Today, in a move on its long-pending proposals, the CFTC: (1) re-proposed its new speculative position limits rules (the “Re-Proposal”), which would impose federal limits on 25 physical commodity futures contracts and their “economically equivalent” futures, options, and swaps; and (2) separately issued final rules relating to position aggregation requirements (the “Final Aggregation Rules”).
We will cover the details of the Re-Proposal and the Final Aggregation Rules in the days ahead. Importantly, though, the Re-Proposal provides commercial end-users and other market participants the opportunity to view the potential new position limits rules in their entirety (rather than the piecemeal fashion in which they have been released to date), and to comment further on the substance and impact of the proposed new position limits regime.
Based on a limited review of these lengthy rulemakings, and a Fact Sheet and other materials also published by the CFTC today, a few highlights include the following:
- The Re-Proposal would:
- Adopt new estimates of deliverable supply for certain contracts (particularly in the energy sector), which impacts the size of the proposed limits;
- Permit bona fide hedging positions to include any non-enumerated positions recognized as bona fide hedges by a futures exchange or swap execution facility pursuant to rules approved by the CFTC;
- Deem trade options, under certain circumstances, to be equivalent to a cash position for purposes of recognition as the basis of a bona fide hedging position; and
- Adopt a conditional spot-month limit exemption of 10,000 contracts for cash-settled contracts only in the NYMEX Henry Hub Natural Gas contract.
- The Final Aggregation Rules:
- Require a trader to aggregate positions of an entity in which it owns a greater than 10% interest;
- Modify certain proposed requirements for disaggregating such positions where trading is independently controlled and a notice filing is submitted to the CFTC;
- Clarify the process by which an entity can rely on a disaggregation notice obtained by an affiliate; and
- Provide some clarifying guidance with respect to the rule that positions taken pursuant to “substantially identical trading strategies” must be aggregated.
As covered in our previous blog entry, Chairman Massad had identified finalizing the position limits rules as a priority for the remainder of 2016. In light of the results of the U.S. elections in November, however, the CFTC has been under pressure to defer the issue to the new Administration. On November 15th, House Majority Leader Kevin McCarthy and the House committee chairmen sent government agencies a “pens-down” letter asking them to stop finalizing pending regulations. Three days later, House Agriculture Committee Chairman Michael Conaway followed up with a separate letter to Chairman Massad warning the CFTC against “pushing through controversial regulations,” with a specific reference to the position limits rulemaking proposal.
Today’s actions appear to be something of a compromise. The aggregation rules have been finalized, but the re-opening of the comment period to receive public input on the Re-Proposal (for 60 days following its publication in the Federal Register) assures that the position limits rules will be finalized, if at all, under the new Administration.
Both the Re-Proposal and the Final Aggregation Rules were adopted unanimously. Chairman Massad, as well as Commissioner Giancarlo and Commissioner Bowen, issued brief statements in support of today’s actions.