Position limits

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Position limits are the predetermined position level (number of contracts allowable for holding) set by regulatory bodies -- such as the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) in the U.S. or by an exchange - for a specific futures or options contract. Contracts will have varying position limits and these limits can be set for individual expiration months, such as the spot month, and for all listed expiration months combined.[1]

Position limits are created for the purpose of maintaining stable and fair markets. Contracts held by one individual investor with different brokers may be combined in order to gauge accurately the level of control held by one party. "CFTC regulations require FCMs and clearing members to file with the CFTC, on a daily basis, reports on futures and/or options positions for each account holding a reportable position. Exchanges have similar reporting requirements. CFTC and exchange position reporting requirements apply to all accounts holding reportable positions and do not distinguish, for the purpose of determining who must report, between types of accounts, such as hedge or speculative. In determining CFTC reportable status, the total long or total short gross position in any one month in any one market on any one exchange is used."[2]

"In addition, FCMs, clearing members, and foreign brokers must file a special account identification report(CFTC Form 102) providing basic account background information. Individuals and business entities (so-called “large traders” for the purpose of this CFTC regulation) who hold reportable positions also must file, upon request of the CFTC, a Statement of Reporting Trader (CFTC Form 40) showing background information about the trader.[3]

The CFTC's position limits are imposed on traders classified as "non-commercials" (i.e. speculators). The Commission and exchanges may grant exemptions to their position limits for bona fide hedging, as defined in CFTC Regulation 1.3(z), 17 CFR 1.3(z). Hedges must reduce risk for a commercial enterprise and must arise from a change in the value of the hedger's (current or anticipated) assets or liabilities.[4]

Position limits are intended to protect futures markets from excessive speculation that could cause unreasonable or unwarranted price fluctuations and are sometimes referred to as "speculative position limits", or "speculative limits". The Commodity Exchange Act (CEA) authorized the Commodity Futures Trading Commission to impose limits on the size of speculative positions in futures markets. Core Principle 5, of Section 5(d) of the CEA, requires designated contract markets to adopt speculative position limits or position accountability for speculators, where necessary and appropriate, to reduce the potential threat of market manipulation or congestion, especially during trading in the delivery month.[5] Hedge positions as defined by the CFTC and exchanges, are generally exempt from position-limit requirements, but they are not exempt from CFTC and exchange reporting requirements.

"For many futures and options contracts the CFTC and exchanges place limits on the maximum size of market positions that any one trader or group of related traders may hold or control if the trader is not exempt from the requirement."[6] By law, the CFTC sets limits on the number of futures contracts in agricultural products like wheat, corn and soybeans that can be held by each market participant to protect the market against manipulation. But for other products, including energy commoditiescrude oil, heating oil, natural gas, gasoline and other energy products — it is the futures exchanges themselves that set the position limits.[7] Exchanges only impose hard limits on energy products in the last three days of trading before a contract's expiration. The rest of the time, they impose accountability levels, which trigger additional oversight if exceeded.[8] Swaps dealers, although they are a huge group of speculators, are exempt from position limits because they are classified as commercials, even though they have no dealings in the physicals. The swaps dealers trade mostly on behalf of commodity index traders, a relatively new breed of speculator.[9]

Contents

Background

In early 2010, The Commodity Futures Trading Commission held discussions on energy position limits. Gary Gensler admitted the agency is considering setting limits on energy contracts to limit disproportionate energy speculation. If the rule is put into place, it will apply to trading on regulated futures exchanges, derivatives transaction execution and electronic trading facilities. [10] John Damgard, president of the Futures Industry Association, doesn't believe the proposal will pass and said that CFTC Commissioners Jill Sommers and Scott O'Malia have reservations about the rule.

In a late-July 2010 interview with Reuters, CFTC Commissioner Bart Chilton said a new speculative position limit regime will also apply to metals and soft agricultural commodities, in addition to the energy market limits proposed in January. The regulator will use new authority granted in the financial reform bill to apply curbs to "all commodities of finite supply," Chilton said.[11]

In November 2010, CFTC's Gensler said the regulator would take up the issue of position limits at its December 1, 2010 meeting.[12]

On On Jan. 26, 2011, the Commodity Futures Trading Commission (CFTC) published a notice of proposed rule making which establishes a position limits regime for 28 exempt and agricultural commodity futures and options contracts and the physical commodity swaps that are economically equivalent to such contracts. The notice was published in the Federal Register. Subsequently, the CFTC received received 15,116 comments and held meetings to discuss the proposed rules.

