CFTC approves final rule on speculative position limits for commodity derivatives

The US Commodity Futures Trading Commission approved a final rulemaking on speculative position limits for commodity derivatives via a 3-2 vote at an open meeting on 15 October.

The vote is a major milestone for both the CFTC and derivatives industry. The final rule closes a rulemaking that had been proposed and re-proposed several times since the passage of the Dodd-Frank Act nearly 10 years ago. The rule also includes a number of measures advocated by FIA and its members to protect commercial end users and market liquidity, including an expanded list of bona fide hedge exemptions and the agency's decision not to impose position limits outside of the spot month for certain commodity contracts.

The final rulemaking places spot month limits on 25 core referenced futures contracts as well as futures and options linked to them and economically equivalent swaps. The rulemaking also delegates to exchanges the authority to set position limits outside the spot month, and revises the definition of "bona fide" hedging to better reflect current commercial hedging practices for commodities including metal, agricultural and energy products.

In his comments at the meeting, CFTC Chairman Heath Tarbert stressed the importance of putting forward a workable position limits rulemaking rather than allowing current efforts to once again fail by trying to balance too many competing interests. "The flexibility in the necessity finding, the exemption process, and the adjusted limits are what make this rule workable," he said. "Otherwise, we are just repeating past mistakes and hoping for a different result—the very definition of insanity."

However, Tarbert noted several times that the milestone of finalizing this rulemaking on position limits should not be seen as a sign that the CFTC's work is over on the topic. Specifically, Tarbert noted that the complexities of the final rule, which spans roughly 900 pages, could naturally result in technical issues that will require agency attention in interpretation, implementation and enforcement.

In his support of the rule, Commissioner Brian Quintenz stressed it was important to acknowledge the other avenues the agency still had available to refine position limits and to not add further delays to what had already become a 10-year process.

Commissioner Dan Berkovitz, who voted against the final position limits rulemaking, expressed concerns that the CFTC was delegating too much power to exchanges in the final rule by allowing them to administer hedging exemptions. In fact, Berkovitz made the rare act of proposing an amendment to the final rulemaking at the 15 October meeting that would recommend exchanges provide the agency with early notice when they intend to allow exemptions for "non-enumerated" hedges, meaning hedges that are not explicitly spelled out in CFTC regulations. That amendment passed on a 3-2 vote, with Commissioner Dawn Stump standing with Commissioner Rostin Behnam and Berkovitz on the measure.

Behnam, who with Berkovitz also voted against the final rulemaking, noted that the absence of position limits for crude oil futures was particularly disturbing to him given the large move in those markets earlier in 2020. While acknowledging the CFTC is currently working on a comprehensive report specifically relating to crude oil futures activity, Behnam noted several public comments received by the CFTC expressed concerns about speculation in those markets and said that he thought the agency was too hasty in moving forward with this rulemaking without addressing those concerns.

Other matters: Phase VI UMR compliance delayed, registration exemption for foreign CPOs

In other matters, the CFTC also unanimously approved a final rule on the Phase VI compliance date extension for margin requirements for uncleared swaps. The new deadline for compliance is 1 September 2022, aligned with Basel and IOSCO recommendations from earlier this year.

Separately, the commissioners also voted unanimously to finalize an exemption from registration for certain foreign intermediaries. As a group, the commissioners collectively expressed a desire to avoid using the resources of the CFTC on commodity investment pools solely used by foreign investors and to defer to peer regulators in outside jurisdictions.