Make your position clear

The CFTC has extended the reopened comment period for its latest efforts to impose position limits on participants in the commodity derivatives market. The Position Limits Proposal and the Aggregation Proposal are the “unassailable” formulation, following the legal rejection of its predecessor on the grounds of ambiguity and lack of necessity. The controversial proposals have drawn a wealth of comment from a diverse base- industry groups ISDA and Sifma, energy and utility groups, the airline industry, farmers and other end-users, as well as Catholic nuns supporting curbs on speculation. Although subject to accusations of democratic deficit and displaying a disdain for contradiction, the Agency has been notably willing to facilitate the volume of comment provoked by the proposals.

Designed to prevent market manipulation and its attendant price volatility, the limits will apply to 19 soft contracts, four energy and five metals. Spot month limits will broadly be set at 25% of deliverable supply, non-spot month at 10% of the first 25,000 open interest contracts. The list of hedging exemptions is more narrowly-defined than its predecessor, in an effort to disallow the notoriously porous “anticipatory hedging”. Aside from the broad constituency who will be directly affected by the proposals, they will impact even those end-users who benefit from the hedging exemptions. In order to claim exemptive relief, transactions must be evaluated and reported and limits must be monitored by the end-users themselves. Up to six reports (two daily, two monthly) may have to be compiled and filed. There are multiple aggregate views of position limits, differing netting treatments and detailed rules for affiliate positions.

Comments should be limited to the following subjects: (i) hedging of a physical commodity by a commercial enterprise, including gross hedging, cross-commodity hedging, anticipatory hedging and the process for obtaining a non-enumerated hedging exemption; (ii) spot month limits in physical-delivery and cash-settled contracts and a conditional spot-month limit exemption; (iii) non-spot limits for wheat contracts; (iii) the aggregation exemption for certain ownership interests of greater than 50 percent in an owned entity; and (iv) aggregation based on substantially identical trading strategies. Comments may be submitted electronically here before the 3 August closing date.

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