By Amy Leisinger, J.D.
The CFTC unanimously approved a proposal to update a rule governing exchanges that list security futures products to increase liquidity in SFP trading. The proposal would provide these exchanges with greater discretion in setting position limit levels to foster more effective risk management. Specifically, the proposed amendments would increase the default level of equity SFP position limits to 25,000 contracts and adjust the criteria for setting higher position limits and position accountability levels.
Current regulations. Under existing regulations, the CFTC generally requires a designated contract market to establish for each SFP a position limit applicable to positions held during the last five trading days of an expiring contract month of no greater than 13,500 (100-share) contracts. A DCM may adopt position accountability for an SFP on a security with an average daily trading volume of at least 20 million shares and at least 40 million outstanding shares.
Proposed changes. Under the proposal, the Commission would amend its position limits rules for SFPs by increasing the default level of equity SFP position limits to 25,000 contracts from 13,500 contracts and modifying the criteria for setting a higher level of position limits and position accountability levels. Rather than setting position limits based on average trading volume and outstanding shares, a DCM listing an SFP would set a specific position limit level, generally equivalent to no more than 12.5 percent of estimated deliverable supply of the underlying security.
Instead of position limits, a DCM would be able to set position accountability levels when six-month total trading volume in the underlying security exceeds 2.5 billion shares and more than 40 million shares of estimated deliverable supply exist, rather than when the six-month average daily trading volume in the underlying security exceeds 20 million shares and there are more than 40 million outstanding shares, as is the case under the current rule. In addition, the maximum accountability level under the position accountability regime would be increased to 25,000 contracts, from the current level of 22,500 contracts.
In addition, the proposal would provide a DCM with discretion to apply limits either on a net basis or on the same side of the market. If a DCM imposes limits on the same side of the market, the DCM could not net positions in SFPs in the same security on opposite sides of the market.
The default level for position limits for SFPs have not changed over time, but those on security options have, which has allowed position limits for security options to be set at a higher default level, potentially placing SFPs at a competitive disadvantage. The proposal is designed to level the playing field, the CFTC notes.
The Commission seeks comment on potential alternatives to the proposal and potential costs to, and benefits for, market participants, as well as whether to eliminate default position limits for equity SFPs and instead simply require that position limits and accountability be based on deliverable supply. Comments on the proposal are due 60 days after publication in the Federal Register.