Debevoise & Plimpton

Proposed CFTC rules on position limits

By Byungkwon Lim and Aaron J Levy

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended section 4a of the Commodity Exchange Act (CEA) to require the Commodity Futures Trading Commission (CFTC) to establish position limits on an aggregate basis for (1) futures and options contracts on agricultural and exempt commodities traded on or subject to the rules of a designated contract market (DCM) and (2) contracts based on the same underlying commodity as such futures and option contracts, including (a) swaps listed for trading by a DCM or swap execution facility (SEF), (b) swaps that are not traded on a DCM, SEF or other registered entity but that are determined to perform or affect a ‘significant price discovery function’ (SPDF swaps) and (c) foreign board of trade (FBOT) contracts that are price-linked to a DCM or SEF contract and made available for trading on the FBOT by direct access from within the US.

On 18 October 2011, the CFTC adopted final rules on position limits for 28 exempt and agricultural commodity futures and options contracts and swaps that are economically equivalent to such contracts as Part 151 of its regulations. On 30 May 2012, the CFTC published proposed modifications to Part 151 addressing the policy for certain aspects of aggregation requirements in determining position limits.

However, on 28 September 2012, the US District Court for the District of Columbia issued an order in International Swaps and Derivatives Association v United States Commodity Futures Trading Commission that generally vacated those final rules and remanded the matter to the CFTC. The District Court rejected the CFTC’s contention that section 4a of the CEA unambiguously mandated the imposition of position limits without any finding that such limits are necessary ‘to diminish, eliminate or prevent excessive speculation’ and held that it was therefore required to remand the matter to the CFTC to ‘fill in the gaps and resolve the ambiguities’…

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