On October 18, 2011, the Commodity Futures Trading Commission (CFTC) held a public meeting to consider a final rule on position limits for futures and swaps. The final rule was passed by a 3-2 vote, with Chairman Gensler and Commissioners Chilton and Dunn voting for it, and Commissioners O’Malia and Sommers voting against it. In addition to approving the final rule on position limits, the CFTC approved a final rule on derivatives clearing organization (DCO) general provisions and core principles by the same 3-2 vote, and unanimously approved a proposed order to amend the effective date of swap regulation from the current expiration date of December 31, 2011, to July 16, 2012. The CFTC’s General Counsel, Dan Berkovitz, noted that the extended expiration date of the proposed order could occur earlier than July 16, 2012 if the entity and product definitions are finalized and become effective before July 16, 2012.
The CFTC will publish the text of the two final rules and the notice of proposed amendment in the Federal Register in the next several days. We will be reviewing the Federal Register versions of both rules and will provide you with more detailed summaries of the substantive changes.
Summary of Final Rule on Position Limits
Aggregation. The CFTC’s final rule will retain the CFTC’s long-standing independent account controller exemption, with some substantive modifications that will be revealed in the published rule. While the CFTC did not discuss in detail the substantive modifications to this exemption, it is expected that, although the exemption will no longer be self-effectuating, the final rule will require a firm relying on the exemption to make a notice filing, which would be effective upon filing and thus will not require any pre-approval from the CFTC.
Speculative Position Limits. Limits on speculative positions in 28 core physical commodity contracts and their “economically equivalent” futures, options, and swaps (collectively, “Referenced Contracts”) will occur in two phases. CFTC staff indicated that the limits are designed to target large traders to avoid the potential occurrence of excessive speculation. However, CFTC staff could not identify any working definition of “excessive speculation” or any criteria to assess whether it is occurring.
Exemptions for Bona Fide Hedging Transactions. The exemptions in the final rule will now include certain anticipated merchandising transactions, royalties, and service contracts to reflect concerns by commercial firms. The CFTC added a last-minute amendment to enable market participants to petition the CFTC for exemptive relief for any legitimate risk reducing hedging transaction to qualify as a bona fide hedging transaction under the new requirements in the final rule, or to seek interpretive guidance from CFTC staff on whether their hedging strategies would qualify as bona fide hedging. The new definition of bona fide hedging will be effective 60 days after the term “swap” is further defined in final rulemaking.
The final rule also contains exemptions for positions established in good faith prior to the effective date of the initial limits established by the final rule.
Click here to read the CFTC’s fact sheet on the final rule on position limits for futures and swaps.
Click here to read the CFTC‘s Q&A on the final rule.
Click here to access the CFTC’s open meeting event release with embedded links to the opening statements of Chairman Gensler and Commissioners Chilton, Sommers and O’Malia, as well as Commissioner O’Malia’s statement of dissent on the final rule.
* * * *
If you have any questions or comments on any of the above items, please feel to call and ask to speak to the following members of MFA’s Legal staff at (202) 730-2600 or email them directly.