CFTC Issues Revised Position Limits Rule Proposal and Proposes Related Aggregation Standards

The CFTC voted on Tuesday to propose a new position limits rule that would establish limits on speculative positions in physical commodity futures contracts.  The CFTC’s previous position limits rule was vacated last year by a federal district court that found that the CFTC had failed to properly justify the need for the rule, having concluded that the relevant provision of the Commodity Exchange Act is ambiguous and rejected the CFTC’s argument that the provision unambiguously mandates that the CFTC impose position limits without first making a finding that it is necessary to do so.

As with the previous version of the rule, the new proposal would establish speculative position limits for 28 exempt and agricultural commodity futures and option contracts as well as for physical commodity swaps that are “economically equivalent” to such futures and option contracts.  In an attempt to rectify the flaws cited in the court’s rejection of the previous rule, the new proposal includes a more robust justification of the proposed rule “using [the CFTC’s] experience and expertise to resolve the ambiguity the district court perceived” in the Commodity Exchange Act.  The proposed rule release also includes findings that position limits are necessary to reduce the likelihood of certain forms of market manipulation and to help diminish or prevent unreasonable fluctuations or unwarranted changes in the price of a commodity.  An appendix to the rule release includes a list of approximately 130 studies relevant to position limits that were analyzed by CFTC staff.  At the CFTC meeting at which the proposal was approved, both commissioners and staff discussed these studies and positioned the CFTC’s decision to propose the rule as a consequence, at least in part, of its review and analysis of the studies.

In a related action, the CFTC unanimously proposed new aggregation standards that would provide additional opportunities for related entities to avoid aggregating their respective positions for purposes of the position limits rule.  The proposal would establish a baseline rule providing that all positions in accounts for which any person directly or indirectly controls trading or holds a 10 percent or greater ownership or equity interest must be aggregated with the positions held and trading done by such person.  However, the proposal would provide several exemptions from this rule.  For example, any person with an ownership or equity interest of not more than 50 percent in an owned entity, other than through an interest in a pooled account in certain cases, would not be required to aggregate the accounts or positions of the owned entity with any other accounts or positions such person is required to aggregate, provided that, among other things, such person and the owned entity do not know each other’s trading decisions, have written procedures to preclude each from having knowledge of the trades of the other, and do not share employees that control the trading decisions of either.  Similarly, any person with an ownership or equity interest in an owned entity of greater than 50 percent, other than through an interest in a pooled account in certain cases, need not aggregate the accounts or positions of the owned entity if (i) the person and the owned entity meet the foregoing requirements (among others), (ii) the person certifies to the CFTC that the owned entity is not, and is not required to be, consolidated on the financial statements of such person, (iii) the CFTC finds that such person has satisfied the specified requirements, and (iv) certain other conditions are met.

Comments on each proposal will be due 60 days after its forthcoming publication in the Federal Register.

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