Full Text: CFTC proposal to set position limits

Proposal to Set Position Limits in the Energy Futures and Options Markets

The Commodity Futures Trading Commission (CFTC) is proposing to set position limits for futures and option contracts in the major energy markets. In addition, the proposal establishes consistent, uniform exemptions for certain swap dealer risk management transactions while maintaining exemptions for bona fide hedging.

The CFTC is directed in its original 1936 statute to set position limits to protect against the burdens of excessive speculation, including those caused by large concentrated positions.

Commodity Exchange Act, Section 4a(a): For the purpose of diminishing, eliminating, or preventing such burden, the Commission shall, from time to time proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person under contracts of sale of such commodity for future delivery

on or subject to the rules of any contract market or derivatives transaction execution facility, or on an electronic trading facility with respect to a significant price discovery contract, as the Commission finds are necessary to diminish, eliminate, or prevent such burden.

The CFTC currently sets position limits in certain agriculture markets. The CFTC sets limits for allmonths- combined (AMC), single-month and the spot-month in certain agriculture commodities. Limits apply to aggregate positions in futures and options combined, plus mini-sized contracts in the same commodity. There are exemptions for bona fide hedging transactions involving commodity inventory hedges and anticipatory purchases or sales of the commodity.

Position limits existed in the energy markets until 2001. The New York Mercantile Exchange (NYMEX), with CFTC approval set and enforced position limits in the energy futures markets until 2001. The position limits applied to AMC, single-month and spot-month. In 2001, NYMEX substituted accountability levels for AMC and single-month limits and set position limits only in the spot month.

The Commodity Exchange Act directs the CFTC to act prospectively, as necessary, to curb or prevent excessive speculation that may burden interstate commerce. The CFTC need not demonstrate that there has been excessive speculation in the regulated derivatives markets for the major energy commodities.

The proposed rulemaking leverages the CFTC fs experience setting position limits in the agriculture markets.

The energy position limits proposal uses the same gopen interest h formula as the one used in CFTC guidance to exchanges. The proposal uses the same formula for the AMC position limits. The approach to setting the level of the spot-month limit in the physical delivery contract also is the same.

The proposed energy position limits build upon the agricultural limits in several ways. The proposed energy limits would be responsive to the size of the market and administratively reset on an annual basis, rather than change only with a Commission rulemaking.

The proposed energy limits differ from the agriculture markets by establishing aggregated position limits. These limits aggregate positions: across physically-settled and cash-settled contracts; across reporting markets; and at the owner level. Rules for agricultural products permit disaggregation for independently controlled positions.

Commodity Futures Trading Commission . Office of Public Affairs . 202-418-5080