiguous
by the court, refers to discretion on the limit levels rather than on whether
or not to have position limits. He added that it is “not the most
reasonable interpretation” to conclude that the limits were discretionary and
explained that if they were, Congress would not have “repeatedly referred to the
limits as required.”
Lee
Ann Duffy, Office of General Counsel, stated that the position limits in the
proposal are necessary to lessen the likelihood that a trader will accumulate
speculative positions that can cause “unwarranted or unreasonable” price fluctuations
because large positions can affect prices even if they were not due to
manipulative conduct. She then cited the “silver crisis” of 1979 and the events
in the natural gas market in 2006 as examples of large speculative positions
having “indirect burdens on interstate commerce.”
Steve
Sherrod, Division of Market Oversight, said that the 28 core commodity
contracts selected were based on the largest notional value of open
interest. He added that the staff recommend a phased-in approach be used
and that limits eventually be applied to all physical commodities. He
said a phase-in will reduce the burden to the market and facilitate monitoring
procedures by those not currently subject to limits.
Sherrod
then explained the three basic components of the proposed regulations: 1)
levels of limits; 2) exemptions from the rules; and 3) aggregation standards.
On
limits, Sherrod explained that spot-month position limits for referenced
contracts “will be set at 25% of estimated deliverable supply and will be
applied separately for positions in the physical-delivery and all cash-settled
referenced contracts combined.” The non-spot month limits, he said,
“apply to positions a trader may have in all contract months combined or in a
single contract month” and for each referenced contract, these limits “will be
set at 10 percent of open interest in the first 25,000 contracts and 2.5
percent thereafter.” He further explained that initial non-spot-month position
limits “will be set based on open interest data in futures and swaps that are
significant price discovery contracts” and that subsequent levels “will be
reset at least every two years based on open interest data in futures, cleared
swaps, and uncleared swaps.”
On
exemptions, Sherrod said that they include: 1) bona fide hedging positions; 2)
conditional spot month limit positions; and 3) positions that are established
in good faith prior to the effective date of the initial limits.
On
aggregation, he added that, in general, swap execution facilities (SEFs) and
designated contract markets (DCMs) would need to use the Commission’s
aggregation limits for excluded commodities.
Commissioner
Comments and Questions
Gensler
began the discussion noting that the CFTC staff has included 130 studies in the
appendix of the proposal and encouraged the public to “dig into” them in order
to provide feedback to the Commission, adding that they are “at the heart” of
the cost-benefit considerations. He noted the some of the studies suggest that
speculation creates burdens on interstate commerce, while others do not find
any such effects. Gensler then asked staff for a summary of these
studies.
Hannah
Ropp, Office of Chief Economist, stated that while some of the studies show
there may be a relationship between the amount of speculation in the
marketplace and price movements or volatility, “other studies find no such
connection.” She added that “still more studies are inconclusive” with
regard to the impact of speculation on price and explained that “very few” have
“any real input” on position limits and whether or not they should be
implemented. She concluded that of all the studies, one third say
excessive speculation has an impact, one third say it does not, and one third
are inconclusive.
Gensler
followed up on these remarks calling the situation a “classic jump ball” but
that Congressional intent is clear and that it is “better to err on the side of
caution.” He then asked staff if framing the proposed rule language in this
fashion would be appropriate.
Marcus
replied that the district court “did not require us to do necessity findings”
but rather, defined ambiguity in the statute as to whether or not the CFTC had
a mandate to impose limits “without such findings.” He added that the
CFTC concluded that Congress did require the Commission to impose limits
without studies and findings. With that said, however, he noted that a
framework erring on the side of caution would be appropriate as excessive
speculation may led to unwarranted price fluctuations and Congress indicated
that position limits are an effective tool.
Chilton
then asked staff if they looked into the studies and found any that do not show
a link between speculation and prices, and any that were not funded by industry
groups who seek to benefit from those kinds of findings. Ropp replied that she
is not sure who funded each particular study.
