On November 5, 2013, the Commodity Futures Trading Commission ("CFTC" or "Commission") proposed new speculative position limits. The proposal ("New Proposal") would establish spot-month and non-spot-month limits for 28 core physical commodity contracts and their "economically equivalent" futures, options, and swaps (collectively, "referenced contracts"). The CFTC had finalized position limits in a 2011 rulemaking ("2011 Rule"), but a federal court vacated the 2011 Rule. The New Proposal constitutes the Commission's latest effort under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") to establish federal position limits for specified physical commodity contracts beyond those already in place for certain agricultural contracts. The New Proposal would institute a position limits regime largely identical to that prescribed by the 2011 Rule, with some exceptions. The Commission approved the New Proposal for publication in the Federal Register by a 3 to 1 vote, with Commissioner Scott O'Malia casting the lone dissenting vote. The Commission also unanimously approved an accompanying proposal ("Aggregation Proposal") that would expand the exemptions from aggregating positions that had been available under the 2011 Rule and a subsequent May 2012 proposal.
This client alert summarizes the New Proposal and the Aggregation Proposal and highlights key similarities and differences between these proposals and the 2011 Rule. The New Proposal will be open to public comment for 60 days after it is published in the Federal Register, which has not yet occurred. The Aggregation Proposal will be open to comment until January 14.
BACKGROUND FOR THE NEW PROPOSAL
The New Proposal marks the second time in as many years that the Commission has sought to establish a new, expanded position limits regime under Dodd-Frank beyond that currently in effect for certain "legacy" agricultural futures and options. Title VII of Dodd-Frank amended Section 4a of the Commodity Exchange Act ("CEA") to give the CFTC authority to establish position limits to curb and prevent "excessive speculation" in commodities markets. In November 2011, acting pursuant to its perceived authority, the Commission issued the 2011 Rule, which established spot-month and non-spot-month position limits for 28 referenced contracts. However, in September 2012, shortly before certain of the new limits were to go into effect, a federal district court invalidated the 2011 Rule in a lawsuit brought by industry representatives.1 Whereas the CFTC had argued that Section 4a unambiguously required it to establish position limits, the court held that the CEA was at least ambiguous on this point, and that another plausible interpretation was that the statute required the CFTC to find position limits necessary before imposing them. The court remanded the 2011 Rule to the CFTC to resolve the ambiguity.
Responding to the court's directive, the CFTC in the New Proposal clarifies that it believes Section 4a mandates the imposition of position limits. The CFTC goes on to say that even if this were not so, and it had discretion to impose position limits, such limits would be necessary to achieve Dodd-Frank's purposes based on its experience regulating commodities markets. In support of this "necessity finding," the Commission cites to the attempted cornering of the silver market by the Hunt brothers in 1979-80, and the 2006 collapse of the Amaranth Advisors hedge fund through natural gas trading on the NYMEX, and states its belief that had the position limits provided for in the New Proposal been in place at those times, they would have prevented the accumulation of large positions and resulting market disruption in both episodes. Commissioner O'Malia criticizes the Commission's reliance on these historic examples in his dissent, stating that it should have analyzed the new swaps data collected under Dodd-Frank while recognizing that such data is still unreliable. The Commission also reviewed 132 studies analyzing the impact of position limits or the role of speculation on commodity prices. While recognizing a lack of consensus in the studies, the CFTC states that such lack of consensus warrants erring on the side of caution and imposing position limits as a prophylactic measure.
CONTRACTS SUBJECT TO PROPOSED POSITION LIMITS
Like the 2011 Rule, the New Proposal establishes position limits for 28 referenced contracts. The specified commodity contracts span the energy, metal, and agricultural commodities markets, as set forth below.
Four energy contracts: (1) NYMEX Henry Hub Natural Gas (NG), (2) NYMEX Light Sweet Crude Oil (CL), (3) NYMEX RBOB Gasoline (RB), and (4) NYMEX NY Harbor ULSD (HO). Five metal contracts: (1) COMEX Copper (HG), (2) COMEX Gold (GC), (3) COMEX Silver (SI), NYMEX Palladium (PA), and (5) NYMEX Platinum (PL). Nine "legacy" agricultural contracts: (1) CBOT Corn (C), (2) CBOT Oats (O), (3) CBOT Soybeans (S), (4) CBOT Soybean Meal (SM), (5) CBOT Soybean Oil (BO), (6) CBOT Wheat (W), (7) ICE Futures U.S. Cotton No.2 (CT), (8) KCBT Hard Winter Wheat (KW), and (9) MGEX Hard Red Spring Wheat (MWE). Ten non-"legacy" agricultural contracts: (1) CME...
