In a 3-2 vote, the CFTC adopted a final rule that applies federal speculative position limits to 25 "core referenced futures contracts," including futures and options linked to those contracts and economically equivalent swaps. Commissioners Benham and Berkovitz dissented.
As previously covered, the final rule (i) expands the definition of "bona fide hedging transaction or position" to incorporate a larger list of enumerated bona fide hedges and (ii) adopts a new definition of "economically equivalent swaps." The final rule also (i) amends the regulations governing exchange-set position limit levels, (ii) creates a new process to streamline the recognition of non-enumerated bona fide hedging recognitions, and (iii) eliminates Form 204 (and relevant corresponding parts of Form 304).
Among other things, the final rule:
- enables commercial end users that have entered into unfixed price transactions to qualify for an enumerated bona fide hedge;
- allows market participants to enter into a hedge position while non-enumerated bona fide hedges are pending CFTC review;
- provides that dealers can rely, in good faith, on bona fide hedge representations from their counterparties;
- establishes conditional limits on natural gas contracts;
- codifies a broad list of self-effectuating enumerated bona fide hedges; and
- eliminates the risk management exemptions.
The final rule also adopts a bifurcated compliance date, establishing as the compliance dates:
- January 1, 2022 for position limits on the 16 non-legacy core referenced futures contracts subject to the newly adopted CFTC position limits, as well as position limits for associated referenced contracts other than economically equivalent swaps; and
- January 1, 2023 as the compliance date for position limits on economically equivalent swaps.
The final rule goes into effect 60 days after its publication in the Federal Register.
CFTC Commissioner Statements
CFTC Chair Heath P. Tarbert emphasized that the CFTC's position limits are "a ceiling, not a floor," arguing that the exchanges themselves can appropriately calibrate their position limits (within the "outer bounds of the federal limits") to account for any relevant issues in the commodities markets.
Commissioner Brian Quintenz stated that the final rule is a significant improvement from the proposal and "correctly premises new limits on a finding that they are necessary to diminish, eliminate, or prevent the burden on interstate commerce from extraordinary price movements caused by excessive speculation (necessity finding) in specific contracts."
Commissioner Dawn D. Stump described the final rule as (i) reasonably designed, (ii) balanced in its regulatory approach, and (iii) practicable for both market participants and the CFTC. Commissioner Stump disagreed with suggestions that the final rule's position limits were premised upon "an inappropriate reliance by the Commission on the exchanges." Commissioner Stump noted that the final rule does not delegate the CFTC's authority to the exchanges, and emphasized that the exchanges "know their markets."
In dissent, Commissioner Rostin Behnam stated that the final rule defers regulatory authority to the exchanges, contrary to "Congressional mandate and clear statutory intent." Mr. Benham argued that the CFTC has not provided a rational basis for "its determination not to establish federal limits outside of the spot month for referenced contracts based on commodities other than the nine legacy agricultural commodities." Further, he argued that the CFTC's decision to (i) expand the bona fide hedging exemption, (ii) codify a broader list of "self-effectuating" enumerated bona fide hedges, and (iii) allow exchanges to recognize a number of non-enumerated bona fide hedging exemptions, were "inconsistent with Congressional intent."
Commissioner Dan M. Berkovitz also dissented, criticizing the final rule for its failure to achieve the prevention of harm caused by excessive speculation. Specifically, Commissioner Berkovitz argued that the final rule: (i) wrongly allows private entities to establish new bona fide hedging exemptions; (ii) completely overlooks issues with "trading at settlement" transactions; (iii) "misinterprets" the Dodd-Frank Act; and (iv) "reverses decades of precedent" in establishing an antecedent necessity finding as a condition for the CFTC to impose federal speculative position limits.
The economic rationale for imposing onerous position limits on physical commodities, particularly energy, has long been open to question, even in ordinary times. See, e.g., Finance Professor Weighs in on Derivatives Market Concentration and Position Limits.
That said, it is difficult to imagine a time when there would be less of a need to adopt a position limit regulation that would be expensive to implement and produce a general drag on market participants, as advocated by the dissenters. Is there any remote realistic scenario in which bad guys on Wall Street dominate the energy supply?
- CFTC Voting Draft: Position Limits for Derivatives
- CFTC Press Release: CFTC Finalizes Position Limits Rule at October 15 Open Meeting
- CFTC Statement, Heath P. Tarbert: Statement in Support of Final Rule on Position Limits
- CFTC Statement, Brian Quintenz: Supporting Statement Regarding Position Limits for Derivatives
- CFTC Statement, Dawn D. Stump: Position Limits for Derivatives
- CFTC Statement, Rostin Behnam: Statement of Dissent Regarding Position Limits for Derivatives
- CFTC Statement, Dan M. Berkovitz: Dissenting Statement Regarding Final Rule on Position Limits for Derivatives
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