Chilton
then stated that it is important to differentiate between speculations being
completely responsible for price movements and whether they contributed in
part.
O’Malia
referenced footnote 426 of the proposal which notes that certain data may
contain shortcomings and errors and asked what data the position limits rules
are based off of. Sherrod replied that these errors are due to process
changes at major reporting firms but that he is hopeful the data will continue
to improve over time. He added that the staff recommends using data they have
been consistently receiving from the futures and options Large Trading
Reporting Systems.
O’Malia
then asked how the position limits are aligned with enhancing hedging and
determining manipulation. Sherrod replied that staff recommend using
traditional formulas for the outer bounds of position limits and that they are
“certainly erring on the high side,” but noted that limit will not prevent all
price distortions or manipulation.
Next,
Commissioners Wetjen, O’Malia, and Gensler discussed trade options and asked
how they would be handled under the proposal if deemed to be a swap or forward.
They agreed to amend the proposal to include a question that asked how trade
options should be treated and what characteristics should be looked at when
making any determinations on their treatment.
Wetjen
then expressed concern about the CFTC’s resource constraints affecting its
ability to respond to market participants on “which enumerated hedges are
permitted or are not.” He added that he wants the Commission to retain
flexibility to permit non-enumerated hedges and worried that the process at the
CFTC may not provide the timeliness that the market deserves. He then
asked if other specific daily reporting requirements are in the proposed rule.
Sherrod
replied that the bona fide hedging exemption would follow the existing
reporting format, as each entity is required to keep books and records.
Staff
Presentation – Aggregation of Accounts
Mark
Fajfar, Office of General Counsel, stated that the amendments to the position
limits rules for aggregation of accounts would permit four additional
exemptions from aggregation: 1) where sharing of information would violate or
create reasonable risk of violating Federal, state or foreign jurisdiction law
or regulation; 2) where ownership interest is no greater than 50 percent in an
entity whose trading is independently controlled; 3) where ownership interest
is greater than 50 percent in a non-consolidated entity whose trading is
independently controlled and an applicant certifies that such entity’s
positions either qualify as bona fide hedging positions or do not exceed 20
percent of any position limit; and 4) where ownership results from broker-dealer
activities in the normal course of business as a dealer.
Closing
Remarks
In
closing remarks, Commissioner O’Malia asked for clarity on the timeframe for
cross-border regime discussions including substituted compliance
determinations. He also asked when the Commission will received the final text
of the Volcker Rule expressing concern that there may not be enough time to
read through the text reported to be in excess of 1,000 pages.
On
cross-border issues and substituted compliance determinations, Gensler said “we
will make this work before December 21” and that he has had “very good
dialogue” with the six jurisdictions that will be under review. He added
that the CFTC staff will have documents to the Commissioners “later this
month.”
On
the Volcker Rule, Gensler called it “one of the most challenging rules” but
that there is “very good work” being done and the “document is moving
along.” He said the CFTC “as an agency” does not yet have a final copy,
but he expects to be able to vote on the rule in the third week of
December. With this vote date in mind he stated that the Commissioners
will need to have a “pens down” version of the rule at least three weeks in
advance of this meeting, thus leaving two weeks for the rule to be
finalized.
For
more information on this meeting, please click here.
Opening
Statements:
Opening Statement of Commissioner Gary Gensler
Statement of Commissioner Bart Chilton – At Last
Statement of Dissent by Commissioner Scott D. O’Malia
Statement of Commissioner Mark Wetjen
Additional
Documents:
Fact Sheet: Proposed Regulations on Position Limits for
Derivatives
Questions and Answers: Position Limits for Derivatives
Federal
Register:
Federal Register: Aggregation of Positions
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:CFTC,Publish Year:2013
AT
NOVEMBER 5TH’S COMMODITY FUTURES TRADING COMMISSION (CFTC) Open Meeting, regulators
approved Proposed Regulations on Position Limits for Derivatives by vote of 3-1
and unanimously approved a Notice of Proposed Rulemaking on Aggregation of
Accounts under Part 150.
