The Commodity Futures Trading Commission is once again girding for battle over a controversial plan to impose position limits on futures contracts. On Dec. 3, notice will be published in the Federal Register to announce the reopening of a public comment period on the long-lingering rules.
Back in October 2012, CFTC rulemaking was poised to begin limiting speculative positions in physical commodity futures and options contracts. An effort to prevent price manipulation, the rule was intended to ensure that no single trader could obtain too large a share of the market, ensuring competitiveness in the derivatives markets. The Commission planned to start capping the maximum number of contracts that are bought and sold for 28 physical commodities, among them oil, gasoline, corn, wheat, cotton, sugar, silver, and platinum. Traders would have been required to aggregate their holdings when determining position limits.
That plan was scuttled, however, after the U.S. District Court in the District of Columbia ruled on a legal challenge by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association. The court sided with their claim that the position limits rule, as crafted, would adversely affect commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility. The cornerstone of the legal challenge was that the CFTC misinterpreted its statutory authority under the Commodity Exchange Act, as amended by Dodd-Frank, when it set position limits.
U.S. District Judge Robert Wilkins, ruling that the CFTC had no “clear and unambiguous mandate” to set position limits under the Dodd-Frank Act, remanded the rulemaking back to it for a rewrite. The Commission opted not to appeal the decision and has slowly worked its way towards a revised proposal.
In November 2013, the CFTC re-proposed the rule and, this past June, held a roundtable to discuss those potential changes and reopened the public comment process. The latest proposal establishes two categories of speculative limits: spot-month position limits and non-spot-month position limits. Exemptions are provided for “bona fide hedging positions” and the new version also eases up on how positions are aggregated among affiliates, a particular concern of banks.
As part of the latest 45-day comment period, an update on the position limitsproposal is on the agenda for a Dec. 9 meeting of the CFTC’s Agricultural Advisory Committee.
“We cannot allow this rule to linger indefinitely on our docket,” Commissioner Sharon Bowen said in a statement. “It has been over a year since we re-proposed this rule and nearly four years since it was first proposed. We need to finish this rule next year, and I believe we can release a final rule by spring 2015.”
Bowen warned that the CFTC “must avoid the temptation to simply ratchet back or weaken prior versions” of the rule. “The best way of viewing changes to our rules is not that we are tweaking them, but rather that we are enhancing them,” she said.