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]

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.[3] 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."[4] 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.[5] 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.[6]

Position Limits Regulations Under Dodd-Frank

Section 737 of the Dodd-Frank Act mandated that the CFTC "limit the amount of positions, other than bona fide hedging positions, that may be held by any person with respect to physical commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of a designated contract market (DCM), as appropriate." [7]

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. [8] 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.[9]

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.

The CFTC issued its final rules on position limits in October 2011. Compliance for spot month positions was to become effective on October 12, 2012, but in September 2012, a U.S. District Court vacated the rule and remanded it back to the CFTC. Though the commission initially filed an appeal of the ruling, it opted instead to withdraw the appeal and redraft a proposed rule, which was approved on November 5, 2013. The proposal entered the Federal Register on December 12, 2013, but the comment period has been reopened three times in 2014.

The New Proposals, 2013

Note: for a full summary and timeline of position limits, visit the position limits regulation page in MarketsReformWiki.

On November 5, 2013, the CFTC approved a proposed rule that would impose position limits on 28 physical commodity futures contracts, and futures and swaps that are "economically equivalent" to those contracts. These include:

  • Grain and livestock futures (corn, wheat, oats, rice, the soy complex, milk, coffee, sugar, cocoa, cattle and hogs);
  • Energy (crude oil, heating oil, natural gas and gasoline; and
  • Metals (gold, silver, copper, platinum and palladium.

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:

  • look-alike contracts, meaning it settles off of the core referenced futures contract or contracts that are based on the same commodity for the same delivery location
  • reference price contracts, based on only the combination of at least one referenced contract price and one or more prices in the same or substantially the same commodity, but is not a "locational basis swap";
  • intercommodity spread contracts, with two reference price components, one or both of which are based on referenced contracts; or
  • priced at a fixed differential to a core referenced futures contract.

"Bona Fide Hedging" Exemption, 2016

In May 2016, the CFTC approved a supplemental proposal that would alter some of the processes by which designated contract markets and swap execution facilities recognize and determine bona fide hedges, which are exempt from position limits.[10] The supplement would cover anticipatory hedges, some spread positions, and certain products not specifically spelled out in the 2013 rules ("non-enumerated" bona fide hedges).

After the rules are published, a 30-day comment period will commence.[11]

Resources

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. Speculative Limits. CFTC.
  4. Guide to U.S. Futures Regulation, pg 16. The Institute for Financial Markets.
  5. Energy trading limits considered by feds. Crain's Chicago Business.
  6. Gensler Pushes for Trading Curbs. The Wall Street Journal.
  7. Final Regulations on Position Limits for Futures and Swaps. CFTC.
  8. CFTC To Meet On Energy Position Limits on January 14. MarketWatch.
  9. CFTC's Chilton sees broader position limit rule. Reuters.
  10. U.S. futures regulator adds hedging exemptions to position limit proposal. Reuters.
  11. CFTC Approves Supplement to Position Limits Proposal to Permit Exchanges to Recognize Non-enumerated Bona Fide Hedges. CFTC.