By Lene Powell, J.D.
Several financial services industry associations and public interest groups have submitted comments on CFTC position limits rules proposed in December 2016, for which the comment period recently closed.
Position limits proposals. In 2011, the CFTC issued proposed and final rules to implement provisions of the Dodd-Frank Act on position limits and the bona fide hedge definition. Most of these rules were vacated in 2012 by the D.C. district court on the basis that the CFTC did not adequately find that position limits were necessary. The CFTC proposed new rules for position limits and aggregation of positions in late 2013, followed by a supplemental proposal in June 2016. The CFTC then issued a reproposal in December 2016.
The reproposal would establish speculative position limits for 25 exempt and agricultural commodity futures and option contracts, and physical commodity swaps "economically equivalent" to such contracts, as defined. Among other provisions, the reproposal would also update definitions; revise exemptions, including for bona fide hedging; extend and update certain reporting requirements; and establish processes for exchanges to recognize positions as hedges and provide exemptions subject to CFTC review. Comments on the reproposal were due on February 28, 2017.
Financial services associations. According to the Futures Industry Association (FIA), the position limits and exemptions as proposed are too restrictive and would impede bona fide hedging by end-users like farmers, manufacturers, and construction companies. Rather than attempting to prevent any speculation, threatening the ability of commercial business to carry out critical risk management activities, the CFTC needs to define when speculation becomes “excessive” and demonstrate that this speculation has an undue effect on prices. Among other suggestions, the FIA recommended that the rule include more enumerated bona fide hedges and allow more flexibility for hedging activities generally, provide for a phase-in with spot-month limits first, and establish accountability levels in lieu of hard limits on non-spot-month contracts.
A group of associations including the Managed Funds Association (MFA), the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA AMG), and the Alternative Investment Management Association (AIMA) emphasized that before attempting to regulate in this area, the CFTC must first find that excessive speculation exists, and that position limits are necessary in each of the core referenced futures contracts. The associations also think the reproposal uses an overly simplistic one-size-fits-all approach based on a generic percentage of deliverable supply and open interest. The associations believe the CFTC should make more specific findings, delegate more authority to exchanges, and exclude economically equivalent contracts, at least at this time.
Public interest groups. Taking a mostly opposite view, Better Markets and Americans for Financial Reform believe that the reproposal falls short in reining in excessive speculation, failing to protect consumers and physical commodity producers. According to Better Markets, by setting very high, narrowly applied limits and delegating some of the CFTC’s paramount duties and authorities to for-profit exchanges, the proposed rules would fail to meaningfully prevent or reduce excessive speculation except for the most egregious cases of manipulation. The rules would also fail to capture particularly harmful types of speculation like commodity index trading, said the group.
The group recommends a number of revisions including lowering the limits, subjecting commodity index funds to limits, removing the delegation of authority to exchanges, and requiring that bona fide hedges be linked to demonstrable physical positions.
Americans for Financial Reform (AFR) backed the views of Better Markets, saying the rules will not protect the public from commodity price manipulation by speculators. By simply accepting and authorizing current market practices, said AFR, the CFTC leaves the door open to wild swings in commodity prices, unjustified by fundamentals and harmful to real economy businesses and consumers. The group pointed to an apparent conflict in having exchanges set limits and grant exemptions, saying it is in the interest of exchanges to set high limits because they have a profit motive to increase trading volume.
“We urge the Commission to turn away from its current course of the repeated delay and weakening of commodity position limits,” wrote the group. “Instead, the Commission must act on the Congressional mandate to control the greatly increased level of speculation in vital CFTC-regulated commodity markets.”