The U.S. Commodity Futures Trading Commission (CFTC) approved two Position Limits Proposals on a 3-1 vote. Commissioners also unanimously voted for a proposal related to aggregating accounts under the position limits rule.
The regulations implement section 737 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act required the Commission to limit the amount of positions, other than hedging positions, “that may be held by any person with respect to physical commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of the designated contract market.”
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The commission generally set spot-month position limits at 25% of estimated deliverable supply. Non-spot-month position limits are set using the 10/2.5% formula: 10% of the contracts’ first 25,000 of open interest and 2.5% thereafter.
CFTC Chairman Gary Gensler said the position limits further protect the markets and clearinghouses, as such limits diminish the possible burdens when any individual participant may need to sell or liquidate a position in times of individual stress.
Reacting to the announcement, the CME Group said it supports position limits, but says the CFTC rules could damage price discovery that occurs when a futures contracts converges with the physical market as it nears delivery. “We are especially concerned about this 5 times higher limit for cash-settled contracts given the updated deliverable supply information that we recently provided to the CFTC. As just one example, based on our analysis of current data, under this proposed rule structure the limits for NYMEX Physical Crude Oil would increase by 500%,” it states.
“If implemented, these proposed rules could prevent people from hedging in the first place, or create the unintended consequence of pushing participants out of the best-regulated markets, into less-regulated markets that carry greater risk,” it adds.
The CME Group provides this example: “To illustrate the negative impact the CFTC proposal could have on the marketplace, CME Group recently provided updated deliverable supply analyses for many of the markets that would be affected by the proposed federal structure and conditional limits. NYMEX Physical Crude Oil’s updated spot limit of deliverable supply would be 12,000 contracts while under the CFTC’s conditional limit proposal cash-settled crude oil would equate to 60,000 positions versus the current exchange spot limit in physically and cash- settled crude of 3,000,” it said.
