New Derivative Position Limit Rule

Simon Riveles CFTC, Futures, Position Limit

Under the Dodd–Frank Wall Street Reform and Consumer Protection Act (commonly referred to as “Dodd-Frank”), Congress required the Commodities Futures Trading Commission (“CFTC”) to impose limits in speculative positions in physical commodity futures and options contracts and economically equivalent swaps.

On November 5, 2013, the CFTC in a 3-1 vote approved a new rule (the “Rule”) that establishes position limits in 28 physical commodity futures in agricultural (19), energy (4) and metals (5) markets, and swaps that are economically equivalent to the agricultural and exempt commodity derivatives. The limits are established for a spot month, another single month and all months combined.

Spot-month limits are set for futures contracts that can be physically settled, as well as those swaps and futures that can only be cash settled. Single-month and all-months-combined limits, which are currently set only for certain agricultural contracts, would be reestablished in the energy and metals markets and be extended to swaps.

The Rule also allows for a bona fide hedging exemption for agricultural and exempt commodities, and a narrower exemption for swap dealers with regard to their use of futures and swaps to facilitate the bona fide hedging of their customers.

The U.S. District Court for District of Columbia vacated the original rule on position limits in September 2012, in ISDA v. CFTC. As the court noted, the CFTC failed to show that position limits were necessary or appropriate.  The new rule has already been widely criticized by the trading community for curbing the ability of firms to hedge their risk exposure. The CME, the world’s leading derivatives marketplace, also expressed concern that “if implemented, these proposed rules could prevent people from hedging.”

It seems though, that mostly energy futures are affected. The new rule imposes position limits for single month and all months for energy futures. Before the rule such limits did not exist.

For example for NYMEX Light Sweet Crude Oil position limits for spot month is 3,000 contracts, single month and all months – 109,200 contracts. By contracts, currently the limit is imposed by the exchange only on the spot-month position and is the same – 3,000 contracts.

On the other hand, agricultural sector’s position limits increased. For CBOT rough rice (RR) the new rule position limits for a single month and all months is 2,200 contracts as opposed to the existing 1,800. Position limits for wheat are raised from 12,000 contracts in all months/single month from 12,000 to 16, 200 contracts.

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