On Nov. 18, 2011, the CFTC's final and interim rules on Position Limits for Futures and SWAPS were published in the Federal Register.[13]

New Position Limits Regulations Under Dodd-Frank

CFTC regulations have long established position limits for the grains, the soybean complex, and cotton. However, on Oct. 18, 2011, CFTC undertook rule making in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act to establish federal position limits for 28 physical contracts on energy, metals and agricultural products and option contracts (‘‘Core Referenced Futures Contracts’’) and physical commodity swaps that are economically equivalent to such contracts (collectively, ‘‘Referenced Contracts’’). The new regulations also impose additional compliance and reporting requirements, including position visibility, reporting requirements upon exceeding position limit levels and filing and reporting requirements in connection with claiming aggregation and bona fide hedging exemptions.

Initially the new CFTC limits will be based on the spot-month position limits level currently in place at exchanges and designated markets. Later on the spot-month limits will be adjusted biennially energy and metals and annually for agricultural contracts. These subsequent limits will be based on the CFTC's determination of deliverable supply. In addition, the numerical non-spot-month position limit levels for all types of contracts will be adjusted biennially.

The limit rules cover agricultural commodity futures and options contracts and the physical commodity swaps that are economically equivalent to the Core Referenced Futures Contracts. These economically equivalent contracts are called Referenced Contracts, and other contracts, which include OTC contracts such as swaps are:

  • Contracts whose reference price is based only on the combination of (i) at least one Referenced Contract price and (ii) at least one price in the same or substantially the same commodity as the commodity underlying the relevant Core Referenced Futures Contract; and
  • Look-alike contracts that either settle off a Core Referenced Futures Contract or contracts that are based on the same commodity for the same delivery location as a Core Referenced Futures Contract;
  • Inter-commodity spreads with two components, at least one of which is a Referenced Contract.

Resources

Video

Meeting on Energy Position Limits and Hedge Exemptions Originally presented on Jan. 14, 2010

  • Opening Statement by Chairman Gary Gensler
  • Statement by Dan Berkovitz, Office of General Counsel, CFTC
  • Presentation and Statement by Steve Sherrod, Division of Market Oversight, CFTC
  • Motion to accept staff report and publish proposed rule
  • Questions and Answer Session
  • Statement by Commissioner Scott O’Malia
  • Statement by Commissioner Bart Chilton
  • Statement by Commissioner Jill Sommers
  • Statement by Commissioner Michael V. Dunn
  • Closing Statement by Chairman Gary Gensler
  • Vote on Rule Making

[14]

Comment letters on position limits

United States Commodity Funds, LLC - Advance Comments on Position Limits and the Definition of "Major Swap Participant" Under the Dodd-Frank Wall Street Reform and Consumer Protection Act [15]

White Papers on position limits

Excessive Speculation and Position Limits in Energy Derivatives Markets, CME Group
CME Group strongly opposes regulatory policies that unfairly discriminate against index funds and swap dealers in their ability to access energy and commodity futures markets. There is already significant evidence that CFTC actions to repeal no-action letters that granted exemptions from position limits to two index funds and the rhetoric regarding the possible imposition of position limits on swap dealers and index funds without allowance for exemptions is pushing these participants to exempt-over-the-counter (OTC) swap markets, foreign exchanges with less restrictive or non-existent position limits requirements, and even domestic securities markets. Market participants are also developing other product substitutes that will allow investors to bypass the regulated exchange markets in the United States. [16]

References

  1. Guide Futures and Options, pg 228. The Institute for Financial Markets.
  2. Guide to U.S. Futures Regulation, pg 16. The Institute for Financial Markets.
  3. Guide to U.S. Futures Regulation, pg 16. The Institute for Financial Markets.
  4. Speculative Limits. CFTC.
  5. Speculative Limits. CFTC.
  6. Guide to U.S. Futures Regulation, pg 16. The Institute for Financial Markets.
  7. Energy trading limits considered by feds. Crain's Chicago Business.
  8. Gensler Pushes for Trading Curbs. The Wall Street Journal.
  9. Commodity Speculation: Over the Top?. Barron's.
  10. CFTC To Meet On Energy Position Limits on January 14. MarketWatch.
  11. CFTC's Chilton sees broader position limit rule. Reuters.
  12. CFTC sets sweeping rule timelines as clock ticks. Reuters.
  13. {{cite web|url =http://www.gpo.gov/fdsys/pkg/FR-2011-11-18/pdf/2011-28809.pdf%7Cname = COMMODITY FUTURES TRADING COMMISSION, 17 CFR Parts 1, 150 and 151, RIN 3038–AD17 =CFTC|date =November 18, 2010}}
  14. Meeting on Energy Position Limits and Hedge Exemptions. CFTC.
  15. United States Commodity Funds -- Comments to Position Limits and Definition of Maj or Swap Participant. Sutherland Asbill & Brennan LLP.
  16. Excessive Speculation and Position Limits in Energy Derivatives Markets. CME Group.
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