- Chairman
Gensler along with Commissioners Chilton and Wetjen supported the proposed
rule on Position Limits, while Commissioner O’Malia voted against it.
·
The Position Limits Proposed Rule Includes:
o Limits on speculative
positions in 28 core physical commodity contracts and their “economically
equivalent” futures, options, and swaps;
o Spot-month position
limit levels set generally at 25% of estimated deliverable supply;
o Non-spot month
position limits set using the 10/2.5 percent formula: 10 percent of the
contract’s first 25,000 of open interest and 2.5 percent thereafter; and
o Exemptions for bona
fide hedging positions in physical commodities based on the Dodd-Frank Act’s
new requirements for such positions.
·
CFTC staff says the proposed rule “resolves the
ambiguity” found by the district court ruling which vacated the CFTC’s previous
attempt at a position limits rule.
·
CFTC staff note that of the 130 studies looking at the
effects of speculation on market prices, one-third say excessive speculation
has an impact, one-third say it does not, and the other one-third are
inconclusive.
Opening
Remarks
CFTC
Chairman Gary Gensler, in his opening remarks,
stated that the Commission is charged with protecting the public from fraud,
manipulation, and other abuses and that Congress directed the CFTC to prevent
any single trader “from obtaining too large a share of the market to ensure
that derivatives markets remain fair and competitive.” He also noted that
“position limits have been a tool to curb or prevent excessive speculation that
may burden interstate commerce” since the Commodity Exchange Act was passed in
1936.
Gensler
said position limits promote price discovery by “limiting the size of any one
speculator’s footprint in the market” and by diminishing the “possible burdens
when any individual participant may need to sell or liquidate a position in
times of individual stress.” He said the “strong proposal” put forth by
the Commission is the best way to expedite position limits implementation and
that the proposed rule is consistent with congressional intent.
Commissioner
Bart Chilton, in his remarks,
stated that he “sent a letter to the President expressing my intent to leave
the Agency in the near future,” and said the position limits rule has been the
“signal rule” of his tenure at the CFTC. Chilton said that, in early 2008,
“when I asked Commission staff about the influence of speculation on prices,
some said speculative positions couldn’t impact prices” but that as “numerous
independent studies have confirmed since, it was not true.” Chilton
concluded that “after months of delay” since a federal district court vacated
their previous rule on position limits the Commission “has the right text
before [it].”
Commissioner
Scott O’Malia, in his remarks,
expressed concern with the proposed rules on position limits because the
proposal: 1) fails to utilize current, forward-looking data and other empirical
evidence as a justification for position limits; 2) fails to provide enough
flexibility for commercial end-users to engage in necessary hedging activities;
and 3) fails to establish a useful process for end-users to seek hedging
exemptions. He added that “we will see if we’ve done our homework on this one”
and added that the Commission has been receiving data daily and must be able to
“put it to work.”
Commissioner
Mark Wetjen dispensed with his formal remarks,
to state that he was “surprised by the news” of Chilton’s departure and
commended him for keeping the “proverbial little guy in mind” throughout his
time at the Commission. In his formal remarks for the record, Wetjen
stated that there is a “reasonable statutory basis for the view that Congress
intended position limits to be mandatory” but that the Commission will need to
consider whether aspects of the rule adhere closely enough to congressional
intent by recognizing appropriately-tailored hedging exemptions.
Staff
Presentation – Position Limits for Derivatives
Jonathan
Marcus, Office of General Counsel, stated that the proposed rule “resolves the
ambiguity” found by the district court who vacated the CFTC’s previous rule by
addressing the “standards” in Section 4a(a)(1) referring to whether or not it
is necessary to set limits on speculation. He said the proposal addresses
ambiguities based on the Commission’s previous experience, the legislative
history of Section 4a, and earlier rulemakings. He said that “the most
reasonable interpretation” is that Congress intended a “prophylactic approach”
to establishing mandatory limits for physical commodity derivatives.
