During an otherwise quiet Summer at the Commodity Futures Trading Commission (CFTC), agency staff hosted a public Roundtable where commercial end-users and other market participants could comment on the CFTC’s re-proposed rules to implement the position limits and aggregation provisions of the Dodd-Frank Act. The common theme from end-users was that the CFTC’s proposals would severely harm commercial activity by sacrificing legitimate hedging practices.
The CFTC was forced to re-propose its post-Dodd-Frank speculative position limits and aggregation rules after its prior rules were vacated in court. Generally, the re-proposed rules closely track the vacated rules.
The re-proposed rules would establish speculative position limits for the same 28 futures contracts on physical commodities, and their “economically equivalent” swaps, that were covered by the vacated rules. The re-proposed rules also would require market participants, in determining compliance with position limits, to aggregate not only positions in all accounts where they control trading or have a 10% ownership interest, but also the accounts of any separate owned entity in which they have a 10% ownership interest.
During the Roundtable on June 19, 2014, the criticisms of the re-proposed position limits rules by end-user participants included:
- Economically appropriate test for bona fide hedge exemption: A proposal, for the first time, that to be a bona fide hedge exempt from position limits, a hedge must reduce risk to an entire enterprise – such that risk must be managed on a global affiliated-entity basis – would be inconsistent with how commercial users manage the various risks confronted in their daily businesses;
- Cross-commodity hedging: A proposed new quantitative test to establish that a cross-commodity hedge is bona fide and thus exempt from position limits would exclude some commonly-used cross-hedges, such as natural gas to hedge power prices;
- 5-Day rule: A proposed prohibition on carrying certain hedges into the last 5 days of trading in a contract originally was adopted only for a handful of agricultural contracts that are currently subject to CFTC position limits, and should be modified if it is going to be extended to other commodities and markets;
- Deliverable supply: Since the re-proposed rules provide that spot-month position limits are to be based on deliverable supply, there is a need for updated deliverable supply data;
- Commodity trade options: The proposal to include these physical-delivery contracts in rules addressing speculative trading activity is not appropriate;
- Non-enumerated bona fide hedges: A process is needed for expedited review of requests for bona fide hedge exemptions that are not enumerated in the re-proposed rules, including time limits for action by the CFTC or its staff;
- Hedging of merchandising activity: Merchandisers should be eligible for bona fide hedge exemptions from position limits equivalent to those available to producers and processors.
On another topic, panelists presented a variety of views on proposed higher conditional limits for cash-settled contracts as opposed to physical-delivery contracts. The Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE) took opposite positions on this issue (ICE in support; CME in opposition).
Finally, several market participants, including asset managers and private equity funds, as well as the Futures Industry Association, objected to the re-proposed aggregation requirement to aggregate positions of owned entities where there is no control over the owned entity’s trading.
In connection with the Roundtable, the CFTC also reopened the comment period on the re-proposed position limits and aggregation rules to August 4, 2014. The fact that the Roundtable was held, and that the comment period was reopened, suggests that the CFTC is prepared to take the time to assure it has the information it needs before finalizing these rules.
It seems unlikely, therefore, that the CFTC will be issuing its final position limits and position aggregation rules before the first half of 2015. That said, the CFTC’s re-proposals provide a window into what its second set of final rules in this area may look like, and it is never too early to begin thinking about compliance based on the information currently at hand.