CFTC Finalizes Futures and Swaps Position Limit Rules

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The Commodity Futures Trading Commission (“CFTC”) on October 18, 2011 adopted a comprehensive set of rules addressing the incorporation of over-the-counter (“OTC”) derivatives into the CFTC’s existing position limit regime for exchange-traded futures and options (“Position Limit Rules”). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) both expanded the CFTC’s jurisdiction to include surveillance and enforcement authority in the OTC markets and mandated certain regulatory changes to implement that authority. The Position Limit Rules are largely a response to that mandate.

The Commodity Exchange Act directs the CFTC to set limits on trading in the commodity markets to curb “excessive speculation” and ensure the price discovery function of those markets. Because most commodities (especially agricultural, metals, and energy com-modities) are of finite supply, it is possible that, if one trader controls a significant portion of the market, that trader could cause “sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity” which burden the cash commodity markets whose participants use the derivative markets to manage risk. To that end, the CFTC uses position limits to limit the number of positions any trader can hold in a commodity contract for the same delivery period. Position limits also play a role in the CFTC’s efforts to prevent manipulation in the commodity markets.

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