The Commodity Futures Trading Commission (CFTC) issued two proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) at its first open meeting of the new year on Thursday, January 13, 2011. The first proposed rule addresses position limits for certain commodity futures contracts and “economically equivalent derivatives.” This proposed rule is substantively the same as the proposed rule on position limits that the CFTC considered but did not adopt at its last open meeting on December 16, 2010. The second proposed rule addresses swap documentation requirements for swap dealers and major swap participants and is a continuation of a proposed rule on swap confirmation, portfolio reconciliation and portfolio compression requirements for swap dealers and major swap participants that the CFTC issued at its December 16, 2010, open meeting.

The text of these proposed rules have not yet been published in the Federal Register. This discussion is based on statements made at the January 13, 2011, and December 16, 2010, open meetings and the Fact Sheets and Q&As made available by the CFTC.

Position Limits

The Dodd-Frank Act expands the authority of the CFTC to impose position limits on 28 exchange traded commodities (including metals, agricultural commodities and energy commodities) and “economically equivalent” derivatives. The proposed rule adopted by the CFTC on Thursday would establish such position limits in two phases.

Phase One. The first phase would essentially give the CFTC the authority to monitor and enforce the spot-month position limits currently imposed by the exchanges. These limits would apply during the last days of the spot month, in the same way that the exchange spot-month position limits currently function. Also akin to the position limits currently imposed by the exchanges, these limits would be set at 25% of deliverable supply for physically settled contracts (as determined by the exchanges) and five times that level for cash-settled positions. Bona fide hedging transactions (as defined under the Dodd-Frank Act) will not be included in determining whether any entity has exceeded position limits.