Marcus
noted that the phrase “as appropriate,” which was also deemed to be ambiguous
by the court, refers to discretion on the limit levels rather than on whether
or not to have position limits. He added that it is “not the most
reasonable interpretation” to conclude that the limits were discretionary and
explained that if they were, Congress would not have “repeatedly referred to the
limits as required.”
Lee
Ann Duffy, Office of General Counsel, stated that the position limits in the
proposal are necessary to lessen the likelihood that a trader will accumulate
speculative positions that can cause “unwarranted or unreasonable” price fluctuations
because large positions can affect prices even if they were not due to
manipulative conduct. She then cited the “silver crisis” of 1979 and the events
in the natural gas market in 2006 as examples of large speculative positions
having “indirect burdens on interstate commerce.”
Steve
Sherrod, Division of Market Oversight, said that the 28 core commodity
contracts selected were based on the largest notional value of open
interest. He added that the staff recommend a phased-in approach be used
and that limits eventually be applied to all physical commodities. He
said a phase-in will reduce the burden to the market and facilitate monitoring
procedures by those not currently subject to limits.
Sherrod
then explained the three basic components of the proposed regulations: 1)
levels of limits; 2) exemptions from the rules; and 3) aggregation standards.
On
limits, Sherrod explained that spot-month position limits for referenced
contracts “will be set at 25% of estimated deliverable supply and will be
applied separately for positions in the physical-delivery and all cash-settled
referenced contracts combined.” The non-spot month limits, he said,
“apply to positions a trader may have in all contract months combined or in a
single contract month” and for each referenced contract, these limits “will be
set at 10 percent of open interest in the first 25,000 contracts and 2.5
percent thereafter.” He further explained that initial non-spot-month position
limits “will be set based on open interest data in futures and swaps that are
significant price discovery contracts” and that subsequent levels “will be
reset at least every two years based on open interest data in futures, cleared
swaps, and uncleared swaps.”
On
exemptions, Sherrod said that they include: 1) bona fide hedging positions; 2)
conditional spot month limit positions; and 3) positions that are established
in good faith prior to the effective date of the initial limits.
On
aggregation, he added that, in general, swap execution facilities (SEFs) and
designated contract markets (DCMs) would need to use the Commission’s
aggregation limits for excluded commodities.
Commissioner
Comments and Questions
Gensler
began the discussion noting that the CFTC staff has included 130 studies in the
appendix of the proposal and encouraged the public to “dig into” them in order
to provide feedback to the Commission, adding that they are “at the heart” of
the cost-benefit considerations. He noted the some of the studies suggest that
speculation creates burdens on interstate commerce, while others do not find
any such effects. Gensler then asked staff for a summary of these
studies.
Hannah
Ropp, Office of Chief Economist, stated that while some of the studies show
there may be a relationship between the amount of speculation in the
marketplace and price movements or volatility, “other studies find no such
connection.” She added that “still more studies are inconclusive” with
regard to the impact of speculation on price and explained that “very few” have
“any real input” on position limits and whether or not they should be
implemented. She concluded that of all the studies, one third say
excessive speculation has an impact, one third say it does not, and one third
are inconclusive.
Gensler
followed up on these remarks calling the situation a “classic jump ball” but
that Congressional intent is clear and that it is “better to err on the side of
caution.” He then asked staff if framing the proposed rule language in this
fashion would be appropriate.
Marcus
replied that the district court “did not require us to do necessity findings”
but rather, defined ambiguity in the statute as to whether or not the CFTC had
a mandate to impose limits “without such findings.” He added that the
CFTC concluded that Congress did require the Commission to impose limits
without studies and findings. With that said, however, he noted that a
framework erring on the side of caution would be appropriate as excessive
speculation may led to unwarranted price fluctuations and Congress indicated
that position limits are an effective tool.
