Exercising new authority Congress conferred on it in the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), in a January 13 rulemaking proposal the Commodity Futures Trading Commission (CFTC) proposes to impose limit on holdings of certain derivatives, including swaps linked to energy commodity prices. To be considered, public comments on this proposal must be submitted no later than March 28.
The proposed limits apply to physical delivery futures and “economically equivalent” derivatives such as swaps involving 28 commodities, including crude oil, natural gas, heating oil, gasoline, and various metals. Implementation would be phased. In the first transitional phase, new rules would limit spot month positions in relation to a designated contract markets (e.g., NYMEX, CBOT) determination of the deliverable supply of the commodity. In the second phase, they would limit both spot-month and non-spot month positions in relation to the CFTC’s determination of deliverable supply. The spot month limit would be 25% of deliverable supply; the non-spot month limit would be 10% of open interests in the first 25,000 contracts, and 2.5% of open interests in additional contacts. To determine compliance with these limits, the accounts of holders under common management are to be aggregated.
Public comments are likely to call for greater clarity in identifying what derivatives are “economically equivalent” to physical delivery futures. That task could be fraught with difficulty since swaps traded over the counter are not standardized and remain “invisible” to regulators when traded off-exchange. Even if these uncertainties can be resolved in the public comment and response, the fate of the proposed position limits rule is questionable. Of the five CFTC commissioners, one (Sommers) opposed issuing the proposed rule, and two others (Dunn and O’Malia) voiced pointed skepticism as to whether the limits will serve their proposed purpose of limiting commodity price volatility.