CFTC passes final position limit rule under a cloud of partisan controversy

By Brad Rosen, J.D.

With the CFTC’s approval of its final rule on speculative position limits for commodity derivatives at a recent open meeting, Chairman Heath Tarbert unabashedly expressed his pride and satisfaction proclaiming "Today we have reached the end of an arduous journey … we are removing a cloud that has hung over both the CFTC and the derivatives markets for a decade. Market participants, particularly Americans who need these markets to hedge the risks inherent in their businesses, will finally have regulatory certainty." Tarbert added, "I am pleased to say—promise made, promise kept." The final rule, which has been the subject of five separate rule proposals since 2011, passed on a 3-2 vote along party lines, and completes the CFTC’s rulemakings related to Dodd-Frank Act which was enacted in 2010.

Dan Berkovitz, a Democratic commissioner, issued a dissenting statement asserting "The Final Rule fails to achieve the most fundamental objective of position limits: to prevent the harms arising from excessive speculation." He added, "It is another disappointing chapter in the Commission’s 10-year saga to implement Congress’s mandate in the Dodd-Frank Act to impose speculative position limits in the energy, metals, and agricultural markets." Recognizing the dominant role played by exchanges in the regulation’s implementation, Berkovitz observed "the rule demoted the Commission from head coach to Monday-morning quarterback."

The Commission also approved final rules for margin requirements for uncleared swaps, as well as registration exemptions for foreign commodity pools at the meeting. Both of those measures were approved by unanimous 5-0 votes.

Highlights of the position limits final rule. Some of the main features of the final rule, which was proposed in January of 2020, include the following:

• The CFTC adopted new and amended federal spot month position limits for derivatives contracts associated with 25 physical commodities, and amended single-month and all-months-combined federal limits for most of the agricultural contracts currently subject to federal position limits. Under the final rule, federal non-spot month position limits were not extended to the sixteen new physical commodities as initially proposed;
• The CFTC adopted new and amended definitions for use throughout the position limits regulations, including a revised definition of "bona fide hedging transaction or position" that includes an expanded list of enumerated bona fide hedges and a new definition of "economically equivalent swaps"; and,
• The CFTC amended rules governing exchange-set position limit levels and related exchange exemptions; and established a new streamlined process for non-enumerated bona fide hedging recognitions for purposes of federal position limits. Specifically, authority has been delegated to exchanges to set position limits outside the spot month.

Other commissioners weigh in on the final rule. Commissioners Quintenz, Behnam and Stump also had something to say about the final position rule limit rule as follows:

• Commissioner Brian Quintenz expressed his enthusiastic support noting, "The new position limits regime will provide commercial market participants with sufficient flexibility to hedge their risks efficiently and will promote liquidity and price discovery."
• In a dissent, Commissioner Rostin Behnam decried the measure noting it "signified yet one more instance where the Commission seemed to be comfortable with deferring core, congressionally mandated duties to others and calling it a victory."
• Commissioner Stump observed that the final rule addressed a number of misgivings she had about the rule as proposed and noted her support that "above all, the final rulemaking is reasonable in design, balanced in approach, and workable in practice."

One last final amendment. Towards the conclusion of the open meeting, Commissioner Dan Berkovitz offered an amendment to the final rule that would recommend exchanges voluntarily provide the CFTC with early notice when they intended to allow exemptions for "non-enumerated" hedges, meaning hedges that are not explicitly spelled out in CFTC regulations. Under the final rule, the CFTC would only have two days to review these matters which Berkovitz viewed as inadequate. The amendment was approved by a 3-2 vote, with Commissioner Stump voting with Commissioners Behnam and Berkovitz on the measure. The final position limit rule will be effective 60 days after its publication in the Federal Register.

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (Phase VI Compliance Date Extension). This final rule amends the margin requirements for uncleared swaps for swap dealers and major swap participants for which there is no banking regulator. The final rule extends the initial margin implementation schedule for entities with smaller uncleared swap portfolios from September 1, 2021 to September 1, 2022, to avoid market disruption due to the large number of entities that would have been required to comply with the initial margin requirements by September 1, 2021. Commissioner Quintenz had further comment about the Phase VI compliance extension date rule. This final rule will be effective 30 days after publication in the Federal Register.

Exemption from Registration for Certain Foreign Intermediaries. This final rule amends CFTC Regulation 3.10(c), which provides exemptions from intermediary registration under certain conditions to foreign-located persons, in connection with their U.S. commodity interest transactions conducted on behalf of persons located outside the United States (the 3.10 Exemption). Specifically, among other amendments, this final rule clarifies that the 3.10 Exemption for foreign-located persons acting as a CPO (non-U.S. CPOs) on behalf of offshore commodity pools may be claimed by such non-U.S. CPOs on a pool-by-pool basis. Chairman Tarbert, Commissioners Quintenz, Behnam, Stump and Berkovitz each had further comments about the final rule amending the registration exemption for foreign CPOs. This final rule is effective 60 days after publication in the Federal Register. The CFTC’s next open meeting will be held jointly with the SEC on October 22, 2020.