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CFTC Takes Position on Position Limits

By    |   Tuesday, 05 November 2013 01:54 PM

The Commodity Futures Trading Commission (CFTC) met on Nov. 5 "to Consider Proposals on Position Limits and Other Business." By a vote of 3-1, with Commissioner Scott O'Malia dissenting, the Commission approved its latest proposal to set position limits on the most popular trading vehicles in the areas of futures, options and swaps, 28 in all, for physical commodities in agriculture, energy and metals.

Also, by unanimous vote, it proposed the aggregate the positions of entities that have common interests so that the limits cannot be evaded by splitting positions among various related entities. The proposed limits would initially be very broad, so the main purpose of this move seems to be to establish the authority of the agency to act in this area by responding to the remand it received from the federal district court that struck down the last version of the rule back in 2011.

This issue dates back to 2008, when the CFTC sought to re-establish its authority to set position limits after it lost the authority to regulate swaps with the enactment of the Commodity Futures Modernization Act of 2000 and its so-called "Enron loophole." The Commission received additional authority under the Dodd-Frank Act of 2010 to set position limits, but the industry succeeded in getting the 2011 rules overturned on the ground that the agency had not laid the proper foundation.

Two industry trade associations, the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association, contended that specific findings had to be made for each trading vehicle proposed to be regulated that position limits were necessary and justified by cost/benefit analyses.

Now the CFTC has decided to terminate the appeal of this decision and start over, and the industry is bound to renew its effort to vitiate this new regulation through exemptions and perhaps more challenges in the courts and on Capitol Hill.

CFTC Chairman Gary Gensler cited the cornering of the silver market in 1970 to 1980 and events in the natural gas market in 2006 as compelling reasons to establish position limits in order to fulfill the agency's mission to prevent market manipulation and to improve the ability of markets to establish reliable prices for commodities.

However, he admitted that of 130 studies listed in an appendix to the proposal, roughly a third are supportive, a third opposed and a third inconclusive, as to whether speculation is a problem in commodities markets and whether position limits are the solution to this problem if it exists.

The most vocal proponent of position limits, Commissioner Bart Chilton hailed the vote as the culmination of six years of effort and took the occasion to announce that this would be his last meeting as he prepares to leave to pursue another opportunity.

At the end of the meeting, O'Malia and Gensler fenced again, as they did last week over when commissioners will be able to see a draft of the Volcker rule on which they plan to vote by Dec. 21. Gensler stated that the key issue will be whether dealer banks should be allowed to take positions styled as market making that they hold for so long that they become proprietary.

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The Commodity Futures Trading Commission (CFTC) met on Nov. 5 "to Consider Proposals on Position Limits and Other Business."
Tuesday, 05 November 2013 01:54 PM
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