Chilton
then asked staff if they looked into the studies and found any that do not show
a link between speculation and prices, and any that were not funded by industry
groups who seek to benefit from those kinds of findings. Ropp replied that she
is not sure who funded each particular study.
Chilton
then stated that it is important to differentiate between speculations being
completely responsible for price movements and whether they contributed in
part.
O’Malia
referenced footnote 426 of the proposal which notes that certain data may
contain shortcomings and errors and asked what data the position limits rules
are based off of. Sherrod replied that these errors are due to process
changes at major reporting firms but that he is hopeful the data will continue
to improve over time. He added that the staff recommends using data they have
been consistently receiving from the futures and options Large Trading
Reporting Systems.
O’Malia
then asked how the position limits are aligned with enhancing hedging and
determining manipulation. Sherrod replied that staff recommend using
traditional formulas for the outer bounds of position limits and that they are
“certainly erring on the high side,” but noted that limit will not prevent all
price distortions or manipulation.
Next,
Commissioners Wetjen, O’Malia, and Gensler discussed trade options and asked
how they would be handled under the proposal if deemed to be a swap or forward.
They agreed to amend the proposal to include a question that asked how trade
options should be treated and what characteristics should be looked at when
making any determinations on their treatment.
Wetjen
then expressed concern about the CFTC’s resource constraints affecting its
ability to respond to market participants on “which enumerated hedges are
permitted or are not.” He added that he wants the Commission to retain
flexibility to permit non-enumerated hedges and worried that the process at the
CFTC may not provide the timeliness that the market deserves. He then
asked if other specific daily reporting requirements are in the proposed rule.
Sherrod
replied that the bona fide hedging exemption would follow the existing
reporting format, as each entity is required to keep books and records.
Staff
Presentation – Aggregation of Accounts
Mark
Fajfar, Office of General Counsel, stated that the amendments to the position
limits rules for aggregation of accounts would permit four additional
exemptions from aggregation: 1) where sharing of information would violate or
create reasonable risk of violating Federal, state or foreign jurisdiction law
or regulation; 2) where ownership interest is no greater than 50 percent in an
entity whose trading is independently controlled; 3) where ownership interest
is greater than 50 percent in a non-consolidated entity whose trading is
independently controlled and an applicant certifies that such entity’s
positions either qualify as bona fide hedging positions or do not exceed 20
percent of any position limit; and 4) where ownership results from broker-dealer
activities in the normal course of business as a dealer.
Closing
Remarks
In
closing remarks, Commissioner O’Malia asked for clarity on the timeframe for
cross-border regime discussions including substituted compliance
determinations. He also asked when the Commission will received the final text
of the Volcker Rule expressing concern that there may not be enough time to
read through the text reported to be in excess of 1,000 pages.
On
cross-border issues and substituted compliance determinations, Gensler said “we
will make this work before December 21” and that he has had “very good
dialogue” with the six jurisdictions that will be under review. He added
that the CFTC staff will have documents to the Commissioners “later this
month.”
On
the Volcker Rule, Gensler called it “one of the most challenging rules” but
that there is “very good work” being done and the “document is moving
along.” He said the CFTC “as an agency” does not yet have a final copy,
but he expects to be able to vote on the rule in the third week of
December. With this vote date in mind he stated that the Commissioners
will need to have a “pens down” version of the rule at least three weeks in
advance of this meeting, thus leaving two weeks for the rule to be
finalized.
For
more information on this meeting, please click here.
Opening
Statements:
Opening Statement of Commissioner Gary Gensler
Statement of Commissioner Bart Chilton – At Last
Statement of Dissent by Commissioner Scott D. O’Malia
Statement of Commissioner Mark Wetjen
Additional
Documents:
Fact Sheet: Proposed Regulations on Position Limits for
Derivatives
Questions and Answers: Position Limits for Derivatives
Federal
Register:
Federal Register: Aggregation of Positions