Proposed CFTC Rules on Position Limits

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday December 20, 2013 at 10:07 am
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Editor’s Note: The following post comes to us from Byungkwon Lim, partner in the Corporate Department at Debevoise & Plimpton LLP and leader of the firm’s Hedge Funds and Derivatives & Structured Finance Groups. This post is based on a Debevoise & Plimpton Client Update by Mr. Lim and Aaron J. Levy; the complete publication, including footnotes and appendix, is available here.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) amended section 4a of the Commodity Exchange Act (the “CEA”) to require the Commodity Futures Trading Commission (the “CFTC”) to establish position limits on an aggregate basis for (1) futures and options contracts on agricultural and exempt commodities traded on or subject to the rules of a designated contract market (“DCM”) and (2) contracts based on the same underlying commodity as such futures and option contracts, including (a) swaps listed for trading by a DCM or swap execution facility (“SEF”), (b) swaps that are not traded on a DCM, SEF or other registered entity but which are determined to perform or affect a “significant price discovery function” (“SPDF swaps”) and (c) foreign board of trade (“FBOT”) contracts that are price-linked to a DCM or SEF contract and made available for trading on the FBOT by direct access from within the United States.

On October 18, 2011, the CFTC adopted final rules on position limits for exempt and agricultural commodity futures and options contracts and swaps that are economically equivalent to such contracts as Part 151 of its regulations (the “Regulations”). On May 30, 2012, the CFTC published proposed modifications to Part 151 addressing the policy for certain aspects of aggregation requirements in determining position limits.

However, on September 28, 2012, the U.S. District Court for the District of Columbia issued an order in International Swaps and Derivatives Association v. United States Commodity Futures Trading Commission that generally vacated those final rules and remanded the matter to the CFTC. The District Court rejected the CFTC’s contention that section 4a of the CEA unambiguously mandated the imposition of position limits without any finding that such limits are necessary “to diminish, eliminate, or prevent excessive speculation,” and held that it was therefore required to remand the matter to the CFTC to “fill in the gaps and resolve the ambiguities.”

On November 5, 2013, the CFTC voted to dismiss its appeal of the District Court’s decision and approve revisions to Part 150 (and other related provisions) to incorporate a new set of proposed rules (the “Proposed Position Limits Rules”) establishing position limits for 28 exempt and agricultural commodity (i.e., “physical commodity”) futures and option contracts and swaps that are economically equivalent to such contracts, updating certain relevant definitions, revising the exemptions from position limits (including for bona fide hedging) and extending and updating reporting requirements for persons claiming an exemption from these limits. Additionally, the Proposed Position Limits Rules update certain existing Regulations, guidance and acceptable practices for compliance with DCM core principle 5 and SEF core principle 6 in respect of exchange-set position limits and position accountability levels.

Also on November 5, 2013, in a separate notice of proposed rulemaking, the CFTC proposed modifications to the aggregation provisions of Part 150 (the “Proposed Aggregation Rules”) that are substantially similar to the aggregation modifications proposed to vacated Part 151.

If both the Proposed Position Limits Rules and the Proposed Aggregation Rules (collectively, the “Proposed Rules”) are adopted, the proposed modifications to Part 150 in the Proposed Aggregation Rules would apply to all of the 28 futures and options contracts and the economically equivalent swaps covered by the Proposed Position Limits Rules. However, the CFTC may adopt the Proposed Aggregation Rules without adopting the Proposed Position Limits Rules.

The text of both Proposed Position Limits Rules is available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister110513c.pdf. The text of the Proposed Aggregation Rules is available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013­27339a.pdf.

As under the vacated Part 151, the Proposed Position Limits Rules limit the number of Referenced Contracts with respect to a particular Core Referenced Futures Contract (as defined below) held or controlled by a trader directly or by application of the aggregation rules, subject to specific exemptions. This update covers the scope of the term “Referenced Contract,” limit levels, exemptions from limits, certain reporting requirements, the aggregation requirement and exemptions from aggregation, as proposed in the Proposed Rules.

The complete publication is available here.

 

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